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Partnering up in a China Joint Venture - A whise decision?


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Joint Ventures used to be the most common foreign investment structure in China. A lot of things have changed since China's accession to the WTO in 2001. In this presentation, Shanghai-based law firm R&P discusses the Joint Venture types and highlights the reasons for and against JV's.

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Partnering up in a China Joint Venture - A whise decision?

  1. 1. Partnering up in a China Joint Venture – A wise decision? An R&P Publication on Chinese Law and Legal PracticeC R&P China Lawyers Shanghai, 2012T +86 21 6173 8270E
  2. 2. INTRODUCTION• Restrictions on FDI / slow opening of China’s economy  JV was the compulsory structure especially in the 80’s/90’s• China accession to WTO in 2001: gradual lifting of foreign direct investment (FDI) restrictions• Today, new WFOE’s (wholly-owned subsidiaries) outnumber new JV’s (Chinese-foreign joint ventures) and the ratio shifts rapidly: 2008: 30% of all German companies in China were JV’s  2011: only 11% of German operations fall into JV’s <2 of 18>
  3. 3. INTRODUCTION WFOE Joint Venture Importance of Joint Ventures is sharply decreasing: When are JVs the right strategy? <3 of 18>
  4. 4. JV Structure: Key Points• The basic idea: 2+ investors invest in and hold a third entity i.e. the JV is NOT a merger of two existing companies! A: B: Foreign Chinese Investor Company C: Joint Venture• Both entities (A + B) continue to exist independently from JV <4 of 18>
  5. 5. JV Structure: Key Points (2)• Two different Joint Venture types: Equity Joint Venture / Cooperative Joint Venture• Joint Investment: mutual capital contribution (cash, assets)• Shared benefits – and shared risks Principle for development of Chinese economy: Foreign partner benefits from local knowledge and resources Chinese partner acquires new technologies, know-how, insight in foreign management style and markets, cash contribution <5 of 18>
  6. 6. Reasons for Joint Venture Structure• Benefits: local • Minimizing costs: market knowledge, Benefit Cost shared capital local resources, contribution, help with contacts, partner’s setting up cost-effective familiarity with facilities under local Legal conditions culture and language • Legal restrictions: Partnering with Chinese company is still mandatory for certain industries determined in the Foreign Investment Catalogue:  E.g. car manufacturing, finance + insurance, telecommunications, media publishing, mining activities <6 of 18>
  7. 7. Equity Joint Venture• Limited Liability Company + Chinese legal entity  Foreign Investor: Companies, individuals  Chinese Investor: Companies only• Profits/dividends and risks proportionally shared• Partners appoint legal representative/board of directors• Capital contribution: cash, assets (e.g. machinery), intellectual property, land-use rights• JV ends upon:  Expiration of agreed term (if not extended)  Mutual agreement between partners  Other reasons specified in JV contract ( exit strategies!) <7 of 18>
  8. 8. Cooperative/Contractual Joint Venture• Can be established as Ltd. Co. OR as cooperation between separate legal entities with independent liabilities• Capital contribution does not have to be of monetary value: resources, services, licenses, market-access rights• Investment return negotiable (dividend payment schedules, ownership of assets during and after the project)  not strictly linked to the party’s share (e.g. BOT projects)• No binding system for voting rights (Board of Directors) High flexibility in the JV organization, but complex, lengthy negotiations: suitable for certain projects <8 of 18>
  9. 9. The Advantages• Shared risks and costs when expanding to Chinese market• Market access: only way to invest in closed industries• JV is a Chinese Ltd. Co.: higher chance in government procurement biddings• Simplifies dealing with government authorities• Benefits from Chinese partner’s network and local business practices (cost control) <9 of 18>
  10. 10. The Disadvantages• Equity transfer requires government approval• Difficult to control: Chinese partner may be involved in active management – who controls daily operations?• High risk of dispute:  Different goals and expectations for the future direction?  Culture: different business/management mentalities• Exposure of IPR and confidential information:  Who is the owner of the IPR when JV is closed? <10 of 18>
  11. 11. When Joint Ventures Fail… • Common dangers for the foreign party: Conflicts of  Chinese partner may share land, machinery and interest employees where JV is located nearby Chinese investor Favoritism  Contracts with relatives in unfavorable conditions  Secret (e.g. night shifts) manufacturing of own or Secret competitive products to generate higher marginsManufacturing  Supplying relatives with IP and know-how to produce counterfeits <11 of 18>
  12. 12. Minimizing Risks, Maximizing Chances Establishment JV Agreement Intellectual Partnering Property Due Diligence Confidentiality Influence Dispute Control Settlement Exit Strategy <12 of 18>
  13. 13. Minimizing Risks, Maximizing Chances (2)• Partnering: What are the roles of each partner in the JV?  Are individual interests/goals understood? Focus on best-fitting partner, not the most obvious one!• Due Diligence: check on partner’s finances, assets, business license, reputation, internal structure/decision-makers• Influence Control: Not just a matter of majority share – optimal balance when appointing decision-makers  Key personnel like legal representative/GM important to control daily business operations <13 of 18>
  14. 14. Minimizing Risks, Maximizing Chances (3)• Detailed Agreements (Articles of Association and JV Contract):  Intellectual Property: contractual rules regarding ownership, use, transfers and licensing of IPR  Confidentiality and anti-competition agreements  avoid exploitation of sensible information and IP  Dispute Settlement: how are disputes solved? Mediation?  Exit Strategy: rules on fair evaluation and sale of equity share in case the partners disagree on future direction <14 of 18>
  15. 15. When are JVs the Right Strategy? Legal • Foreign investor seeks entrance inRestrictions restricted industry • Chinese partner’s market knowledge, Resources capital contribution or other resources crucial to success If not, WFOE may be more suitable:  Easy set up without complex negotiations  100% Control over corporate management and operations  Control over IPR and confidential information  Straightforward exit: easy to close <15 of 18>
  16. 16. Companies that want to do business in China may benefit from contact witha professional services firm such as R&P China Lawyers. If you would like afree-of-charge discussion on how we could assist you, please contact us:Robin Tabbers (International clients)Email: Mobile: +86 13641605259Lukas Steinberg (International and German-speaking clients)Email: Mobile: +86 15221461321It is always a good idea to gain a preliminary understanding of any legal issue before you seekprofessional advice, by reviewing materials such as introductions and articles which are freeand easily available online. One convenient place to find more information on the legalaspects of doing business in China is Available titles include: ‘Guide onEstablishing a Chinese Company’, ‘Dealing with Chinese Customers and Suppliers’, ‘ProtectingIntellectual Property’, ‘Hiring Employees’, and ‘Dealing with Disputes’.© R&P China Lawyers 2012 <16 of 18>
  17. 17. About R&P China LawyersForeign-managed Chinese PRC Law Firm  Corporate / Investment  Commercial Transactions  Employment  Intellectual Property  Taxation / Forex / Customs  Dispute Resolution 2011 <17 of 18>
  18. 18. Good luck in your China venture!Shanghai, 2012