Learning from Danone: The legal admin you really need to be conducting

December 12, 2007 Posted by China Briefing Reading Time: 3 minutes

Checking that your China IP and property ownership is correctly in place

The Danone vs. Wahaha case has drawn a lot of comment. One thing however, seems to stand out: the mess Danone have got themselves into is largely because of a failure in checking their legal administration history and ensuring all was present, correct and in the right place.

Essentially, it seems that Danone did not adequately follow through legal processes concerning trademark registrations. Stan Abrams at China Hearsay comments:

The recent part of this case involves the Wahaha trademark, which was by agreement supposed to be transferred to the JV many years ago. Remember that there is a contract between the parties to this effect, but the actual transfer is something that is not valid until the Trademark Office approves the assignment application and issues a new registration certificate in the name of the new trademark holder (i.e., the JV) — this never happened, of course. This was supposed to have happened, I think, sometime after 1996. I know that JV setups were a bit loose back in the old days, but no one thought to check on this? Before you think that this is so preposterous that someone must be lying, think again. I’ve seen worse, and the idea that a company would never follow up, even for almost a decade, is entirely possible.

Stan is right. It is indeed possible, and actually very common. Foreign invested businesses that set up in China 10, 15, 20 years ago often used their engineer or regional manager to facilitate the legal establishment, or perhaps in-house counsel with no real China expertise. Chinese law firms ten years ago had only just been liberalized and many were unfamiliar with the regulations concerning foreign direct investments. Other Chinese law firms, good as they may be, only really handle Chinese clients and can have little or no knowledge of foreign investment law.

The implications of this are immense. It means, that unless you are 100 percent sure you used a law firm in China that knew exactly what they were doing when you set up in China, your documentation may well be flaky, or incomplete. Your business could become involved in a dispute like Danone has should it matures and become worth many millions of dollars more, and if it is subsequently found to have weak legal administration within, it may not stand up to legal examination or scrutiny. Rather than blithely point out this somewhat obvious fact, here then in this article, we advise on the types of internal audit you should be carrying out on your Chinese business to ensure all is where it should be:

Trademarks, patents and domains
What should have been registered?
Who should it belong to?
Has it been maintained and any annual fees due paid?
Have all jurisdictions in Greater China been covered? (China, Hong Kong, Macau and Taiwan all need separate applications)
Have all the required classes been covered?
Have all domain names and similar brandings online, in Chinese and English, been secured? Do you own the .cn domain for your business in China?

Property and land
Has the difference in status between granted and allocated land use been properly identified?
Is the land use right in compliance with your scope of business?
Have all re-registration procedures and ownership documents been settled?
Do land use rights certificates match your company name?
Are you aware of the expiry date?

These are just two of the many legal administration points that foreign investors should ensure they have ticked off all boxes on.

Enquiries for assistance on legal administration and internal due diligence can, as always, be directed to info@dezshira.com for professional legal and tax advise conducted by professionals based nationally in China.

If you’re not sure whether or not your legal admin is present and correct – and the Danone case as it unravels shows a corporate breakdown in this – now would be a good time to get up to speed and get it checked out. While others comment about legal comment – at China Briefing and Dezan Shira & Associates we point out the specific issues, what needs to be done, and what items to check off.

Next Monday: Preparing for your annual inspection, the seven government departments that need to be reported to and the documentation that needs to be prepared.