Corporate governance of an EJV
Today, as promised, I am going to complete the exposition about the functioning of the EJV adding some very important information about the corporate governance.
With regards to the governance of a EJV, it is necessary to point out that the
Board of Directors
represents the highest organ of power which shall have its size and composition stipulated in the
JV contract
and in the
Articles of Association
after consultation between the parties to the venture and with reference to the proportion of capital contributed (however the number of Directors must be at least three).
The Chairperson of the Board of Directors is the legal representative of the JV; article 6 of the EJV Law (available at:
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/foreign-investment/law-of-the-peoples-republic-of-china-on-chinese-foreign-equity-joint-ventures-2000.html
) states that ‘either party of the Sino-foreign joint venture may be the Chairman and the other shall assume the office of Vice-chairman’.
The
Board of Directors
must meet at least once a year (interim meetings may be convened if one-third or more of the Directors propose), and a board meeting can be held only if two-thirds or more of the directors are present. In handing major problems the Board shall reach a decision through consultation by the parties to the venture, in accordance with the principle of equality and mutual benefit (In this sense, art. 6 of the Law of the People’s Republic of China on Chinese-foreign Equity Joint Venture).
The powers of the Board of Directors are summarized in art. 6 of the EJV Law, however they must be specified in the Articles of Association.
The Board of Directors shall decide on the following important issues:
1) Plans for development, production, and business operations;
2) budget;
3) distribution of profits;
4) labor and wage plans;
5) termination of operations;
6) the appointment, powers, and remuneration of the General manager, deputy general managers and other Staff members, and
7) the increase or reduction of the registered capital.
Resolutions on other matters shall be made in accordance with the rules provided in the Articles of Association. For the amendment of the Articles of Association, termination and dissolution of the joint venture, expansion and reduction of the registered capital, and decision on merger or division of the joint venture, there must be an unanimous vote of all the Directors present at the meeting.
A JV must establish a management organ that is responsible for the daily operations of the venture but this task could also be in the hands of the general manager (if the foreign investor nominates the General manager, the Chinese investor has the right to nominate his deputy (and vice-versa).
Advantages and disadvantages in choosing to operate an EJV
In an EJV one of the most important advantages is that the parties share profits and bear risk and losses in proportion to their respective investment and contributions to the registered capital. Furthermore, the Chinese partner should be more familiar not only with the legal panorama regulating the investment but also with the environment in which the parties are operating their venture, therefore it should be more easy to adapt the marketing strategies to the Chinese market.
The Chinese partner may also have some “
good personal connections
” or
guanxi
, (see entry on this aspect at:
http://blawg.lehmanlaw.com/wordpress/?p=1673
) which is intended not only as simple contacts but some kind of more considered relationships maybe with authorities and prospective clients, which can help in developing the business.
Nevertheless, since the foreign party must consult the Chinese party whenever it makes management and production decisions, it will not have complete control of the joint venture. Besides, if the foreign party makes capital contribution in the form of industrial or intellectual property rights or know-how, the Chinese party will have access to the foreign party’s technologies and trade secrets.
As it is common for the Chinese party (especially when they are state-owned companies) to be monitored by government authorities on the conduct of their activities, the Chinese government, albeit indirectly, may have control over the management of the venture.
If misunderstandings persist in managing the venture, a possible solution for the foreign party is to buy the Chinese stake in the venture and to transform the joint venture in a
wholly foreign
–
owned enterprise
(WFOE).
Dissolution of an EJV
According to the provisions of art. 13 of the
Equity Joint Venture Law
and art. 102 of the
EJV Implementation Regulations,
an EJV will be dissolved under one of the following circumstances:
1) Expiration of the term of the venture;
2) Inability to continue operations due to heavy losses;
3) Inability to continue operations due to the failure of one party to fulfill its obligations prescribed in the joint venture agreement, joint venture contract, and articles of association;
4) Inability to continue operations due to heavy losses caused by
force majeure
, such as natural disasters and wars;
5) Failure to achieve the objectives of the joint venture and no prospects for future development;
6) Occurrence of other causes for dissolution stipulated in the joint venture contract and articles of association.
In the case of points 2, 4, 5, and 6, the
Board of Directors
shall apply to the examination and approval authority, namely the MofCOM, for approval. In case of point 3 the non-breaching party shall apply to the mentioned organ for approval, and the breaching party will be liable for compensation for losses.
Regarding in particular the winding-up proceedings, the matter is governed by the ‘
Measures on Liquidation Procedures for Foreign Investment Enterprises
’,
(to be applied to all forms of FIEs) approved by the State Council on June 15, 1996 and promulgated by the MofTEC on July 9. These provisions were adopted to ensure a smooth liquidation and in order to protect the legitimate rights of both creditors and investors.
An EJV is liable for its debts to the extent of all of its assets, and only after all the debts are paid off, then the residual properties and assets will be distributed among the parties in proportion to their respective investment, unless otherwise provided in the joint venture contract. Finally, the EJV shall apply for cancellation of registration with the SAIC and the tax authorities.
This entry completes the exposition about the functioning of an EJV. In the next entries it will be introduced another instrument, namely the “contractual Joint venture” which represents, for certain aspects, a more flexible instrument to operate a business in conjunction with a Chinese counterpart.
Cristiano Rizzi