Foreign companies invest in China with a variety of investment vehicles. The benefit of a joint venture, meaning a Chinese party and a foreign party jointly create a legal entity for the purpose of providing a product or a service for a fee, is derived from real estate and relationships provided by the Chinese party. You buy-in to an established company and enter the race at full-speed.
Many companies are choosing JV structures, or they simply acquire the assets of their Chinese target, to leave behind legal liabilities for any past action of the Chinese target. The Chinese side, on the other hand, gets to watch western management styles, obtains systems and structures, as well as receives new intellectual property and commercial secrets.
You should be clear about your purpose for investing in China. It is therefore important to have an entry strategy, an exit strategy and an understanding of the risks involved. It is important to include legal counsel during the planning stages of your investment and cooperation in China.
Crystal Lu, from the Shanghai office, specializes in drafting joint venture contracts and articles of association. These two documents are the lifeblood to your company and establish your rights and obligations to the company. Regardless of the amount of capital you have invested and how many shares you control, a company in China is run based on its rules. For example, what type of decisions must be made by unanimous decision of the shareholders? Who will be the General Director of the company and who will select this person? Crystal can help you understand the specifics about how to maintain control of your company and how to work effectively with a Chinese partner.
Joint Ventures in China – Basics
A joint venture company is a limited liability company. Each party to the joint venture company is liable to the joint venture company within the limit of the capital subscribed by it. Before you set up a JV in China, the most important issue is to check whether your intended project falls into a category of encouraged, restricted or prohibited as per the Catalogue for Foreign Investment Industrial Guidance. Only encouraged and a part of the restricted projects may be allowed to setup as a JV in China; while any industry not indicated within a category of the catalogue may be regarded as permitted.
In general, the total investment and the registered capital must be suitable for the predicted business scale and working capital for the business ranging from 3-12 months. Generally, 15% of the registered capital shall be contributed within 90 days after the business license is issued. The remaining shall be contributed within 2 years after the business license is issued.
The JV setup (non-manufacturing company) would generally go through the approval procedures of the local Ministry of Commerce (MOFCOM) and would be followed by registration with the local Administration of Industry and Commerce (AIC). Then, such follow-up registrations as organization code registration, tax registration, statistic registration, customs registration and etc. will be involved.
Blawg post submitted by: Blaine Willis Grunewald, Foreign Legal Consultant, Shanghai Office