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Investing in or Working with a Chinese Company May Be a Great Idea, If You Do Your Due Diligence

May 15, 2014

Posted in Business Litigation, Business Start Ups, Corporate Law

China can have an irresistible attraction for American businesses and rightfully so. Its population of 1.3 billion (of the world’s 6.7 billion) is an unimaginably large potential market for some American companies. With its relatively low cost of doing business, it also has in many ways become the world’s shop floor, manufacturing goods for consumers across the globe.

I represent Chinese businesses working here in the U.S. and American companies working with Chinese companies. With enough research, both sides may be able to find a good fit where both parties benefit. Most Chinese, like most American, companies are run by honest, hardworking people. However, like in all places in the world, there is potential for fraud when an American company invests in or does business with a company in China. Given all the differences between the two countries, including physical distance, language and cultural barriers, American business owners may be vulnerable to fraud in China.

Some instances can be found in the press:

How can an American business avoid being scammed? An article in the Above the Law website makes some suggestions:

  • A Chinese language internet search may provide enough negative info to give you second thoughts.
  • Ask your potential partner to provide government registration documents and, if relevant, its accounting and tax records. If the company refuses, walk away from the deal.
  • If you go to China to take a look at the business, would it be possible that everything you see will be staged? Will you meet with attorneys and accountants, or just people paid to say they are attorneys and accountants?
  • Focus on the operations. If the company claims to sell 10,000 units a week, why is there only enough material on hand to make 100? If you visited on different days, was there a different set of employees?
  • Get copies of the official business records yourself from government agencies. This could be expense and time consuming, but cheaper than going forward with a bad deal.
  • Don’t put much trust in company-provided introductions. You could be speaking with actors or officials whose loyalty has been bought.
  • Speak with the company’s competitors, neighbors, employees and suppliers.

Partnering with or investing in a Chinese company could help your business grow, but only if it’s done correctly and with enough care. I can help you and your business understand all the issues involved and make the right choices. Contact my office for a free consultation.