Foreign business seeking to enter the Chinese market may prefer, or even find it in their best interests, to collaborate with a local partner.
Commonly, foreign businesses able to accelerate the growth of their services or goods in China do so with a local partner who has established a market presence. In this manner, the partnership is an exchange that achieves mutual benefits, or what is often referred to as a ‘win-win’ relationship.
Sino-foreign joint ventures can be established as either a contractual or equity joint venture. The contractual joint venture is governed by a contractual agreement between the involved parties and no joint entity is required to be established. An equity joint venture is required to be established as an entity where the parties constituting a partnership hold percentages of the share of the company. For example, foreign shareholder A holds 49% of the share of the company, whilst Chinese shareholder B holds 51% of the share of the company.
Contractual Joint Ventures (CJV)
Sino-Foreign contractual joint ventures (CJVs) are governed by the Law of the People’s Republic of China on Sino-Foreign Cooperative Enterprises promulgated on 4 September 1995 and last revised in 2016 by the Standing Committee of the National People’s Congress.
CJVs offer more flexibility than an equity joint venture since parties can define the conditions of the partnership, such as dividend distribution not being limited to the amount of a shareholder’s capital contribution, corporate governance, share of risk and loss, and so forth. However, parties should draft a contractual agreement with care and seek legal expertise to safeguard and prevent risk.
At Horizons, we commonly find that parties who comes to us seeking legal expertise find themselves doing so only once the commercial points are already agreed upon between two parties, which all too often leads to complications later on in the partnership. It is advisable to seek experienced legal counsel during the very initial stages a partnership so that the contractual agreement is written both with a clear understanding of the partnership and a keen eye on the all-important clauses found in all contractual agreements.
Although the conditions of a contract can be amended, or a supplementary contract added, a counterparty’s consent could be difficult to obtain, especially if the relationship suffers as a result of cultural misunderstanding or conflict. What’s more, if there is no legal entity established in a contractual joint venture, the parties to the partnership shall assume the civil liabilities of the joint venture.
Equity joint ventures (EJV)
The Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures (Equity Joint Venture Law), adopted in 1979 and last revised in 2016 by the Standing Committee of the National People’s Congress, governs Sino- foreign equity joint ventures in China.
The percentage of equity held by the foreign party in an Equity Joint Venture (EJV ) can be subject to provisions found in the Catalogue for Foreign Direct Investment 2018, which outlines encouraged, restricted and forbidden industry sectors for foreign investment. Generally, restricted sectors stipulate a structure of 51% for the Chinese party and 49% for the foreign party, while EJVs which are not subject to such stipulations, but are required to register a minimum 25% foreign capital contribution.
Since an EJV is required to be established as a legal entity, management of the entity — such as a board of directors, board of supervisors and senior officers — shall be appointed through negotiation between the parties. Although, where the president of the board is assumed by one party of the EJV, the other party of the EJV shall assume the vice-president role. As a result, governance of an EJV is not strictly determined by a contract, as is in the CJV, and the civil liabilities of the joint venture are borne to the EJV.
Overall, joint ventures, whether contractual or equity joint ventures, can be successful in China. Although, foreign business should be willing to invest the time and money in appropriate legal counsel. Too often, we see foreign businesses using old investment models or, in some cases, throwing caution to the wind with the naïve belief that the law is unenforceable in China.
Furthermore, and perhaps most importantly, there should be a concerted to achieve equilibrium and exchange between foreign and Chinese partnerships in order to lessen cultural clashes. For example, a win-win partnership can be one where the foreign party contributes to the developmental history and technology of products, whilst the Chinese party contributes its market knowledge and expertise.
When done right, Sino-Foreign Joint Ventures can be a great experience that achieves successful outcomes.
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