A China Joint Venture (JV) is a Limited Liability Company (LLC) by shares, established through a partnership between a foreign investor and a Chinese company or individual.
Entering the Chinese market through a JV formation is an appealing option for foreign businesses, for example, it allows access to resources and opportunities that would not be available without a local partner, and all associated risks are shared.
Nevertheless, joint ventures pose significant challenges.
Introduction
Before 2020 there were two types of Chinese Joint Ventures: Equity Joint Venture (EJV), governed by the Law on Sino-Foreign Equity Joint Ventures, and Cooperative Joint Venture (CJV), governed by the Law on Sino-Foreign Cooperative Joint Ventures.
Equity Joint Venture (EJV)
An LLC where the foreign partner must invest at least 25% equity interest, with profits and losses distributed according to each party’s equity interest.
Cooperative Joint Venture (CJV)
Both sides can remain separate entities or form an LLC. Profits and losses are distributed under the contract.
In 2020 the two laws governing JVs and the Law on Wholly Foreign-Owned Enterprises – “Three FIE Laws” – were abolished and replaced by the Foreign Investment Law according to which foreign-invested enterprises are now governed by the Corporate Law.
The typical JV duration is 10-30 years that can be extended to 50 years for advanced technology-related projects.
Pros and Cons
Some industries are restricted to foreign businesses and the only way to participate in these is to establish a JV with a local company. In addition, a joint venture with a Chinese partner provides expertise, connections, resources, and a workforce that otherwise wouldn’t be easy to access.
However, in most cases, the foreign partner finds himself vulnerable.
- Intellectual Property Risks
The risk of IP theft is very high. Make sure to have a clearly defined ownership right and don’t entrust related documentation drafting to the local partner’s lawyer.
- Control and Decision-Making
The equal (50/50) ownership structure should be avoided if possible. 60% ownership interest and higher would guarantee legal control over the joint venture. Ownership below 60% is insufficient to ensure effective control.
Do not rely on the Chinese partner as a majority shareholder for oversight and decision-making. Ongoing participation in and supervision of the JV management is necessary to ensure control. It can be achieved through securing power over the managing director or general manager appointment.
- Exit Strategy
Establishing a clear exit strategy from the start is crucial. Even during the foreign equity sale process, the local partner will probably have the upper hand.
- Disputes
Chinese courts and the legal system tend to favor the local partner over the foreign entity.
Protecting Your Investment
Navigating these pitfalls requires thorough planning, expertise, and a deep understanding of local business practices. For professional advice on China joint venture or to explore alternative options for market entry – reach out to our experts at contact@sjgrand.cn.
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