Joint ventures (JVs) are the most difficult forms of organization due to the administrative complexities associated with a partnership between a foreign company and a local company. This article describes the key activities for joint ventures with a Chinese partner. If your company wants to expand the geography of its activities and is looking for a partner in PRC to enter the market or localize its product, then our blog post will be of interest to you.
For the purposes of the article, it is assumed that the foreign participant has already realized the need for partnership, analyzed possible types of partnerships, opted for the creation of a company in Chinese jurisdiction together with a Chinese company, understands his contribution to the joint venture and realizes what contribution is needed from the partner.
Reasons for setting up a Chinese joint venture
In recent years, the PRC authorities have been implementing a policy of attracting foreign capital to the country, motivating in every possible way to create a joint venture with Chinese companies. The goal of this policy is, first of all, to gain access to the latest technologies and advanced management practices.
Benefits of JV in the PRC
A JV is a relatively new form of enterprise that provides for the creation of common ownership of financial and material resources used to perform foreign trade, scientific and technical, production and other functions.
An important feature of the JV is that the services and goods produced are jointly owned by foreign and domestic partners. All types of products are sold both abroad and in the country where the JV is based.
If you have a niche company in the market that has a consumer request to introduce a new and more technological product, then in China you will be welcome. In this case, partnership is beneficial to everyone.
Finding the right partner
Before setting up a JV in PRC, a foreign business needs to find local partners. Before you start, it is vital to check the potential partner conducting a comprehensive due diligence procedure. Points that need to be checked include:
- License and business status. This will give you valuable data about who is the decision maker, what is the partner’s share capital, etc.
- Land use rights. Here you will find out who actually owns the land. Foreign investors should be careful since illegal acquisition of land use rights in the PRC is a common problem;
- Financial statements. It is crucial to make sure that financial information on books truly depicts the company's financial situation.
Settlement of business disputes in China
JVs are operating structures with interdependent relationships, separation of control and management. With joint production, there is a need for joint capital investments, separation of income and losses, management responsibilities, since both parties take on their share of the economic risk.
As such, the JV reflects the deep and complex ties of the cooperating parties.
Participants in the Chinese JV are not allowed to opt foreign laws in relation to the JV agreements. In case of a conflict between the partieseither a local or a foreign arbitration institution can be chosen to settle the dispute.
This article is intended for general information purposes only and cannot be used as advice. IQ Decision UK solicitors provide legal assistance to foreign corporations in setting up a JV in China. Do not hesitate to contact us using contacts listed on the website.