We have all seen the pictures on LinkedIn or company pages. The official signing ceremony of a Memorandum of Understanding (MOU) between a Western and Chinese firm. Usually, there are some high-ranking government officials present, ceremonially co-signing the MOU on a stately desk.
What role does such an MOU play in doing business in China? Is it a vital part of business in China? Should you take it seriously, and what ceremonial aspects play an important role?
A memorandum of Understanding (MOU) is a legal document indicating the intended start of collaboration between two parties. This international legal document is globally used to signal the willingness of parties to move forward. An MOU can be between two or more parties.
The importance of an MOU in China
Businesspeople from common law countries like the United States tend to consider MOU signing as an unimportant but necessary first hurdle. This perspective originates from the fact that common law countries do not consider the MOU as a valid contract.
Only the real contract will have meaning. However, when an MOU is signed under Chinese civil law, the importance of the document becomes much higher. For example, when the foreign party is acting in bad faith, the MOU can be enforced under the Chinese legal system. This is different from any common law MOU.
Therefore, a common mistake is that companies originating from a common-law country will not fight too hard on the details of the MOU. Their reasoning is that the MOU is just a prelude to the real contract. Since an MOU in China has a more binding character, Chinese business people view the MOU already as a real contract and thus have no interest in renegotiating the deal in a second contract.
Besides such a legal basis creating importance to an MOU in China, it is also the starting point of a future collaboration. Therefore, it is important to make sure an MOU fully covers the desired strategic direction a company has for the future.
Lack of strategic direction in the MOU or unclear parts of the MOU might be cause for future disappointments. When either party discovers the real intent of the prospected partner differs from the original expected intent, the whole potential partnership might fail.
Preparation of an MOU in China
Having established the importance of an MOU in China, it is important to carefully consider the contents of an MOU. When establishing the MOU together with the prospected partner, let the partner start with the initial draft.
This will give you insights into their expected approach. Their draft version of the MOU provides a solid basis for further discussions. During the feedback phase, your clarifications, insertions and cancellations will further create clarity in the collaboration.
In preparation for setting up an MOU, the western organisation should check the contents of the MOU with a company knowledgeable about Chinese law. Furthermore, making sure the document is translated into Chinese or English by a third-party professional translation company is very important.
The quality translation will help to guarantee the writing and reading parties are on the same page. Good Chinese law firms will be able to produce quality bilingual contracts.
The actual signing
There is a huge ceremonial importance to signing an MOU. In the hierarchal Chinese business society, it is a moment where the highest involved persons from both companies are present and meet. Make sure the level you present fits the level the Chinese counterpart presents at the MOU signing.
When there is a discrepancy in levels present, this could cause either loss of face to your Chinese counterpart or to the western organisation. For example, when the western sales manager meets with the Chinese CEO, the Chinese CEO might lose face. More importantly, the Chinese party might consider that the Western company takes the partnership too lightly.
To really spice up the MOU signing, high-placed government officials are also valued to attend. The government in China has much more value than in many western cultures. The attendance of high-placed government officials will give a face to the MOU signing.
Because of this fact, Acclime China advises non-Chinese companies to keep a good relationship with their respective Embassies. The Embassy could provide high-level diplomates or access to high-level Chinese officials.
After the MOU in China is signed
After the MOU is successfully signed by both parties, the build-up to real collaboration starts. At that moment, it is imperative not to lean back and relax. You will have to follow up on the strategy formulated, and the joint direction is taken. Furthermore, it is still crucial to build upon the newly established relationship.
An MOU is an important document to get right in China. After doing so, the MOU can also function for external and internal marketing purposes. Publicly through marketing channels or internally to the stakeholders within the organisation. The process of becoming successful in China can be painstakingly long. Therefore, such significant steps could change public and internal opinions about the efforts taken in China.
Example of MOU signing
Mid-September, our client Prime Vision signed a Memorandum of Understanding with Guangdong Tengen Industrial Group Co., Ltd; the Dutch Embassy in Beijing hosted the ceremony. “This is the start of close cooperation to extend the presence of Prime Vision in the Chinese market”. At Acclime China, we are very proud of Prime Vision’s accomplishment, and we trust in their future in China.
Contact our teams for expert support and further information about corporate governance in China to ensure you are compliant in the market.