How This China Hospital Closure Impacts YOUR Business

China WFOE

According to the Hong Kong Free Press (and a number of other newspapers) The Shanghai government this week “ordered the closure of one of the city’s top maternity hospitals saying it was illegally built on land owned by the armed forces, according to an official notice.”

According to the article, the hospital, Shanghai International Women’s and Children’s Hospital, was “founded by Canadian investors” and it had “signed a 20-year lease for prime real estate owned by the military on central Shanghai’s Huaihai Road and started catering to foreigners and wealthy Chinese more than four years ago.” But because “The People’s Liberation Army has been banned from commercial activities since 1998” the hospital was being forced to close. The HK Free Press says this “hospital is one of the largest private business affected by the so-called de-commercialization of the military to date.” The article then quotes the district government as saying “There exists a matter of illegal construction of building at the hospital. It must be rectified duly in accordance with relevant laws.”

Not surprisingly many patients and hospital employees were not happy with the closure:

A gynecologist who was vacating her workplace Sunday afternoon said that the owners, a Canadian couple, had invested billions [of RMB, presumably] into the clinic. “They had all the right documents and invested so much money… it just doesn’t seem fair,” she said.

Christine Cheng had been working as a nurse in the gynecology department for almost two years. “We spent a lot of money and work building this, and now the government wants us to move… We didn’t do anything bad,” she said.

When news transpired last Thursday that the upscale facility would be forced to close, some of the about 300 staff affected hung banners outside the main building criticizing the facility’s imminent closure.

The banners said that while the hospital supported the government, it shouldn’t be forced to move, adding that it wasn’t a “soft tomato” — a Chinese expression for a pushover. Police arrived on the scene shortly afterward and ordered that the banners be removed.

Louise Roy, director of patient support services at Ferguson Women’s Health, a clinic that rents facilities inside the Redleaf complex, said that staff first heard about the possibility of a closure several months ago, although they were never given confirmation or a specific date. “They’ve told us nothing — absolutely nothing,” Roy said. “We came in this morning, like [we do] every day. Then we saw staff gathered outside where the banners were hung, and then the police came.”

Several women who were being treated at the hospital were clearly upset as they collected their medical records before closure.

“I found out from a friend,” said a 32-year-old patient named Jennifer who would not give her last name because of privacy concerns. She said that she had moved to Shanghai from the U.S. recently and was planning to deliver her child at Redleaf in three months. “I have friends who are due in two weeks or a month — I don’t know what they are going to do,” she said.

The hospital’s services have been highly sought-after by those who can afford them. A standard cesarean section delivery at the hospital costs 120,000 yuan, and a prenatal package is priced at 24,000 yuan.

I do not know what happened with this hospital beyond what I read in the newspapers. I can though discuss some of what my law firm’s China lawyers have seen in similar situations over the years and I do so below.

Maybe fifteen years, a very savvy foreign businessperson came to my law firm with a proposed deal that involved our client building a hotel. Just about everything about the deal was perfect. The location was perfect. The cost was perfect. The deal with the landlord was perfect. There was just one flaw: the land on which the hotel was to be built was owned by the military and that made the entire deal 100% illegal.

We explained the clear illegality of the deal (in writing of course) to our client, who already knew it. But like I said, this was a long time ago and our client was very savvy. His response was something like the following:

Yes, I know this deal is illegal and I know this means we will be at risk of the Chinese government coming in and shutting us down the day after (or even before) we build the hotel. But we’ve run all the numbers on this and the numbers tell us that all we need to do for this deal to be an economic positive is last three years and every year after that the hotel will be a cash cow. So even though I know full well all the risks, I am willing to take them because I am willing to bet we can last at least three years.

The client did the deal and ended up lasting for around eight years before the Chinese government shut them down and they ended up making a lot of money. The client’s eight year tenure ended around 7-8 years ago and for probably the last ten years our China lawyers have simply said “no” to such deals, as they have simply become too risky. This does not mean our law firm has not continued to see a slew of deals and WFOE formations we know violate China law. I can hear myself saying the following to companies that bring us such deals and WFOE formations simply because I have said it so many times in my China law career:

What you are doing is illegal and you will get caught. When will you get caught? It could be tomorrow or it could be a year from now. It probably will be less than two years from now. Maybe if you had come to me ten years ago with this deal (or WFOE formation) I would not have been so unrelentingly negative about it, but China has changed. China is very serious about enforcing its laws (at least as against foreign companies, which are the only clients we have in China) and we constantly hear from (and about) foreign companies that are getting shut down by the Chinese government. Not only has China gotten more serious about enforcing its laws, it has gotten way better at enforcement. China is now highly computerized and its various agencies and governmental bodies are quite sophisticated at communicating with each other.

Oh, and one more thing. When you go back to your Chinese counterpart or to your own China employees/people on this, they will tell you we are exaggerating or we are naive or we just flat out “don’t know China.” We would never claim “to know China” but we do know what happens to foreign companies that violate China law and we also know that at least once a month one of our China attorneys gets a call from a foreign company in trouble for having violated some law in China. And when I say trouble I mean they are facing millions of dollars in fines or closure of their operations or in some cases arrest and criminal charges.

Most of the time, the client then explains they didn’t know that their deal (or WFOE) would be illegal (or as they often put it, “so illegal”).

In 2010, in Cracking Down On Illegal Land Use In China. Do You Really Feel Lucky, Foreign Punk? I wrote about foreign companies

The following is an amalgamation of a number (maybe 5 or 6) of conversations I have had over the years with people wanting to register a WFOE (Wholly Foreign Owned Entity) in China fast:

Potential Client: Can you help me register a WFOE in China.

Me: Yes. Not a problem. Do you have a lease yet? Do you know that a legitimate lease is required for approval of a WFOE?

Potential Client: I know that but we are in a real hurry here.

Me:  Okay. But do you have a lease?

Potential Client: We have a lease but I don’t think it technically will qualify.

Me: What do you mean?

Potential Client: The land is zoned agricultural but my Chinese partner has secured all the okays to allow us to use it for our factory.

Me: Not a good idea. Trust me on that.

Potential Client: The factory has been there for two years without a problem and my Chinese partner assures me the local government is fine with it.

Me: Don’t do it. Right now, the local government is okay with it. But if the current mayor is pushed out next week on corruption grounds that will likely change. It also will change when Beijing does its yearly audit.

Potential Client: I am in a hurry and this is the only space that works.

Me: Are you sure? You are in a hurry, but is it really going to be worth it if you get shut down?

Potential Client: I am not going to get shut down. My Chinese partner is incredibly connected.

Me: Incredibly connected to the current local administration, MAYBE, but as I said, that administration could be out the door next week and I highly doubt she is incredibly connected with the people in Beijing. I just don’t think it a good idea to go into a WFOE illegally.

Potential Client: That’s ridiculous. This is how business is done in China.

It is also how businesses get closed down.

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