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Joint
Venture
The co-operative joint
venture ( CJV )
The equity joint venture ( EJV )
None of these vehicles can issue shares, but they are used in Mergers
& Acquisition (M&A) transactions to acquire assets in China.
Here below are the basic
regulations relating to each of these investment vehicles.
Co-operative Joint Venture
Legal Status
Co-operative joint ventures
(or "contractual joint ventures" as they are also called)
are somewhat akin to a partnership or limited-liability company
under US law, and contemplate Chinese and foreign parties co-operating
on the basis of a joint venture contract. The Co-operative Joint
Venture Law, promulgated in 1988, and the Detailed Implementing
Rules for the Law of the Peoples Republic of china on Chinese-Foreign
Co-operative Joint Venture (the Co-operative Joint Venture rules),
promulgated on September 4, 1995, govern the establishment and operation
of co-operative joint ventures.
Two forms of co-operative
joint ventures :
A"pure" co-operative
joint venture in which no legal entity separate from the contracting
parties is established, and where the parties make their contributions
to the project and bear the risk of profit and loss directly.
A "hybrid" co-operative joint venture in which a separate
business entity is established and registered and where the partie's
liabilities are generally limited to their capital contributions
to the entity.
Although the Co-operative Joint Venture Law does not explicitly
distinguish between these two types, it provides that those co-operative
venture would generally qualify as a separate legal person, while
a pure co-operative joint venture would not.
Establishment
The documentation required
for the establishment of a co-operative joint venture and the procedures
for obtaining approval of the project are very similar to those
outlined for equity joint ventures ( see below ). The foreign party,
together with its Chinese partner, must first prepare a letter of
intent and then a joint feasibility study. The parties will then
submit to MOFTEC or its local counterpart a project proposal, the
joint feasibility study, the joint venture agreement or contract
and articles of association, and other relevant documents including
business licences of registration certificates and documents, on
the parties credit standing and legal representatives. Upon receipt
of these documents, the authorities have 45 days to decide whether
to approve the proposed joint venture. The agreement or contract
and articles of association become effective on issuance of an approval
certificate.
Contribution's of parties
Contributions to co-operative
joint ventures can be made in forms other than those listed for
equity joint ventures. For example, the Chinese party to a co-operative
joint venture may be responsible for providing the required local
labour, including the payment for it, and the necessary factory
or office facilities. Often, the Chinese party lacks any assets
of real value, and its contribution consists merely of the provision
of consulting or government relation-type service. In a co-operative
joint venture with legal person status, the foreign partys investment
should be at least 25% of total registered capital. Unlike the case
with an equity joint venture, a foreign party's investment in a
co-operative joint venture may be repatriated before the expiry
of the term of the joint venture (typically through acceleration
depreciation generated pre-tax distributions), if the jont venture
contract provides that ownership of all the fixed assets of the
joint venture revert to the Chinese party on expiry of the joint
venture term.
Activities
Co-operative joint ventures
are favoured for commercial complexes and for projects where the
Chinese partner lacks assets or cash to contribute to the JV. Co-operative
joint ventures are rarely used in manufacturing.
Profits
The basic advantage of
co-operative joint ventures over equity joint ventures is that the
parties may agree on the distribution of profits at a ratio different
from that of the parties capital contributions. When the foreign
investor is seeking to minimise its risk exposure, the co-operative
joint venture contract may allow the foreign investor highest returns
in the early years of operation to speed the return of its original
investment. In practice, it has also been possible to stipulate
that the Chinese party is entitled to a fixed annual payment with
any remaining profits payable to the foreign party. The flexibility
of establishing different allocations of economic benefits, together
with the potential of return of capital before the end of the joint
venture term, are the most interesting features of the co-operative
joint venture.
Equity Joint Ventures
Equity joint ventures
are the most popular investment vehicle in China and governed by
the most developed body of law and regulations.
Legal Status
An equity joint venture
is a non-share issuing Chinese "legal person" with limited
liability. The liability of the registered capital holders is limited
to the amount of subscribed registered capital set forth in the
equity joint ventures constituent documents and registered with
the State Administration for Industry and Commerce (SAIC). An equity
joint venture is established on the basis of a joint venture contract
between Chinese and foreign parties after approval by the Ministry
of Foreign Trade and Economic Co-operation (MOFTEC), or its local
counterpart, and the issuance of a business licence by the SAIT.
Equity joint ventures are governed by the Equity Joint Venture Law,
the Equity Joint Venture Implementing Rules and the Company Law
to the extent that the provisions of the Company Law are not inconsistent
with the Equity Joint Venture Law and Implementing Rules. In addition,
supplementary legislation covers such issues as contribution of
registered capital, debt-equity ratios, registration formalities,
labour, imports and exports, foreign exchange, accounting and taxation.
Establishment
The establishment of
an equity joint venture requires three rounds, each of which requires
the drafting of appropriate documentation.
First, the Chinese party
must receive preliminary approval for the project itself. The Chinese
party must submit a project proposal and preliminary feasibility
study to its supervisory government department and to the appropriate
planning authorities. A signed letter of intent indicating the foreign
partys interest in the project is included in the project proposal.
Second, after the Chinese party has received initial approval from
the planning authorities and its supervisory government department,
the parties must prepare and jointly sign a feasibility study that
reflects their assessment of the economic viability of the proposed
project. The feasibility study is not a legally binding document
unless attached to the joint venture contract or articles of association
as a schedule, but it is nonetheless a very important blueprint
for the future operations of the joint venture and can be referred
to in the event of a dispute.
Third, the parties proceed to negotiate and draft the joint venture
contract and articles of association, the constituent documents
of the equity joint venture company. When the parties have executed
these documents, they must apply to the examination and approval
authority by submitting an application, the joint feasibility study,
the joint venture contract and articles of association, as well
as other documents. Upon receipt of these documents, the authorities
have up to three months to decide whether to approver or refuse
the proposed joint venture. The decision usually comes within four
to six weeks. MOFTEC or its provincial or municipal counterpart
is charged with examination and approval of the joint ventures constituent
documents, while either the State Planning Commission (SPC) or the
State Economic and Trade Commission (SETC) or their local counterpart
have the mandate to review the feasibility study. After approval
by both and the issuance by MOFTEC or its local counterpart of the
approval certificate, the parties must register the joint venture
with the local bureau of the SAIC within one month. The joint venture
will then be issued with a formal business licence and legally comes
into existence.
Management
The board of directors
is the highest authority in an equity joint venture company. Because
there are no shares, there are no shareholders and therefore no
shareholder meetings. In accordance with Chinese law, the appointment
of members of the board of directors is generally determined in
proportion to each partys equity contribution to the joint venture.
China now allows the foreign partner to appoint the chairman of
the board in a joint venture. In such cases, the Chinese party will
appoint the vice - chairman. Meetings of the board of directors
must be held at least once a year. A quorum for meetings of the
board is at least two-thirds of the members.
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