A Joint Venture is a business arrangement in which the participants create a new business entity or official contractual relationship and share investment and operation expenses, management responsibilities, and profits and losses.
The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labour costs, low production costs and a potentially large Chinese market share. Joint Ventures are sometimes the only way to register in China if a certain business activity is still controlled by the government. There are 2 types of Joint Venture: The Equity Joint Venture (EJV) and Contractual Joint Venture (CJV). Please see the detail information regarding EJV & CJV.
Pros & Cons over WFOE
Advantages - JV over WFOE
Fewer restrictions on project approval than for a WFOE, thereby possible in “restricted” industries where WFOEs not allowed.
Upfront investment required from the foreign investor likely to be lower for a JV than a WFOE as shared with the JV partner.
Assistance from partner in such areas as obtaining government approvals, labor recruitment, sourcing raw materials, acquiring land & production facilities, obtaining access to marketing & distribution channels etc.
Thus, potential for reduction in upfront investment risks compared to a WFOE due to transfer of existing customers and sales contracts from the partner to the JV.
And also the potential for JVs to be up and running more quickly than WFOEs.
Disadvantages - JV over WFOE
Need to do proper due diligence on then negotiate the JV contract with a Chinese partner in China.
Risk of inadvertently inheriting the baggage of the JV partner, including excess workers, poor reputation with past customers etc.
No unilateral control of operations, and thus significant risk exposure to partner disputes and losing control of the JV. Moreover, in the case of an EJV, the partner has power of veto over the major decisions that require unanimous board approval, possibly inhibiting the EJV’s ability to respond to changes in market conditions.
AS a JV will effectively be a going concern, allows less control over corporate culture than with a WFOE.
In contrast to WFOE, a JV presents a higher risk exposure to IPR infringement and even “arming” a future competitor with know how, trade secrets etc.
Transfers of Equity Interests in Joint Ventures
If a party proposes to transfer all or part of its interest in the registered capital of the joint venture company to a third party, then each other party has a pre-emptive right to purchase the equity interest proposed to be transferred. As an equity transfer also requires amendment of the joint venture contract and articles of association, which in turns requires the signature of each party, each party in effect holds absolute consent rights to any transfer generally. All transfers of registered capital additionally require a unanimous approval of the joint venture company board of directors and approval by the original government authority which approved the joint venture contract and articles of association.
Operation Period & Others
(A) Under PRC law, joint venture companies have a fixed term of operation. Currently, the most common term of operation approved is fifty (50) years. This term can be extended with the consent of all parties and approval of the relevant government authorities. In some instances, particularly in BOT-like CJVs, the term of operation agreed by the Chinese party and approved by the relevant government authorities will be much shorter.
(B) Depending on the nature of the operations of the proposed joint venture company, certain additional government approvals, permits or licenses may be required, e.g., sanitation certificates, environmental permits, production approvals, export licenses, value-added telecom services operating licenses, etc. Certain other legal and practical considerations relating to the establishment of a Sino-foreign joint venture company are set out in the notes at the end of the template Joint Venture Contract.
We can help you to set-up the JV in China, work out the whole process and make sure that all the issue are done on time an with your satisfaction.