Form

Types of joint venture

What are the key types of joint venture in your jurisdiction? Is the ‘joint venture’ recognised as a distinct legal concept?

Joint ventures in general are incorporated in the form of a limited liability company (LLC), partnership or other legal forms recognised by Chinese law (such as an unincorporated contractual arrangement).

Joint ventures in China can be further classified into two main groups in terms of source of investment: namely, foreign-invested joint ventures and joint ventures without foreign investment. The most common types of foreign-invested joint ventures in China are sino-foreign equity joint ventures (EJVs), sino-foreign contractual joint ventures (CJVs) and the newly merged foreign-invested partnership.

Historically, the term ‘joint venture’ was firstly introduced into the Chinese legal regime as a distinct legal concept in respect of EJVs under the Law on Sino-Foreign Equity Joint Ventures (EJV Law) in 1979 and then for CJVs under the Law on Sino-Foreign Contractual Joint Ventures (CJV Law) in 1988, much earlier than the first People’s Republic of China (PRC) Company Law (PCL), which was issued in 1993.

The PCL regulates all types of LLCs and joint stock companies limited by shares (JSCs) in China in general. The PCL also applies to all types of foreign-invested enterprises (FIEs) incorporated in the form of LLCs or JSCs, including EJVs and CJVs, as they are required to be established in the form of an LLC, except that CJVs can be incorporated as an unincorporated contractual arrangement, although the special laws governing FIEs (such as the EJV Law and CJV Law) prevail in cases of conflict between the PCL and such special laws. It is noteworthy that a joint venture is no longer recognised as a distinct legal concept in the PCL.

Accordingly, FIEs in China (including EJVs and CJVs) and companies without foreign investment have been subject to two different sets of laws and regulations in China (namely, the PCL and laws governing FIEs) and are treated differently thereunder, particularly in terms of their organisational and corporate governance structure.

The separation and inconsistency between the PCL and the laws governing FIEs will be phased out in the coming years, after the release of the new Foreign Investment Law (FIL) on 15 March 2019. The FIL will, upon its effectiveness on 1 January 2020, replace the previous three major existing laws on FIEs, including the EJV Law and CJV Law. By such time, newly established FIEs including EJVs and CJVs will be uniformly governed by the PCL, while existing FIEs previously established pursuant to laws governing FIEs will have a five-year transition period, during which such existing FIEs may retain their existing organisational forms and governance structures. Unless otherwise specified, the special rules relating to EJVs and CLVs mentioned in this chapter are expected to be repealed or modified after 1 January 2020.

Common sectors

In what sectors are joint ventures most commonly used in your jurisdiction?

Joint ventures are formed in a wide variety of sectors and industries in China.

Foreign investment in China is subject to the relevant restrictive and prohibitive measures provided for under the Special Foreign Investment Access Administrative Measures (Negative List). Under the latest 2019 Negative List, foreign investment in certain sectors such as the manufacture of whole automobiles (except for special-purpose automobiles and new energy automobiles), medical institutions, education institutions, etc, must be partnered with Chinese investors in the form of EJVs or CJVs.

Parties

Rules for foreign parties

Are there rules that relate specifically to foreign joint venture parties?

In general, there are no special rules applying specifically to foreign joint venture parties, except for very few general principles in relation to capital contributions by foreign parties to an EJV, including:

  • the machinery or equipment contributed by a foreign EJV party into the EJV as its capital contribution shall be indispensable to produce the EJV; and
  • the intellectual property rights contributed by a foreign EJV party into the EJV as its capital contribution shall be either technologically advanced or energy-saving.

Foreign investors should also consider the major differences in corporate governance structures between foreign-invested joint ventures (EJVs and CJVs) and joint ventures without foreign investment under current Chinese laws, including, among others:

  • the highest corporate authority of an EJV or a CJV is a board of directors, but a CJV may have a joint management committee as the highest corporate authority instead of a board of directors, and they are not required to have a shareholder meeting. Companies governed by the PCL shall have shareholders’ meetings as the highest corporate authority in addition to a board of directors (or one executive director);
  • the quorum for board meetings of an EJV or a CJV or the joint management committee meetings for a CJV shall be two-thirds of the directors or the members of the joint management committee, while the quorum requirement for a company governed by the PCL can be freely decided by the shareholders; and
  • major corporate matters such as an amendment of the articles of association, an increase or reduction of registered capital, merger, division, suspension of business or termination of an EJV or a CJV shall require unanimous approval of the board of directors or members of the joint management committee, while for a company governed by the PCL such matters shall be subject to the approval of shareholders holding voting rights of no less than two-thirds.
Ultimate beneficial ownership

What requirements are there to disclose the ultimate beneficial ownership of a joint venture entity?

When incorporating an FIE (including EJVs and CJVs) in China, the investors are required to disclose the ultimate beneficial controller(s) of the proposed FIE to the competent commerce authority (the Ministry of Commerce or its competent local office) by filing a shareholding structure chart containing the required information of the ultimate beneficial controller(s).

Setting up and operating a joint venture

Structure

Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

For foreign-invested joint ventures, one of the primary driving factors relating to structuring a specific joint venture in China is whether the intended business scope falls within prohibited or restricted sectors for foreign investment provided for under the Negative List. For certain restricted sectors, the Negative List requires that the Chinese joint venture parties shall hold majority shares in the joint venture to be established. In practice, the joint venture parties also resort to contractual arrangements such as the commonly adopted variable interest entity structure to implement foreign investment in certain sectors prohibited or restricted, though the same is not endorsed by Chinese law.

Other common driving factors include:

  • the objective and purpose of the joint venture and methods of co­operation between the joint venture parties, such as if any specific technologies or assets of a specific joint venture are critical to the joint venture;
  • the corporate governance structure and decision-making mechanisms, taking into consideration mandatory legal requirements and the room that the parties may negotiate;
  • preferential tax treatments or policies available;
  • tax consequences, particularly those relating to the distribution of dividends to foreign joint venture parties; and
  • the level of ease for disposing of the shares of or termination of the joint venture.
Tax considerations

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

The main tax considerations for joint venture parties when establishing a joint venture are the overall tax structuring, taxes payable and tax burden in relation to the joint venture to be incorporated.

A domestic joint venture party will also need to consider the tax consequences if it will make its capital contribution by non-monetary assets such as fixed assets, intellectual property rights, etc, and the joint venture party could be subject to enterprise income tax on gains received from such capital contributions, unless the same is regarded as a reorganisation operation and is thus qualified for special tax treatment. In such circumstances, the joint venture party can settle the enterprise income tax payable on a deferred basis over a five-year period.

As for foreign joint venture parties, other tax concerns will be in relation to withholding tax on income from the joint venture such as dividends, interests and royalties, considering the relevant tax treaties entered into with China and the seat of the foreign joint venture parties.

Asset contribution restriction

Are there any restrictions on the contribution of assets to a joint venture entity?

Shareholders to a joint venture may contribute its subscribed capital in cash, in kind or with intellectual property rights, land use rights or other non-monetary assets, provided that the value of non-monetary assets shall be determined through appraisal and the ownership thereof shall be legally transferred to the joint venture.

In relation to EJVs and foreign-invested partnerships, if the capital contribution is made in kind, immovable properties or intellectual property rights, the value of such assets can be determined either through appraisal by a third party or by negotiation between the parties on the principles of fairness and reasonableness.

For EJVs, where a foreign joint venture party contributes in intellectual property rights, the foreign party is also required to provide the company registration authority with documentation relating to the ownership, validity, technical features and the basis for determining the value of such intellectual property rights, as well as the agreement signed with the Chinese party on determining the value of such intellectual property rights.

Interaction between constitution and agreement

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

Under the PCL, articles of association are recognised as the constitution of a company in general, and articles of association are binding on the company and its shareholders, directors, supervisors and senior officers. Articles of association must be filed with the company registration authority for registration and record, and can be publicly available. Contractual agreements between joint venture parties are private agreements between the parties and usually regulate the rights and obligations between the joint venture parties. Contractual agreements are not statutory legal documents required for companies regulated by the PCL and are not required to be filed with the company registration authority. The PCL does not designate priority between the articles of association and the contractual agreement between joint venture parties.

The legal requirements for EJVs and CJVs are different. In addition to articles of association, the current effective laws expressly recognise joint venture agreements and joint venture contracts for EJVs and CJVs. A joint venture agreement for an EJV or CJV is defined by law to govern the key points and principles in relation to the formation of the relevant joint venture and is more like a term sheet or framework agreement, while a joint venture contract for an EJV or CJV is an agreement governing the specific obligations and rights of the joint venture parties, thus it actually serves as the ‘real’ shareholders’ agreement between the parties. The joint venture parties may choose not to enter into a joint venture agreement, although the joint venture contract together with the articles of association are statutory legal documents to be filed with the company registration authority when incorporating an EJV or CJV. The law further expressly provides that, in cases of discrepancy between a joint venture contract and articles of association for EJVs and CJVs, the joint venture contract shall prevail.

As a general rule, both articles of association and joint venture agreements (whether for joint ventures with foreign investment or not) may not violate or override the mandatory law provisions, and on this basis the joint venture parties may agree on specific arrangements or agreements between them and have the same incorporated into the articles of association or the joint venture agreements, although it is common for the articles of association of a company to include mandatory provisions only.

Party interaction

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

The interaction of the joint venture parties with the relevant joint venture will be subject to mandatory law provisions, the articles of association and the contractual agreements between the joint venture parties.

As a statutory law principle, a shareholder may not damage the interests of the company or other shareholders in abusing or taking advantage of its shareholders’ rights or its affiliated relationship with the relevant company, or the said shareholder may be held liable to assume compensation liabilities according to the law. Moreover, when a company intends to provide a guarantee for a shareholder or the actual controller of the company, the matter shall be approved by the shareholders’ meeting and the related shareholder shall refrain from voting on the matter.

Shareholders in a company are entitled to right of information access provided for under the PCL, whereby a shareholder is entitled to review (for both LLCs and JSCs) and take copies of (for LLCs only) the company’s articles of association, minutes of shareholders’ meetings, board resolutions, resolutions of the supervisory board and financial accounting reports, and a shareholder of LLCs is also entitled to check the company’s account books for legitimate purposes.

Exercising control

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

The control over a joint venture by joint venture parties is commonly implemented through means such as:

  • the allocation and balancing of power to appoint or remove directors and senior management personnel; and
  • reserved matters that either require a special majority of shareholders or a vote from specific shareholder(s), which generally is more favourable to and pursued by minority shareholders.

For joint ventures regulated by the PCL, the decision-making mechanism of the joint venture could be substantially agreed by the shareholders freely, except for mandatory rules that must be complied with, such as:

  • amendments to the articles of association, an increase or reduction of registered capital, change of corporate form, the merger, split or termination of the company, which shall be approved by shareholders holding two-thirds or more voting rights;
  • the transfer of shares by one shareholder to a third party shall be subject to the consent of a majority of other shareholders; and
  • the voting rights of shareholders at shareholders’ meetings shall be exercised in proportion to their respective capital contributions, unless the shareholders have agreed on a different method of exercising their voting rights.

The mandatory rules in relation to decision-making mechanisms are different for EJVs and CJVs, for which amendments to the articles of association, an increase or reduction of registered capital, and the merger, split, suspension or termination of the joint venture shall require unanimous approval of all directors, and a transfer of shares by a joint venture party to a third party shall be approved by all other joint venture parties.

Governance issues

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

The most common governance issues for joint ventures in China are:

  • the allocation and balancing of decision-making and management power among the joint venture parties;
  • deadlock issues; and
  • route of exit from the joint venture.

The governance issues are to be deliberated at the very beginning when the joint venture parties negotiate terms for a proposed joint venture, taking into consideration the proposed shareholding structure, and the roles and expectations of joint venture parties in relation to the proposed joint venture. In the case of a foreign-invested joint venture, the joint venture parties shall also consider the mandatory rules relating to decision-making of the joint venture (see question 10) in combination with the proposed allocation of management control between the joint venture parties and the potential deadlock issue.

For example, for an EJV, the law requires that the number of directors shall be at least three, the appointment of directors can be discussed between the joint venture parties by reference to (rather than in proportion to) their shareholding percentage, and the statutory quorum for a board meeting is two-thirds of all directors. Accordingly, in many circumstances, the minority joint venture party is encouraged to negotiate and request the power to appoint directors to the board, plus as many reserved matters as possible to be approved by the board that require a favourable vote from the minority party, and as a result the governance structure agreed between the joint venture parties may easily lead to deadlock.

Nominee directors

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

The directors of a joint venture company owe duties of loyalty and diligence to the joint venture company by law, and as a general principle a director may not act in damaging the interests of the company by taking advantage of his or her affiliated relationship with the company. A director could be also held liable to compensate the company for losses caused to the company when performing its duties in violation of the constitutional documents of the company or law.

In addition, the board of supervisors or supervisors (if there is no board of supervisors) of a company are empowered by law to supervise the performance of duties by directors, and are entitled to request the relevant director to rectify his or her actions and to propose the removal of directors who have acted in violation of constitutional documents, shareholders’ resolutions or the law.

A shareholder may also in his or her own name initiate a lawsuit against a director who violates the constitutional documents of the company or the law in damaging the interests of the shareholders.

In addition to statutory provisions, it is also common to stipulate specific matters that are to be approved by shareholders or alternatively restrict the specific powers of directors or the board of directors in the articles of association to the extent permitted by law.

Competition law

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

The formation of a joint venture in China falls within the scope of ‘concentration of undertakings’ prescribed under the PRC Anti-Monopoly Law, and the relevant transaction will be subject to merger control clearance by the competent anti-monopoly authority if prescribed statutory thresholds are met; namely, if in the preceding financial year:

  • the combined worldwide turnover of all the undertakings concerned exceeds 10 billion yuan, and the nationwide turnover within China of each of at least two of the undertakings concerned exceeds 400 million yuan; or
  • the combined nationwide turnover within China of all the undertakings concerned exceeds 2 billion yuan, and the nationwide turnover within China of each of at least two of the undertakings concerned exceeds 400 million yuan.
Provision of services

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

One of the key considerations in relation to the provision of services to the joint venture by a joint venture party is that the relevant transaction is to be carried out on an arm’s-length basis and shall not damage the interests of the joint venture or other joint venture parties, or the said joint venture party could be held liable for compensating the damages caused to the joint venture or other joint venture parties.

Relevant tax consequences are also key factors in structuring the services from joint venture parties to the joint venture, depending on the nature of the services involved and the identity and seat of the joint venture parties providing the services, as well as if the services involve transfer-pricing issues. For example, if the tax authority believes that transactions between the joint venture parties and the joint venture are not on an arm’s-length basis and as a result the taxable income of the joint venture or the joint venture parties is unreasonably reduced, the tax authority is authorised to step in and adjust the taxable income.

Employment rights

What impact do statutory employment rights have in joint ventures?

Under Chinese law, secondment of employees shall be carried out in line with statutory legal requirements, for example:

  • secondment of employees shall only be for temporary, auxiliary or substitute job positions;
  • the entity dispatching employees to be seconded will be regarded as the employer and shall enter into a formal fixed-term labour contract for at least two years with the employees to be seconded and undertakes all relevant labour law obligations to such employees; and
  • the dispatching entity shall also need to enter into a secondment agreement with the entity receiving the employees.

In addition, the entity receiving the seconded employees shall also provide statutory employee protection and conditions for the seconded employee in line with law.

Where an employee is to be transferred to the joint venture, the joint venture will be the employer and it shall enter into a formal labour relationship with the employee.

Intellectual property rights

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

When incorporating a joint venture, the joint venture parties can contribute subscribed capital with intellectual property rights. It is becoming increasingly popular for joint venture parties to license their technologies instead of transferring them to the joint venture through a capital contribution at the outset of the incorporation of a joint venture.

In the context of an EJV, if a foreign joint venture party contributes its subscribed capital in intellectual property rights, the foreign party is required to provide documentation relating to the ownership, validity, technical features and the basis for determining the value of such intellectual property rights to the company registration authority. In addition, the intellectual property rights shall be either technologically advanced or energy-saving. Furthermore, for technologies to be transferred to an EJV by a joint venture party or a third party, the relevant technology transfer agreement shall meet mandatory legal requirements, such as that the technology transfer fee shall be reasonable, and the party providing technologies may not restrict the areas, quantity or price of the products that are to be exported by the joint venture unless otherwise agreed.

In the case of termination of the joint venture, the intellectual property rights, depending on whether they are transferred or licensed to the joint venture, will be dealt with in accordance with the arrangement as agreed in the relevant joint venture agreement or licensing agreement.

Funding the joint venture

Typical funding

How are joint ventures generally funded in your jurisdiction? Are there any particular requirements relating to funding and security packages?

When incorporating a joint venture, traditionally the common way to fund a joint venture is through an initial capital contribution by shareholders.

Practically, the joint venture parties should consider the level of funds needed initially to operate the joint venture, which therefore may impact the amount of the initial registered capital to be injected. The issue could be a particular concern for a foreign-invested joint venture when funds from its foreign shareholders or foreign banks are needed, due to foreign exchange controls in China. In general, foreign debts are required to be registered with the foreign exchange authorities or the repayment of such debts will not be allowed.

In addition, both equity-financing and debt-financing means are widely adopted to fund incorporated joint ventures. These include shareholder loans, third-party financing (traditional bank loans or inter-company borrowings), subscription of capital increase by shareholders and the transfer of existing shares to new investors.

Capital injection restrictions

Are there any legal or regulatory restrictions on the injection of capital into, or the distribution of profits or the extraction of cash by other means from, the joint venture entity?

Since 2014, as a part of the reform of the PCL and related regulations, the paid-in capital registration system and the minimum registered capital requirements have been substantially removed for companies in most sectors, and shareholders in companies (including EJVs and CJVs) established in China are now free to decide on the total registered capital amount, their respective contribution amount and the timing for capital contributions, except for some specific industries that are still subject to mandatory requirements for a minimum amount of registered capital (such as banking and financial institutions, securities companies, futures companies, fund management companies, insurance companies, etc).

Joint venture parties to a joint venture may contribute capital in cash, in kind or with intellectual property rights, land-use rights or other non-monetary assets. However, they are not allowed to make capital contributions by labour services, credit, the name of a natural person, goodwill, franchise rights or properties over which any guarantee has been created.

As a general rule, profits can only be distributed to joint venture parties from the net profits of a joint venture company after the latter has made up its losses and has allocated statutory reserve funds in accordance with the law.

For joint ventures regulated by the PCL, in principle, the profits of the joint venture are to be distributed among the joint venture parties in proportion to their capital contributions; however, the joint venture parties are also allowed to agree on different methods for profit distribution. For EJVs, the joint venture parties are required to distribute profits strictly in proportion to their respective capital contribution. For CJVs, the Chinese and foreign joint venture parties may agree on different methods of profit distribution, including distribution of profits, distribution of products or other means as they may agree upon.

Tax considerations

What tax considerations should be taken into account in the operation of the joint venture?

A joint venture established in China is regarded as tax-resident in China and, as such, the joint venture is subject to enterprise income tax (EIT) on its worldwide income (subject to credit available for tax paid on foreign-sourced income). The normal EIT rate is 25 per cent, but reduced EIT rates may be available depending on the size and nature of the joint venture. For example, a reduced EIT of 15 per cent can apply to joint ventures duly accredited as high- and new-technology enterprises, joint ventures incorporated in certain regions of China or joint ventures engaged in specified business activities.

Joint ventures established in China may also be subject to other PRC taxes in terms of their business activities. For example, joint ventures engaging in the sale or importation of goods, the provision of services, and the sale of intangible properties and immovable properties are subject to value-added tax (VAT) at rates ranging from zero to 13 per cent (the highest VAT rate of 16 per cent was reduced to 13 per cent on 1 April 2019).

Dividends, interests and royalties paid to a non-tax-resident are subject to withholding at 10 per cent, which could be reduced pursuant to relevant tax treaties or agreements entered into between China and other countries or regions.

In general, there is no tax-consolidation regime in China.

Accounting and reporting issues

Are there any noteworthy accounting or reporting issues for the joint venture parties regarding their investment in the joint venture?

Companies are required to prepare their financial statements at the end of each financial year to be audited by a certified public accounting firm registered in China.

An EVJ must have its financial statements prepared in Chinese in accordance with Chinese accounting standards. However, the joint parties may also agree that the financial statements of the joint venture be prepared simultaneously in another language or in accordance with another accounting standard agreed between them.

A company is normally required to file EIT returns within 15 days of the end of the month or quarter, and a company shall file its annual EIT reconciliation report within five months of the previous year’s year-end for final settlement of its tax liability.

In addition, companies in China are required to prepare and submit their annual company reports for the previous year to the company registration authority, with the relevant information be publicised to the public between 1 January and 30 June of each year.

Deadlock, exit and termination

Deadlock provisions

What deadlock provisions are commonly included in joint venture agreements in your jurisdiction?

A wide variety of clauses and solutions dealing with deadlock are adopted in relation to joint ventures in China. Typical mechanisms used in joint venture agreements dealing with deadlock may include:

  • limiting the matters requiring special majority corporate approval or minority shareholder approval so as to minimise the level of occurrence of deadlocks;
  • providing for the obligations of joint venture parties to act in good faith to operate the joint venture and to solve any deadlock situation;
  • introducing an escalation mechanism by referring the relevant dispute under deadlock to the senior executives of the joint venture parties for solution; and
  • triggering of a prescribed exit mechanism or termination provisions (see question 22).
Exit provisions

What exit provisions are commonly included? Does the law restrict any forms of mandatory transfer provision or any basis of calculation?

Exit provisions commonly included in joint venture agreements include:

  • the right of first refusal over shares to be transferred and related procedures;
  • tag-along and drag-along provisions;
  • put option and call option provisions; and
  • buy-out of shares of the other joint venture parties or forced sales or liquidation of the joint venture upon the occurrence of prescribed events (such as deadlock).

In relation to exit by way of sales or the transfer of shares in a joint venture, such provisions shall take into consideration the mandatory legal requirements regarding the right of first refusal. For LLCs governed by the PCL, the transfer of shares to a third party shall be subject to the consent of a majority of other shareholders, and the other shareholders shall be entitled to the right of first refusal over the shares to be transferred. However, for EJVs, the transfer of shares by one joint party to a third party shall be subject to the approval of all other joint venture parties, while the latter are also entitled to the right of first refusal over the shares to be transferred by law.

Tax considerations following termination

What are the tax considerations on termination of the joint venture?

In cases of the termination and liquidation of a joint venture, the joint venture is subject to EIT at the normal rate of 25 per cent of the income received from the liquidation (if any).

The remaining assets after the liquidation of a joint venture distributed to its shareholders will either be recognised as dividend income or income or loss of the joint venture parties, who will be also subject to EIT or individual income tax (if a joint venture is an individual) on their respective income received from the liquidation of the joint venture according to the applicable rate. Liquidation income received by a non-tax-resident joint venture party will be collected through withholding. For assets distributed to shareholders of a liquidated joint venture, the value of such assets will be determined in accordance with the cashable value or actual transaction value, which will be used as the tax basis.

Disputes

Choice of law and resolution methods

In your jurisdiction, are there constraints on the choice of law or the method of dispute resolution provided for in joint venture agreements?

With respect to EJVs and CJVs to be incorporated within China, Chinese law requires that the relevant joint venture agreements are governed by Chinese law.

For joint ventures incorporated in China between domestic investors, the joint venture parties are not expected to choose foreign laws as the governing law over the underlying joint venture agreements, as otherwise the relevant agreements could be held invalid in cases of dispute, unless the latter involves foreign-related factors such as one of the joint venture parties is a foreign entity or person or his or her habitual residence is outside China, or the subject matter is located or takes place outside China.

For joint venture agreements relating to EJVs and CJVs, the joint venture parties may choose either a domestic or foreign arbitration institution for dispute settlement. However, joint venture parties to EJVs and CJVs may not choose a foreign court to resolve disputes relating to EJV or CJV agreements, and such disputes shall be governed by the Chinese courts as required by Chinese law.

Mandatorily applicable local law

What mandatory provisions of local law will apply irrespective of the choice of governing law?

For matters relating to EJVs or CJVs to be incorporated within China, Chinese law shall apply mandatorily. If a joint venture is without foreign-related factors, in principle the parties are not advised to choose the laws of another country or region as the governing law.

Remedy restrictions

Are there any restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes? Are there any restrictions on the arbitration of shareholder claims?

There are no express restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes, nor on the arbitration of shareholder claims.

One related concern is the recognition and enforcement of foreign arbitration awards in China. In China, foreign arbitral awards are enforceable pursuant to the New York Convention. In practice, the recognition and enforcement of foreign arbitral awards generally involves rather complicated and troublesome procedures, and whether a specific arbitration award will be recognised and enforced in China is without guarantee. An enforcement could be denied by a Chinese court if the subject matter of the dispute is not capable of settlement by arbitration under PRC law or recognition or enforcement of the award would be contrary to PRC public policy.

Minority investor protection

Are there any statutory protections for minority investors that would apply to joint ventures?

The following shareholders’ rights are generally available to shareholders of joint ventures in the form of LLCs and JSCs, including also EJVs and CJVs to the extent applicable (if there are special rules applicable to EJVs or CJVs, such special rules shall prevail):

  • the right to attend and vote at a shareholders’ meeting (not applicable to EJVs and CJVs, which are not required to have shareholders’ meetings), access to company information and documents, the right to receive dividends, etc, and the exercise of such rights is not subject to shareholding requirement;
  • for joint ventures in the form of LLCs (not applicable to EJVs and CJVs), shareholders holding 10 per cent or more voting rights for 90 consecutive days are entitled to call an interim shareholders’ meeting; if the board of directors and supervisors fails to do so, the shareholders may call and preside over a shareholders’ meeting;
  • any shareholders may, within the statutory time limit, petition the court to revoke a board or shareholders’ resolution if the said resolution is believed to be in contravention of the law or the articles of association of the joint venture;
  • any shareholder of an LLC or any qualified shareholder of a JSC is entitled to request the board of supervisors (or supervisor) or the board of directors (or executive director) of the company to sue the directors or management of the company who have violated the law or the company’s articles of association when performing their duties and have caused loss to the company, or sue the directors or management of the company directly if the board of supervisors (or supervisor if there is no board of supervisors) or board of directors (or executive director) of the company fail or refuse to do so or the matter is urgent; and
  • any shareholder holding 10 per cent or more of the voting rights of all shareholders may petition a court to dissolve the company if the operation and management of the company suffers serious difficulties that will lead to significant losses to the shareholder’s interests, and there are no other solutions.
Liabilities

How can joint venture parties have liabilities to each other beyond what is expressly agreed in the joint venture agreement?

Beyond what may be agreed in the relevant joint venture agreement, the law provides that a shareholder shall not abuse the shareholder’s rights in damaging the interests of the company or other shareholders, otherwise it will be held liable for the losses suffered by the joint venture or other joint venture parties.

Disclosure of evidence

Are there any particular issues that can arise in joint venture disputes in your jurisdiction concerning disclosure of evidence?

There are no rules concerning disclosure of evidence in joint venture disputes, apart from general evidence rules under Chinese legislation. Chinese civil procedure does not include a discovery or disclosure process. Each party must decide what documents and evidence it will submit to prove the facts on which its claims or allegations are based. Under limited circumstances, the court has the discretion to require a party to submit certain evidence under its control as the court deems necessary.

Market overview

Jurisdictional advantages

What advantages does your jurisdiction offer for parties wishing to set up and operate joint ventures?

China has established a rather mature and transparent legal regime in relation to foreign investment, which in turn helps China to offer a stable and consistent investment environment for foreign investors.

China has invested heavily in the development of infrastructure, which has been a key driver in attracting foreign investment as it helps China offer much lower transportation and transaction costs and increased profits. In addition, the size of the Chinese market makes China a competitive and attractive nation for investors in all types of sectors.

Requirements and restrictions

Are there any particular requirements or restrictions relating to joint ventures in your jurisdiction that could deter international investors?

Foreign investment in China is subject to restrictive measures provided by law. China adopted the Negative List approach for foreign investment in 2017, and the latest Negative List was released on 30 June 2019. The Negative List sets out all the sectors in which foreign investment is either prohibited or restricted. Sectors categorised as prohibited are not open to foreign investment. Most restricted sectors are open to foreign investors either by way of limits on the equity interests of foreign investors (some sectors require Chinese joint venture partners or that the Chinese partner shall hold a majority equity interest), or the senior executives must be Chinese.

Under the 2019 Negative List, foreign investors are prohibited from investing in sectors such as news agencies, air traffic control, domestic express delivery businesses and harvesting of aquatic products in the territorial waters or inland waters of China, while foreign investment in certain sectors such as printing of publications, medical institutions, education institutions, etc, must be partnered with Chinese investors (namely in the form of EJVs or CJVs).

Updates & Trends

Key developments of the past year

What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?

Key developments of the past year32 What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?

Substantial and incremental changes and reforms have taken place with respect to China’s company law and foreign investment law regime in the past five years, including, among others, the relaxation of registered capital requirements; the implementation of pre-establishment national treatment; the Negative List approach for foreign investment, with heavily reduced restrictive measures and much widened market access for foreign investment; and record-filing-based and simplified registration procedures for foreign investment. Most importantly, the new FIL will become effective in 2020, and by that time all foreign investment activities will be regulated together with domestic investment under uniform laws and regulations. All such changes indicate clear signals of the Chinese government removing barriers for foreign investment and abiding by its standpoint of openness for business.