Business Law in China - Dispute between Get It Ltd and Lock It Ltd - Assignment Example

Business Law in China Name: Unit: Date: Question 1 a. Intellectual property dispute between Get It Ltd and Lock It Ltd The process of protecting intellectual property rights in China starts with registration of the property at the State Intellectual Property Office. China falls under the category of file first countries. This means that the person who applies for a patent first holds the right to the property for which he applies the patent. The right that comes as a result of this filing ignores any evidence of previous use. This means that even if someone else’s use of the patent, trademark or any other intellectual property is a matter of public record, the person who files first is considered to own the property in China. While the first-to-file system applies it, in some instances have led to unfair use of highly recognizable trademarks by third parties. Regardless of this, the country has a law regulating unfair competition. Enforcement of this law is usually at the discretion of the state officers who do the enforcement. The unfair competition law provides for the protection of trademarks that have not been registered in China but it has too many loopholes. The responsibility of interpreting and enforcing this law is left to the State Administration for Industry and Commerce which has a department known as Fair Trade Bureau (Clarke, D. p8). China has ratified several international agreements to protect intellectual property. These include Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, WIPO, Berne Convention, Paris Convention among others. For the patents to be enforceable in China under these conventions, they have to be registered with the patents office in the country (Lo, 2007). If Get It Ltd filed for registration of the Intellectual Property in question first and used the services of a registered patent agent, then the company would have the right. The same case applies to Lock It Ltd. If the property at issue is a trademarks, it must have been registered with the Chinese Trademark Office. Owing to the vastness of the country and the sheer number of patent and trademark applications made every year, devolution of trademark services to the regions is necessary for the promotion of effectiveness of the process. Devolution to the provinces has a significant impact on the process of arbitration due to issue of arbitration. To address the case where Get It Ltd accuses Lock It Ltd of infringement on its rights to intellectual property two options are available. Get It may choose to use any of the two and if the administrative route is used there is the possibility of it ending up in the courts. Most disputes are arbitrated through the administrative route and it is, therefore, probably the one that will be used. The process of determining which agency is in charge of an infringement is not straight forward since there are different government agencies with statutory authority for different types of intellectual property. Other than the confusion on agencies, there are also geographical limitations with infringements occurring in jurisdictions different from where the filing was done being difficult to follow up. While there are proposals to develop cross-jurisdictional enforcement, these have not been followed through and this is something to be ready for when planning for the case (Chen, 2008). Depending on the nature of the infringement claimed by Get It, the administrative arbitration may be done in any of the following agencies: State Administration on Industry and Commerce (SAIC) – the trademark division is in charge of examining the registered trademarks and their infringement. State Intellectual Property Office (SIPO) – this deals with the registered national and international patents. The national office has the responsibility to oversee provincial offices in which the actual filing and arbitration of disputes is conducted. Administration for Quality Supervision, Inspection and Quarantine (AQSIQ) – the agency deals with the infringement of trademarks when the infringement involves goods that do not meet the set quality standards. The agency at the national office also regulates activities of its branches in the regions in so doing, it ensures that the . National Copyright Administration (NCA) - Should it be that the dispute involves alleged copyright infringement, this would be the office to handle it. NCA is also charged with the responsibility of investigating the cases. Should this option be taken, the case is likely to end up in court as NCA does not have enough personnel to settle the disputes (Pissler and Liu, 2013). Other than the administrative route, the case may also initially be filed through the judicial system. This includes filing of the case in the People’s Court nearest to the complainant. There are divisions that deal exclusively with intellectual property in both the intermediate and higher courts across different regions in the country. While the complainant my not file the case with the judicial system at the beginning. An appeal, should either of the parties be dissatisfied with the findings may be filed with a tribunal in the Supreme Court. With this information, it is important to have a good understanding on how the entire process works so as to be ready for any eventuality (Lo, 2007). b. Get It Ltd’s inability to meet its financial obligations Get It Ltd inability to meet its financial obligation may be cause for liquidation. This would have to be done in accordance with the Chinese bankruptcy and liquidation laws. This would require company shareholders to agree to liquidate the company. In case of a bankruptcy, an application may be made by the creditors to the courts. Application for the liquidation is normally made in the Bureau of Commerce (BOC). This would be followed by the formation of a liquidation committee. This would be followed by an audit, which would establish the amount of money the company owes to which creditor. After the audit, a public announcement will be made in the papers after which the staff would be retrenched apart from the key staff with a role to play in the liquidation process. This will be followed by valuation of assets which will be sold to ensure all creditors are paid. After creditors have been paid, the company will be deregistered from all relevant agencies in China and its seals destroyed (Chen, 2008). Question 2: Corporate governance in China Regulation of corporate governance in China is done in accordance with the Code for Corporate Governance for Listed Companies in China. The code establishes a system of two boards for each listed company. These are a supervisory board and a board of directors. According to the law, a board should have 5-19 members a third of whom are, by law, to be independent. The law further defines an independent director as one who holds no position in the company and also is not linked to any of the company’s major shareholders. While this stipulation is made in law, the code does not specify who should appoint directors. As a result, even major shareholders often appoint the directors who are supposed to have no link with them. There has been instances where boards of directors are populated with company insiders especially people holding senior positions. The board of directors is accountable to shareholders but it also protects the interests of other stakeholders in the company. The supervisory board, plays only ceremonial role. According to Company Law (1993). Directors in Chinese companies owe a duty of care to their shareholders. They are under legal obligation not to engage in business similar to the one conducted by the company in which they are directors and also not to divulge confidential business information to third parties (Huang, 2011). External mechanisms for the management of corporate governance include involvement of the judiciary. The exercise of judicial authority is different from one region to another. This is a reflection of the differences in public administration according regions. This is because the judiciary is largely a part of the Chinese executive’s administrative system. There are public institutions doing business in China and when there have been cases between them and private entities, it leaves the impression that public companies get favored by the courts (Lo and Tian, 2009). Government interference is also rife in the country especially when a business is involved in a sector considered sensitive. Sectors considered sensitive include the technology sector, energy sector et cetera. This interference has made it difficult for Chinese companies to raise capital in foreign securities markets. From a corporate governance perspective, this is a problem because the leadership of the company has no freedom to explore the possibilities that come with globalization (Lo, 2007). The systems put in place are clearly not effective. The boards of directors are certainly not independent owing to the influence exerted on them by the major investors of whom they are supposed to be independent as per the law. Supervisory boards on the other hand supervise only on paper but play no real oversight role on the ground. The institution that is supposed to arbitrate cases, the judiciary, is seen as biased in many cases. This is especially the case where state owned corporations are concerned since the courts are still like a department of the executive which wields an inordinate amount of power in a system with virtually no checks and balances. Question 3: Business entities in China There are five different types of business in China. These include; a. Wholly Foreign Owned Enterprises: - These are owned by foreign investors without involvement of the Chinese businessmen. There are certain industries, however, that are considered sensitive and foreigners can only own them in conjunction with the Chinese. If the three are Chinese citizens, they would not be eligible for this business owing to the fact that this model is reserved for foreigners. Should they be foreigners, it would be possible to open a Wholly Foreign Owned Enterprise because the organic food industry is not categorized as one of the industries that re too sensitive to be owned by foreigners. b. Joint Venture: - This is a type of business where a foreign investor teams up with a Chinese individual or a company so as to do business together. As earlier mentioned, the business the three have chosen is not required by law to be a joint venture, however, should some of them not be Chinese citizens, they can decide on a joint venture. Running this type of business may be complicated due to the required consensus between the foreign and the local investor. If there ever comes a time when there are disagreements, the business may suffer from the grid lock. With this in mind, this type of an entity may not be the best for the three investors. c. Partnership Enterprise: - this is a joint venture between individuals or entities, both foreign and local unlike Joint Ventures, these are easier to open and run due to the fact that they do not require approval from the Ministry of Commerce. The fact that they do not require the payment of business income tax means that the cost of doing business in such an entity is lower than other types of businesses. The registration and running of such an entity is still rather complicated as they appear to have been fashioned for partnerships between the Chinese and foreign investors but with less stringent conditions than Joint Ventures. d. Limited Liability Company: a limited liability company registered with the three as shareholders is the best option for them in the business they intend to do. An LLC is most suited for them because the restrictions are fewer especially when it is registered by Chinese citizens. The other advantage is that the business is generally easier to operate than others since requirements like minutes and resolutions are not a requirement. Owing to the fact that it is a young company, unlikely to have a lot of financial resources at its disposal, the easier requirements will reduce the need for staff and the owners time. The time that could have been used in running the business would be spent in marketing the company and its products. A Limited Liability Company also provides for a flexible benefit sharing model. In this case since the member are in the process of raising funds, they might agree on an arrangement where profits are shared according to the percentage of capital raised. Setting up a company in Shanghai entails looking for a company name, which takes a one-day pre-approval period. There is also a requirement for the opening a bank account and depositing funds. Once the funds, which is the capital have been deposited, the applicant is required to obtain a report verifying availability of capital from a registered auditing firm. It is only after these steps have been followed through that a license indicating the registration of the business as a legal person may be obtained. Once the license has been acquired, approval, is to be obtained from the police for the acquisition of a company seal. Other important steps include registration for local and national taxes. Approval has to be sought for activities such as printing of invoices and other essential business stationery, this is one of the examples of the bureaucracy involved in the business registration process in China (Wang, 2006). One of the sources of funding for the new business is the Government’s venture capital fund. To qualify, the business has to be registered and have a business plan (Nolan, 2002). Chinese bank also play an important role in providing capital for start-ups, whether the three entrepreneurs will be funded by the banks or not is entirely dependent on whether they meet the requirements set by the bank from which they seek credit. These requirements range from their individual capacities to borrow based on their credit rating. The three can also write a business plan and approach private venture capitalists to be funded. This option is particularly viable because as they have found out from their market research, investors are willing to finance the organic food importing business. While they are building this business, they are likely to encounter difficulties with the government bureaucracy. The licenses necessary for the operationalization of businesses in China are issues by many different offices which are scattered across the entire government. To import food, for instance, the entrepreneurs need to deal with the Ministry of Commerce, Ministry of Health, Ministry of Agriculture and the custom departments among others. They also have to register for local and national taxes. Sometimes the provincial offices give conflicting requirements when compared to the national government which makes the process all the more confusing. China is still fairly protectionist and businesses that import products that are deemed to be available locally usually find themselves dealing with heavy taxes which are not easy to handle for a startup. Concerning the entrepreneurs themselves, coming to an agreement on decisions concerning day to day running of the business is not easy and as a partnership, this is something they will have to grapple with. Question 4: Competition Law in China The most comprehensive competition legislation in China is the Anti-Monopoly Law of 2008. The law applies in the whole of the country but for the two Macau and Hong Kong which are special administrative regions. The law focusses on the restriction of non-competitive agreements, this refers to agreements that promote monopolistic tendencies in the conduct of business. The law also seeks to restrict the abuse of companies’ dominant positions in the market. Competition laws are enforced by legally established structures. These include the Anti-Monopoly Committee which works under the State Council. The committee develops the necessary policy and conducts investigations. It also formulates the necessary guidelines while coordinating the process of enforcement. There is also the Anti-Monopoly Enforcement Authority which is also charged with the responsibility of enforcing the Anti-Monopoly law (Jin & Luo, 2002). AMEA has agencies under it which enforce specific substantive issues pertaining to the competition and monopoly. These include: a. National Development and Reform Commission (NDRC): Tis commission enforces the AML where rules related to prices are concerned. Anti-competitive agreements and issues of abuse of dominance fall under this commission. b. State Administration for Industry and Commerce (SAIC): The issue enforced under this body pertains to the restriction of state bodies with the intention of preventing abuse of power in as far as regulation of competition is concerned. c. Ministry of Commerce: Mergers and acquisitions are likely to lead to creation of monopolies. It is the responsibility of the Ministry of Commerce to ensure that these mergers do not lead to suppression of competition. Regulations of all mergers and acquisitions in China is controlled by the Ministry of Commerce. Different reviews are conducted in the run-up to mergers and acquisitions especially where foreign companies are concerned. The first step of merger is notification to the authorities on the intention by the parties involved to merge. Local administrative offices determine whether all the requirements have been met and then proceed to establish whether there are issues that need to be handled by the higher offices. One of the issues that may be referred to the national office is a National Security Review. National Security Reviews are conducted by the Ministry of Commerce when a foreign company is acquiring a Chinese company in certain sectors considered sensitive to national security. These include military related industries, energy and other key resources, certain areas in agriculture Manufacture of major equipment, it is the responsibility of local administrative offices in whose jurisdiction mergers have been applied to determine whether the nature of the merger warrants a national security review. If they determine it to be necessary, they request the ministry conduct the review. A review may also be requested by other industry players in the either upstream or downstream. The companies directly involved in the merger may also request a review. The review is supposed a maximum of 90 working days after the first 15 days in which the ministry determines whether a review is necessary (Lo and Tian, 2009). Total Word Count: 3,004 Read More