You must be aware that China is the world fastest growing economy. With the 6.9% economic growth observed in 2015, it is no wonder that overseas investors are showing growing interest in investing in Chinese companies. Overseas Direct Investment (ODI) in China is achieved primarily through outbound Mergers and Acquisition (M&A). According to the recent reports of 2015, Chinese companies reported $100 million per annum outbound M&A and this figure indicates the increased number of overseas direct investments. Do you know why overseas investors are looking for opportunities to invest in Chinese companies?
- China is aiming to diversify its foreign exchange reserves.
- China’s laws and direct state policy support ODI.
- China has realized the need to integrate Chinese companies globally.
- ODI is attracted because of the strong cash position of state owned companies.
However, most of the outbound M&A takes the form of equity or simply as a minority investment. Minority shareholders face the greatest risk of exploitation both by companies and majority shareholders in China. This is mainly because the overseas investors are not physically present in company’s board of Directors meeting and cannot actively take part in the decision making process. Civil law jurisdiction of China, regularly intervene and regulate the affairs of Joint Venture Company (JVC) and thus safeguarding the rights of Chinese minority investors. Under the Chinese legal system, minority shareholders can consider themselves protected under the following areas discussed below:
Seat on the Board
The Chinese minority investor has full right to appoint the director on the board of meetings of JVC and can fully exercise their influence. This might lead them to have a seat on the board and the appointed director can be the representation of Chinese minority investors. This could although arise the conflict of interest between the minority shareholders stakes and company’s policies, but this can give them much needed right to exercise their control.
Right to Veto
China law also states that Chinese minority stakeholders can exercise their right to veto. They can take a decision on the key matters like capital expenditure, major acquisitions, changes in the constitutional documents and changes in the share capital.
Information Rights
The Chinese minority investor, according to Chinese Law has right to receive timely information regarding the business, their financial position and can have full access to the JVC accounting and other material records.
Distribution
The sole reason for investing in overseas companies is to gain the returns on the investments. Chinese minority shareholders are given right by the Chinese Law to gain access to profits and dividends earned over their investment. Chinese companies are liable for the distribution of dividends and repayments of minority shareholder loans.
Tax
Minority shareholders are given right by the Chinese Law that they can study the structure of taxes of JVC and make sure that the tax is equally distributed among all the shareholders. Overseas investors can make tax structure negotiations at an early stage and ensure that there is no tax arrangement made between JVC and majority stakeholders which can be a threat to their rights. Minority investment is a common sight in China. The prevalent economic conditions in China have encouraged outbound M&A transactions. However, China law has ensured that minority shareholders’ rights are protected so that Chinese companies can attract Overseas Direct Investment to further boost their economy.