China Structure – Joint Ventures

Unfortunately, this is not always the case, as evidenced by the fall in percentage of total foreign investment allocated to JV establishment from 32.2 percent in 2004 to 22.8 percent in 2007. This does not mean the JV is a deadweight entity, however. It has its purposes, and it?s crucial for foreign investors to understand those purposes and whether their Chinese partner is capable of fulfilling them. The popular Chinese idiom ?same bed, different dreams? has become the failed joint venture?s mantra.

There are two types of JVs in China: the equity JV and the cooperative JV, sometimes known as the contractual JV. They may appear similar on the surface but have different implications for the structuring of your entity in China. Here we explore the differences, providing practical advice on structuring and tips on investment clawbacks, land use rights and profit distribution.

Think of a JV as having both a heart and a mind. Its heart lies in the contract, which specifies the agreement and duties of each party. The mind lies in the articles of association, which determines how a JV can fulfill its responsibilities. They are equally important and attention to detail is essential.

There are significant operational differences between the contracts and laws governing EJVs and CJVs. EJVs and CJVs are respectively governed by the Sino-Foreign Equity Joint Venture Law of 1979, the Sino-Foreign Cooperative Joint Venture Law of 1988, and their related post-hoc amendments. The China Company Law of 2006 is also partially applicable to JVs. The are several key differences between the two.

Liability status

EJVs must be established as limited liability companies, while CJVs can operate either as a limited liability company or as a non-legal person (though this option is becoming less popular). In the latter case, liability will be defined within the business contract. Such entities are run by a management committee rather than by a board of directors. They are typically operated in the event of the foreign party making capital contributions to a Chinese manufacturer to upgrade facilities, but then wanting some degree of control as to how that investment is managed.
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