Introduction to the
Sino-Foreign Contractual (or “co-operative”) Joint Venture (CJV
)
Today this entry is dedicated to the so called “contractual joint venture.” Subsequent to the equity joint ventures, the contractual joint ventures (CJV) were introduced with the structure of a
partnership.
The use of a CJV has introduced a more flexible investment instrument in conducting a business in partnership with a Chinese counterpart. This form of cooperation does not necessarily lead to the formation of a new company, but it keeps separate the entrepreneurial Chinese and foreign entities, while maintaining a purely contractual relationship. For several years, these type of ventures, due to the absence of specific laws regulating these figures, follow the principles contained in the EJV’s law. In order to fill this legislative gap the
‘Law of the People’s Republic of China on Sino-Foreign Contractual Joint Ventures’
was adopted at the 1
st
Session of the 7
th
National People’s Congress on April 13, 1988. This Law was amended according to the
Decision on Revision of the Law
of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures
) adopted at the 18
th
Meeting of the Standing Committee of the 9
th
National People’s Congress on 31 October, 2000 (available at the following web-site:
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/foreign-investment/law-of-the-peoples-republic-of-china-on-chinese-foreign-cooperative-joint-ventures-2000.html
).
Basic characteristics of the
Contractual Joint Venture
It is necessary to point out that a
Contractual Joint Venture
, also known as
Cooperative Joint Venture
, ‘refers to the co-operation between two separate economic entities who reach an agreement or a contract on specific matters such as the provisioning of investment conditions, the earnings on products, the sharing of profit and loss, the operating procedure and the ownership of the property.’
Another important aspect that deserve to be mentioned ‘a contractual joint venture which meets the conditions for being considered a legal person under Chinese Law shall acquire the status of a Chinese legal person in accordance with law’(in this sense, see Art. 2 of the CJV Law) and will assume the form of a
limited liability company
.
It is necessary to highlight that a contractual joint venture shall abide by Chinese laws and regulations and may not injure the public interest of China (in this sense, Art. 3 of the CJV Law).
Furthermore, earning from a CJV may not necessarily be distributed in cash, but rather in products (this must be specified in the contract), and the proportions in which profits are shared may not necessarily be the same as the proportions of the investment. In any case, the proportion of investments contributed by foreign partner, which can be made in the form of cash, in-kind contribution, industrial or other property rights, cannot be less than 25% of the registered capital, and profit sharing must be determined by discussions that occur on a yearly basis between the parties.
For these reasons, the most special feature of contractual joint ventures is their “flexibility”, in that they represent a mouldable and agile vehicle for FDIs, either for small and large projects. In particular for short-term co-operative projects, the investor who wants flexibility in tailoring joint ventures, and the investor who wants to do business with Chinese parties on a trial basis, may incline towards the CJV scheme.
Another important characteristic is that the parties must pay in full their investment or furnish the cooperative means on schedule, and after the parties have made all their contributions a ‘Chinese accountant company’ shall verify the contributions and produce a certificate of capital verification. The parties cannot mortgage or use as collateral in other situations their respective investments or cooperative means. Furthermore, during its term, the CJV cannot reduce its registered capital. In case it is necessary to reduce the registered capital due to changes in the total amount of investment and production or operation scale, the CJV must obtain the approval of the examination and approval organ (i.e. the MofCOM). It should be noted that the rules regarding the proportion o the registered capital to the total amount of investment in an equity joint venture also apply to cooperative joint ventures. (Reference must be made to the
‘Provisional Rules on the Proportion of the Registered Capital to the Total Amount of Investment of Sino-Foreign Equity Joint Ventures’,
promulgated by SAIC on March 1, 1987).
The duration of the contractual joint venture shall be determined by the parties through consultation and stipulated in the joint venture contract and it depends on the nature of the investment project itself.
Since China loosened restrictions on wholly foreign owned enterprises before joining the World Trade Organization, however, CJVs have fallen in popularity.
Application procedure for the establishment of a CJV
Setting-up a CJV requires the approval of MofCOM (or an authorized local authority). If the CVJ is approved, the MofCOM or the local government issues an approval certificate (local authority approvals should be reported to MofCOM within 30 days), and parties must register their organization within the SAIC to obtain the
business license
(and other authorities, e.g. tax authorities)
.
The issuance date of a CJV’s business license is considered the establishment date of the CJV.
The items to be included in the joint venture contract and article of association of a CJV are similar to those to be included in the joint venture contract and article of association of an EJV. However, since a contractual joint venture may have a
Joint Management Committee
rather than a
Board of Directors
and the parties to a CJV may receive products rather than profits, provisions regulating these aspects (on corporate governance and profit distribution) both in the contract and article of association should be also included.
The MofCOM will not approve a proposed CJV if:
i) it would be detrimental to China’s sovereignty or national interest;
ii) it would endanger state security;
iii) it would cause environmental pollution; or
iv) it would violate PRC laws, administrative regulations, or national industrial policies.
Most MofCOM approvals are granted at the central level, but a proposed CJV may apply to the provincial level commerce bureau if it meets the following requirements:
i) its business scope falls under the encouraged or permitted categories of the 2012 Catalogue (
http://blawg.lehmanlaw.com/wordpress/?p=1632
); On December 24, 2011, China’s National Development and Reform Commission (NDRC) and the Ministry of Commerce of China jointly issued the revised “Catalog” effective from January 30, 2012 (
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=142915
) to replace its previous version issued in 2007 (the old version of the Catalog is available at:
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=87372
for a comparison). The 2011 Catalog is the fifth revision of the document since its first promulgation. In particular foreign investors are encouraged under the 2011 Catalog to invest in projects that call for energy-saving and environmental protection, or engage in new-generation Information Technology, high-end equipment manufacturing, new-energy, new materials and new-energy automobiles.
ii) it is self-financed and does not require state balancing for construction or production conditions;
iii) it does not affect foreign trade export quotas; and
iv) it does not require the state to allocate additional raw material, including fuel, power sources, or transportation.
The CJV contract must stipulate each investor’s amount and timeline for capital contributions to the CJV. If a party fails to fulfill its contractual obligations, SAIC will set a new timeline for carrying out the obligations. If the party does not meet this timeline, SAIC and the CJV’s approval authority will decide the next step. A party that fails to fulfill its capital contributions may be charged with breach of contract. Registered capital refers to the total amount of capital subscribed by each party as registered at SAIC to establish the CJV. The registered capital should be expressed in RMB or a convertible foreign currency agreed by the parties.
These are the main aspects of the Contractual Joint Venture. In the next entry it will be exposed another important theme, namely the corporate governance of this investment vehicle.
Cristiano Rizzi