China Business Vehicles: Part III
Joint Ventures
By Gregory Sy
Joint Ventures, in this specific context, refer to a registered legal entity cooperation between at least one foreign investor and Chinese investor. Previously, this structure was more common, though it has been steadily decreasing due to the disadvantages set out below.
Joint Ventures can be classified into two different types:
- Equity Joint Ventures
- Cooperative Joint Ventures
The main distinction between the two is that the latter provides for more flexibility in distribution of revenues. Whereas Equity Joint Ventures require that the joint venture partners share in distribution of profits based on their proportionate contribution to registered capital, Cooperative Joint Ventures allow for distribution and sharing in losses based on the contractual terms of cooperation rather than on monetary/asset contributions.
Equity Joint Ventures are governed by the Law of the PRC on Equity Joint Ventures, and relevant implementing regulations.
Cooperative Joint Ventures are governed by the Law of the PRC on Cooperative Joint Ventures, and relevant implementing regulations.
Some advantages of Joint Ventures include:
- Only option, as industry is Restricted
- Guanxi (connections)
- Quick establishment/contribution of existing facilities
- Local expertise
Some disadvantages include:
- Inflexibility
- Difficulties in expanding investment (partners have pre-emptive right to purchase newly issued capital and transferred shares to third parties)
- Differing business plans
- Differing management styles
- Exposure and theft of intellectual property
Establishment
Establishment of a Joint Venture is very much similar to that of a WFOE, with the addition of one key document, the Joint Venture Contract. The Joint Venture Contract has many of the same features as a WFOE’s articles of association, however, it contains more terms akin to a Shareholders’ Agreement.
This is the last part of the Grandall Legal Group article Business Vehicles. Here you can find part I and part II.
Gregory M. Sy is a partner / foreign counsel with Grandall Legal Group. His practice includes general business advisory for SME’s in China, particularly in the areas of international corporate structuring and transactions. Representative clients include the Consulate of the United States of America in China (Shenyang), Embassy of Brazil, various publicly listed companies (NYSE, LSE, DAX, and BSE), along with numerous other SME’s operating in a wide range of industries. Mr. Sy obtained an LL.B. from the University of Victoria, and is admitted to the New York bar. Gregory publishes extensively on a variety of China legal issues for international and local publications, and has recently acted as chief editor for Martindale’s China Law Digest. You can contact Gregory at gregsy@grandall.com.cn or learn more about the firm at www.grandall-profile.com.
