I had a meeting not long ago with the CEO of a European company, the largest consumer electronics distributor in the company’s home country. In this meeting the CEO advised me that they already had a contract with a major Chinese electronics company for distribution in Europe, and they just wanted to confirm a few practical issues with the contract an make it was signed appropriately. The first thing I did was to ask whether they had the contract signed by the company in its real Chinese name, reminding the CEO that Chinese is the only official language of the People’s Republic of China and that the English name of a Chinese company is legally meaningless. I was not surprised at all when the CEO confirmed that the document only included an English name for the Chinese party.
Two weeks later this company contacts me again by email, providing a copy of the contract with the Chinese company. Turns out the company is established in Hong Kong, where English company names are perfectly valid. Hong Kong and People’s Republic of China (PRC) are two different legal jurisdictions. When talking to your China lawyer, make sure you are clear about the distinction and make sure everyone is on the same page about what you are talking about.
This company then asks our firm to perform due diligence on this Hong Kong company to confirm its links with the headquarters of this Chinese company in Beijing. A review of the Hong Kong company registration documentation indicates that the Hong Kong company was actually established by Cayman Islands company. A search of the Cayman Islands online company registry doesn’t provide information about shareholding or directors.
We had separately conducted due diligence investigation into the shareholders of the PRC headquarters and we have the incorporation documentation of the HK Company, but the strict laws of the Caymans prevented us from conducting the necessary searches. What’s a China Lawyer to do?
Interestingly a quick internet search for the Cayman Islands company online turned up USA SEC filings which the Cayman islands company reported its corporate Directors as part of required filings of beneficial ownership of a separate company publicly listed on the NYSE. This documentation revealed that the Directors between the PRC company, the Cayman’s company, and the Hong Kong company are all pretty much the same.
This kind of situation is something China Lawyers, and those doing business with Chinese companies are encountering more and more. Due to restrictions on flow of capital out of PRC, and restrictions on foreign investment in specific sectors in PRC, inventive companies are seeking alternative corporate structures to get around the restrictions. USA and European companies have been doing this for years via complex structures to maximize tax savings.
We still don’t know who the formal shareholder of that Cayman Islands company is, but I would bet it is established directly by one or more of the individuals who directly established the headquarters in Beijing. If this is true, the “headquarters” may be more like a standalone operation in PRC, while the Cayman Islands company sits a top of a complex web of international investments.