Common is the story of the foreigner who thought he was buying from a Chinese company, only to find out later that the company never existed – making any claim for repayment futile. This extreme example serves to illustrate the need to know one’s Chinese business partner beyond the rituals of exchanging name cards and sharing food and drink; with cultural and language barriers clouding mutual perceptions, it is all the more important to understand whom you are dealing with.
How deep an understanding is appropriate depends on the transaction at hand. To acquire a Chinese target company and all its existing liabilities, an in-depth legal and financial due diligence is recommended, while for a simple commercial transaction a copy of the Chinese company’s business license may be sufficiently re-assuring. In many cases, the middle way is to check a target company’s Company File.
Every company registered and validly existing in China has a Company File. China does not have a central registrar; instead the Company File is kept with the Administration for Industry and Commerce (AIC) at the district or township, municipal, provincial or national level where the target company is registered. We generally distinguish the content of the Company File under two types:
- Basic information confirming the company’s vitals, including its current shareholders, registered capital, legal address, legal representative and business scope.
- Extensive information, which usually includes the company’s establishment files (e.g. Articles of Association, list of directors), annual inspection reports and penalties (if any), etc.
An investigation of a target’s Company File is by far the most direct and the least costly means to independently investigate a company’s official legal status; however this is considerably complicated in that the level of access to the public and even lawyers varies greatly from place to place, as does the availability of extensive information.
This can be illustrated with some examples.
- In Suzhou and Fuzhou, a member of the public (with ID card) can access both the basic file and the more extensive information.
- In Shanghai and in Binzhou (in Shandong), a target company’s basic information is open to the public, while the combination of a lawyer’s license and law firm introduction letter will give direct access to the extensive information.
- Recently, Hangzhou, Wenzhou and Shenzhen have adopted more restrictive internal policies on access: applications from lawyers for extensive information are no longer entertained unless accompanied by a court filing or the consent of the target company.
The extended information can be difficult (or impossible) to access but could include “treasures” on the target company’s health, and as such can be useful in making decisions on whether to do business with this target company, whether filing a lawsuit against it would be worthwhile, etc. Basic information is often less valuable, but at least confirms the existence of the target company, and tells of the activities
that it may engage in.
The recent adoption of more restrictive policies in Wenzhou, Hangzhou, Shenzhen and some other localities seems to counter the trend of increasing transparency of China’s legal and business environment, by effectively cancelling the option to check on Chinese-registered companies without their knowledge and for a reasonable price. In some cases, it may be feasible to ask a company for permission to check, but Chinese businessmen often see this as a sign of mistrust – not the best way to start a business relationship. At the same time, many other AICs are adopting less restrictive policies, with an increasing number opening their full registry to the public. It will be interesting – and important to foreign investors doing business with Chinese counterparts – to see which trend will persist.