Joint venture structuring in restricted industries

[ By Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates ]

Joint ventures have attracted some unsavory press in the past, with lurid tales of foreign investors being burnt and treated poorly by their Chinese counterparts. While there is truth to some of this, other problems with a China JV are often the responsibility of an errant foreign investor also. No-one likes to admit blame when things go wrong. In our firm, we are often called in to provide internal audits on JVs by the foreign investor or for mergers and acquisitions ? a surprisingly large number are doing very well indeed.

When investing in China?s restricted industries, you have to have a joint venture partner. Often the maximum percentage of equity allowed in foreign ownership can only be 50 percent. So what options are available to the foreign investor to mitigate the risk of not owning, on paper, a majority stake? All JVs are bespoke, so the situations and investment environment can vary considerably. But there are some well proven guidelines to follow that can assist you get the most out of your JV.

50-50 ownership

The problem with this is the potential risk of getting into a static management position later with both parties disagreeing on a future direction. At worst, a board at loggerheads and unable to agree on a decision can effectively wreck an entire business. I find it best to build into the JV structure a mechanism that can provide a way out under certain circumstances. It is better to have made a bad decision that can be reversed than to have a board unable to move in any direction.

There are a number of ways in which this can be accomplished. Agree to give up one percent and have the Chinese side own the majority, which in the case of respected partners should not be an issue if the management team is healthy and the business able to declare dividends. A one percent loss of dividends is a small price to pay for a united board. Alternatively, other mechanisms can be enacted within the JV articles to permit the chairman, for example, the deciding vote in the event of a split vote. This needn?t be immediately enacted ? it could be triggered if after say three or four board votes on the subject were spilt, allowing both parties time to negotiate or better understand the issue at hand.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

0 comments

Add your comment

Commenting is allowed only for registered users.

Other articlesgo to homepage

Trends in the Chinese Online Education Industry

Trends in the Chinese Online Education IndustryComments Off

The Increase of China on the net Training Market place Income of online training sector in China achieved 84 billion Yuan in 2013, with a 19.9%-growth from 2012, based on the 2013-2014 China On-line Education Report unveiled by iResearch. The huge Potential of China on the internet Education Market place The 3 key engines are

US$1.8 Trillion : the Chinese Consumption by 2021

US$1.8 Trillion : the Chinese Consumption by 2021Comments Off

Luxurious manufacturers in China have had to deal with down a slowing financial system for many time, but a brand new report by Boston Consulting Group (BCG) and Alibaba Group’s study section, AliResearch sheds a more constructive light-weight on China’s purchaser economic system. By 2021, Chinese people are envisioned to add US$1.8 trillion in new

China Structure – Joint Ventures

China Structure – Joint Ventures(0)

Forming a joint venture in China can be a successful endeavor as long as each side?s goals, contributions and responsibilities are mutual and understood.

China Structure – Foreign-Invested Commercial Enterprises

China Structure – Foreign-Invested Commercial Enterprises(0)

Foreign-invested commercial enterprises are capable of conducting the following activities: Import, export, distribution and retailing Retailing ? selling goods and related services to individual persons from a fixed location, as well as through TV, telephone, mail order, internet, and vending machines Wholesaling ? selling goods and related services to companies and customers from industry, trade

China Structure – Wholly Foreign-Owned Enterprises

China Structure – Wholly Foreign-Owned Enterprises(0)

The wholly foreign-owned enterprise has become the investment vehicle of choice for the international investor wanting to manufacture, service or trade in China.

read more

Contacts and information

Social networks

Most popular categories

Real Time Analytics