UNHS Legal Issues Regarding International Bribery and Corruption Research Paper

Electronic copy available at: http://ssrn.com/abstract=1930190 Electronic copy available at: http://ssrn.com/abstract=1930190 Electronic copy available at: http://ssrn.com/abstract=1930190 WAKE FOREST JOURNAL OF BUSINESS AND INTELLECTUAL PROPERTY LAW VOLUME 12 SUMMER 2012 NUMBER 3 AMERICAN ENTREPRENEUR IN CHINA: POTHOLES AND ROADBLOCKS ON THE SILK ROAD TO PROSPERITY Lawrence J. Trautman† I. OVERVIEW …………………………………………………….. 427 II. WHAT BASIC NEEDS ARE DRIVING CHINESE POLICY? …………………………………………… 429 III. DOING BUSINESS IN CHINA IS NOT JUST LIKE DOING BUSINESS IN ANOTHER FOREIGN COUNTRY ………………………………………… 431 A. THE MODERN CHINESE LEGAL SYSTEM ……………… 433 B. NO CONCEPT OF PRIVATE PROPERTY …………………. 434 C. ACCOUNTING STANDARDS: AUDITOR FRUSTRATION AND ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”) ………. 435 D. EXPERIENCE WITH MARKETS AND “CORPORATE FORM” IS DISARMINGLY RECENT ………………………… 438 E. BANKING IN THE PRC ……………………………………… 440 The non-performing loan (“NPL”) issue ……………….. 441 F.BANKING DAY OF RECKONING NEAR? …………………. 443 IV. A CONTROLLED ECONOMY IS A BUREAUCRACY AFTER ALL……………………………. 446 A. BUSINESS FORMATION …………………………………….. 446 † J.D., Oklahoma City Univ. Law School; MBA, The George Washington University; BA, The American University. Mr. Trautman is a past president of the New York and Metropolitan Washington/Baltimore Chapters of the National Association of Corporate Directors. The author wishes to extend particular thanks to the following for their assistance in the research and preparation of this article: Lawrence Hellman and Attorney Gu Ming of the Oklahoma City University School of Law; Deans Hou Xinyi and Zuo Haicong and Professor Zhang Yong of the Nankai University Law School; Susan Shirk, former Deputy Assistant Secretary of State for East Asia and Pacific Affairs, and now Professor at UC- San Diego; and, in particular, Professor Norwood Beveridge of the Oklahoma City University School of Law. 426 WAKE FOREST J. BUS. & INTELL. PROP. L. [VOL. 12 V. BRIEF HISTORY OF CHINESE SECURITIES MARKETS ………………………………………………………… 447 A. NOT REALLY PRIVATIZATION ……………………………. 451 B. REGULATION EVOLVES ……………………………………. 453 C. THE PEOPLE’S BANK OF CHINA (“PBOC”) ………….. 455 D. CHINA SECURITIES REGULATORY COMMISSION (“CSRC”) ……………………………………………………….. 457 E. SHANGHAI AND SHENZHEN MARKETS DEVELOP ….. 459 F.IS “STOCK” TRADED ON THE SHANGHAI OR SHENZEN EXCHANGES A “SECURITY” AS AMERICANS UNDERSTAND THE TERM? ………………… 460 VI. DEVELOPMENT OF CHINESE CORPORATE LAW………………………………………………………………….. 462 A. THE CHINESE CORPORATE LAW ………………………… 462 B. THE NEW COMPANY LAW (EFFECTIVE JANUARY 1, 2006) ……………………………………………………………… 463 C. CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (“CISG”) ………….. 465 D. ARBITRATION AND DISPUTE RESOLUTION …………… 465 E. BANKRUPTCY…………………………………………………. 466 F.INTELLECTUAL PROPERTY ISSUES……………………….. 467 G. U.S. COURT JUDGMENTS IN CHINA: ENFORCEABLE? ……………………………………………….. 470 H. JUDICIAL SYSTEM AND THE PRACTICE OF CORPORATE LAW IN THE PRC…………………………….. 471 VII. DUTIES AND RESPONSIBILITIES OF DIRECTORS IN A CHINESE SETTING ………………. 475 A. COMPARISON OF U.S. CORPORATE GOVERNANCE WITH THAT OF THE PRC …………………………………….. 475 1. Number of Directors ………………………………………. 477 2. Term of Office for Directors ……………………………. 477 3. Qualifications ……………………………………………….. 477 B. DUTY OF LOYALTY …………………………………………. 482 C. DUTY OF CARE ……………………………………………….. 483 D. DISCLOSURE ………………………………………………….. 483 E. CHINESE DIRECTORS REPORT TO THE PRC GOVERNMENT …………………………………………………. 484 F.TWO-TIER BOARD SYSTEM ………………………………… 485 G. IMPACT OF SARBANES-OXLEY…………………………… 486 H. DIRECTOR AND OFFICER LIABILITY ……………………. 487 I. ROLE OF THE CHINESE COMMUNIST PARTY IN CORPORATE GOVERNANCE ………………………………… 488 J. FOREIGN CORRUPT PRACTICES ACT (“FCPA”) ……… 490 Corruption Threatens China’s Future …………………… 491 K. HONG KONG IS DIFFERENT ………………………………. 494 VIII. CONCLUSION ……………………………………………. 495 2012] [AMERICAN ENTREPRENEUR IN CHINA] 427 I. OVERVIEW In many ways China is the new frontier for entrepreneurship as it is perceived to be a logical primary source of economical manufacturing, raw materials, and component parts, in addition to being considered a major end market.1 China may also represent the most likely future competition for many American industries, as well as our major trading partner. 2 Increased commerce between the United States and The People’s Republic of China (“PRC”) demands that U.S. entrepreneurs understand the basic foundation for doing business in the PRC. An increasing demand for United States citizens to engage in commerce, or to sit on boards dealing with significant exposure to Chinese developments has also become a reality. A comprehensive and exhaustive treatment of this subject is beyond the scope of this article. However, an identification of some major issues, with suggestions for further research, is attempted. Hopefully, constructive thinking will result from an overview of how conducting business is fundamentally different in the PRC along with an examination of relevant corporate governance issues. This paper is an outgrowth of an earlier article written to discuss the fundamentals of Chinese corporate governance.3 However, it soon became apparent that any such attempt required an understanding of some of the basic ways the Chinese environment differs from that familiar to those experienced in the ways of American or European governance. For example, common shares in China do not represent the same ownership interest or have the same designated rights as in the United States, there is no law protecting private property as we know it, and the functions of true “free economic markets” (securities or goods and services) have neither been understood nor embraced by officials having a natural cultural instinct for governmental control of economic enterprises. 4 Accordingly, with a view toward the perspective of the entrepreneur, an attempt is made to bring to the reader’s attention some of the more significant differences found in conducting business in the PRC. Recent headlines depicting closer 1 Debbie Liao & Philip Sohmen, The Development of Modern Entrepreneurship in China, STAN. J. OF EAST ASIAN AFFAIRS, 28, 31 (2001). 2 Wayne M. Morrison, China-U.S. Trade Issues, CONGRESSIONAL RESEARCH SERVICE (Sept. 30, 2011), http://www.fas.org/sgp/crs/row/RL33536.pdf. 3 Lawrence J. Trautman, Corporate Governance in the People’s Republic of China: What an American Director Needs to Know About Doing Business in China (Aug. 2008), http://works.bepress.com/lawrence_trautman/1/. 4 Id. 428 WAKE FOREST J. BUS. & INTELL. PROP. L. [VOL. 12 economic relations between the U.S. and China make the codependence between the two countries inevitable. China now ranks as the largest trading partner of the United States in terms of trade balance, ranks first in terms of imports into the U.S., and ranks third (behind Canada and Mexico) in terms of receiving U.S. exports. 5 According to the World Bank, when measured by the “purchasing power parity” method, China has the world’s second largest economy.6 It ranks fourth (roughly equal to the economies of France and Great Britain) behind the U.S., Japan, and Germany, when viewed under the traditional market exchange method.7 When results for 2010 became available, China surpassed Japan as the world’s second largest economy. 8 China Daily reports that “China’s economy grew at an annual rate of 9.5 percent in the second quarter of [2011], slower from a 9.7 percent rise for the first quarter.”9 It has been said that the construction crane is the national bird of China. While China enjoys perhaps the oldest of the world’s great cultures, traveling through the PRC today and witnessing its dramatic economic growth, makes it difficult to understand that the beginning of relevant, modern Chinese legal development dates back only to 1979, with the Law of the People’s Republic of China (“Chinese Company Law”) adopted in 1993. 10 Even more astounding, the modern roller-coaster development of Chinese securities markets is essentially an experiment materially just twenty-something-yearsold.11 Donald C. Clarke has recently highlighted the pressing need for 5 U.S. CENSUS BUREAU, U.S. DEPT. OF COMM., U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES (July 2011); see also Angel Gonzalez & Ryan Dezember, Sinopec Enters U.S. Shale, WALL ST. J. (Jan. 4, 2012), http://online.wsj.com/article/SB10001424052970203550304577138493192325500.h tml (providing an example of almost daily announcements illustrating increased investment by Chinese in the U.S.). 6 China Overview, THE WORLD BANK, http://www.worldbank.org/en/country/china/overview (last visited May 26, 2012). 7 China’s Economy Smaller in New Study: World Bank, CHINA DAILY (Dec. 18, 2007), http://www.chinadaily.com.cn/china/2007-12/18/content_6329427.htm; see also BARRY NAUGHTON, THE CHINESE ECONOMY: TRANSITIONS AND GROWTH, (The MIT Press, 2007). 8 Chester Dawson & Jason Dean, Rising China Bests A Shrinking Japan, WALL ST. J. (Feb. 13, 2011), http://online.wsj.com/article/SB10001424052748704593604576140912411499184.h tml. 9 Xinhua, China Faces Pressure of Price Rises in Short Term, CHINA DAILY (Sep. 26, 2011), http://www.chinadaily.com.cn/bizchina/201109/26/content_13791250.htm. 10 GU MINKANG, UNDERSTANDING CHINESE COMPANY LAW 5-8 (Hong Kong Univ. Press, 2006). 11 CARL E. WALTER & FRASER J.T. HOWIE, PRIVATIZING CHINA: INSIDE CHINA’S continued . . . 2012] [AMERICAN ENTREPRENEUR IN CHINA] 429 scholarly research about comparative corporate governance, stating that: [T]he last thirty years have seen a startling rise in the economic importance of other countries, particularly China and the rest of non-Japan Asia. From 1980 to 2006, for example, China’s share of world GDP (estimated on the basis of purchasing-power parity) rose from about three percent to about sixteen percent.12 Indeed, we should all be grateful to Professor Clarke for “bring[ing] comparative law—an interest in what people in other countries do— into the mainstream of a branch of American legal scholarship.”13 II. WHAT BASIC NEEDS ARE DRIVING CHINESE POLICY? Susan Shirk, a former Deputy Assistant Secretary of State for East Asia and Pacific Affairs, and now Professor at UC-San Diego, notes that “[e]very good diplomat knows that you can never get anywhere until you put yourself in the shoes of the person sitting across the table from you.”14 Accordingly, all those seeking to do business in China are well served to constantly ask themselves “what we would want” if we were in charge of the PRC “controlled” economy. Law professors Norwood Beveridge, Tahirih V. Lee, Dean John Cooper and other commentators have observed that the motives of the PRC government appear to consist of the following four major objectives: (1) Increasing industrial productivity; (2) Seeking foreign exchange; (3) Import substitution; and (4) Job creation (perhaps the primary goal). 15 Jamie F. Metzl of the Asia Society says “Driven by the need to deliver economic growth as a major justification for its existence, the STOCK MARKETS 5-43 (2d ed., 2006). 12 Donald C. Clarke, “Nothing But Wind”? The Past and Future of Comparative Corporate Governance, 59 AM. J. COMP. L. 75, 77 (2011). 13 Id. at 109. 14 SUSAN L. SHIRK, CHINA: FRAGILE SUPERPOWER: HOW CHINA’S INTERNAL POLITICS COULD DERAIL ITS PEACEFUL RISE 12 (2007). 15 Norwood Beveridge, Professor, Oklahoma City University School of Law, Lecture for the 2007 International Conference at Nankai University in Tianjin, China (July 9-Aug. 4, 2007); Tahirih V. Lee, Professor, Florida State University College of Law, Lecture for the 2007 International Conference at Nankai University in Tianjin, China (July 9-Aug. 4, 2007); John F. Cooper, Associate Dean of International and Cooperative Programs and Professor of Law, Stetson University College of Law, Lecture for the 2007 International Conference at Nankai University in Tianjin, China (July 9-Aug. 4, 2007); see also Michael Petrusic, Oil and the National Security: CNOOC’s Failed Bid to Purchase Unocal, 84 N.C. L. REV. 1373 (2006). 430 WAKE FOREST J. BUS. & INTELL. PROP. L. [VOL. 12 Chinese government has done a tremendous job of creating wealth and bringing hundreds of millions of Chinese people out of poverty.” 16 Development of capital markets and an efficient framework for capital formation should allow China to tap its internal assets and the resources needed from the rest of the world to finance and fuel the PRC’s impressive economic growth. Yuwa Wei contends that the decision to open and nurture the growth of the Shanghai and Shenzhen exchanges rested upon two primary purposes: “(1) to utilize domestic savings to facilitate social funds and private companies; and (2) to discipline the listed companies and accelerate the pace of building a modern corporate governance system.”17 The PRC leadership’s enlightened motivation to raise funds for the National Social Security Fund may be seen through its activities of June 12, 2001, when all companies were directed by the State Council to include 10 percent of state-owned shares in all initial or follow-on stock offerings. 18 The 2008-2009 global financial crisis, however, “made clear that China’s dependence for growth on the purchasing power of consumers in America, Europe and Japan creates a dangerous vulnerability.” 19 China’s need to expand and reinforce a “formal social safety net” is expanding as more Chinese reach retirement age.20 This will add unprecedented costs that may shock an already over-taxed environment that is heavily dependent on infrastructure projects and other state-directed investments for growth.21 In light of this, Even if China’s leadership makes major progress on domestic reform, it will find that the international environment is becoming less conducive to easy economic expansion. Higher prices for the oil, gas, 16 Jamie F. Metzl, China’s Threat to World Order: Computer hacking is typical of Beijing’s disdain for global norms, WALL ST. J. (Aug. 17, 2011), http://online.wsj.com/article/SB10001424053111904006104576500690087766626.h tml. 17 Yuwa Wei, Volatility of China’s Securities Markets and Corporate Governance, 29 SUFFOLK TRANSNAT’L L. REV. 207, 209 (2006). 18 Sandra P. Kister, China’s Share-Structure Reform: An Opportunity to Move Beyond Practical Solutions to Practical Problems, 45 COLUM. J. TRANSNAT’L L. REV. 312, 327 (2006) (explaining how deteriorating market conditions and political pressure resulted in abandonment of this requirement within just a few months). 19 Ian Bremmer, China’s Bumpy Road Ahead: Unrest, inflation and an aging populace stand in the way of the Middle Kingdom’s Touted Domination, WALL ST. J. (July 9, 2011), http://online.wsj.com/article/SB10001424052702303544604576430103921843770.h tml. 20 Id. 21 Id. 2012] [AMERICAN ENTREPRENEUR IN CHINA] 431 metals and minerals that China needs to power its economy will weigh on growth. The exertions of all those other emerging market players will add to the upward pressure on food and other commodity prices, suppressing growth rates and undermining consumer confidence, which have been the most important sources of social and political stability in China . . . Strong growth in China, coupled with America’s unsustainable fiscal policies, high unemployment and weakened consumer demand, will generate friction between the world’s two largest economies—in particular, by significantly increasing the likelihood of protectionism on both sides. That’s a problem for American companies looking for access to Chinese consumers, but it’s far more troublesome for the Chinese, who rely more on U.S. fiscal stability, investment, technology and consumption.22 III. DOING BUSINESS IN CHINA IS NOT JUST LIKE DOING BUSINESS IN ANOTHER FOREIGN COUNTRY Business decisions may prove unusually complex to foreigners seeking to do business in the PRC. Evolving from Confucianism,23 the traditional Chinese culture places much more emphasis on the nurturing and maintenance of relationships than in most other areas of the world. Relationships and connections, or “Guanxi,” are the “vehicle in which Chinese business is conducted. Nothing gets done without them.” 24 In this system, [f]amily and social context define the individual, unlike the Western view in which the individual defines his own context. In other words, self-individualization is possible only through an interaction with others within the context of one’s own social roles and relationships. The self is always in relation to others, a rational self, a 22 Id. See generally The Influences of Confucius, CULTURAL CHINA (May 26, 2012, 11:12 AM), http://history.cultural-china.com/en/182History5836.html. 24 William D. Greenlee, China – Business Not as Usual, MARTINDALE.COM (May 26, 2012, 11:24 AM), http://www.martindale.com/business-law/article_JonesVargas_218562.htm; see also Graham Mayeda, Appreciating the Difference: The Role of Different Domestic Norms in Law and Development Reform; Lessons from China and Japan, 51 MCGILL L.J. 547, 588-89 (2006). 23 432 WAKE FOREST J. BUS. & INTELL. PROP. L. [VOL. 12 rational being. 25 Under this powerful system of Guanxi, “[p]eople’s sense of themselves, and their self-worth, is often determined by their relationships with others. The Chinese are both individualist and group-oriented and the relationships between group and individual are complex and deep-rooted.”26 Thus, it has been observed that personal and business relationships in China must be developed on two levels: “with the person as an individual, and the person as a member of a reference group.”27 It is true that Westerners also develop guanxi-type relationships and networks. What distinguishes the Chinese Guanxi system, however, is that in China this same pattern of relationships is also central to the business world, on a quite explicit and open basis. Business associates within a network are referred to as being zi jia ren (one’s own family). In a Confucian society, guanxi represents a natural blurring of the line between the professional and the personal . . . This complex system carries expectations that favors will be returned.28 American businessmen in China should remain conscious of the Guanxi system. While “[s]ome Chinese businesspeople dismiss guanxi as old fashioned and . . . replaced by modern Western methods[,] . . . the Western business person should assume both approaches are relevant.”29 Guanxi and Western models of approaching a transaction need to be viewed in tandem: a strong enough relationship gains entry to the Western model of n …
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