Joint Ventures used to be the most common foreign investment structure in China. A lot of things have changed since China's accession to the WTO in 2001. In this presentation, Shanghai-based law firm R&P discusses the Joint Venture types and highlights the reasons for and against JV's.

1. Partnering up in a China
Joint Venture – A wise
decision?
An R&P Publication on Chinese Law
and Legal Practice
C R&P China Lawyers Shanghai, 2012
T +86 21 6173 8270
E info@rplawyers.com www.rplawyers.com

2. INTRODUCTION
• Restrictions on FDI / slow opening of China’s economy
 JV was the compulsory structure especially in the 80’s/90’s
• China accession to WTO in 2001: gradual lifting of foreign
direct investment (FDI) restrictions
• Today, new WFOE’s (wholly-owned subsidiaries)
outnumber new JV’s (Chinese-foreign joint ventures)
and the ratio shifts rapidly:
2008: 30% of all German companies in China were JV’s
 2011: only 11% of German operations fall into JV’s
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3. INTRODUCTION
WFOE
Joint
Venture
Importance of Joint Ventures is sharply
decreasing: When are JVs the right strategy?
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4. JV Structure: Key Points
• The basic idea: 2+ investors invest in and hold a third entity
i.e. the JV is NOT a merger of two existing companies!
A: B:
Foreign Chinese
Investor Company
C:
Joint
Venture
• Both entities (A + B) continue to exist independently from JV
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5. JV Structure: Key Points (2)
• Two different Joint Venture types:
Equity Joint Venture / Cooperative Joint Venture
• Joint Investment: mutual capital contribution (cash, assets)
• Shared benefits – and shared risks
 Principle for development of Chinese economy:
Foreign partner benefits from local knowledge and resources
Chinese partner acquires new technologies, know-how, insight
in foreign management style and markets, cash contribution
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6. Reasons for Joint Venture Structure
• Benefits: local • Minimizing costs:
market knowledge, Benefit Cost shared capital
local resources, contribution, help with
contacts, partner’s setting up cost-effective
familiarity with facilities under local
Legal conditions
culture and language
• Legal restrictions: Partnering with Chinese company is still
mandatory for certain industries determined in the Foreign
Investment Catalogue:
 E.g. car manufacturing, finance + insurance,
telecommunications, media publishing, mining activities <6 of 18>

7. Equity Joint Venture
• Limited Liability Company + Chinese legal entity
 Foreign Investor: Companies, individuals
 Chinese Investor: Companies only
• Profits/dividends and risks proportionally shared
• Partners appoint legal representative/board of directors
• Capital contribution: cash, assets (e.g. machinery), intellectual
property, land-use rights
• JV ends upon:
 Expiration of agreed term (if not extended)
 Mutual agreement between partners
 Other reasons specified in JV contract ( exit strategies!)
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8. Cooperative/Contractual Joint Venture
• Can be established as Ltd. Co. OR as cooperation between
separate legal entities with independent liabilities
• Capital contribution does not have to be of monetary value:
resources, services, licenses, market-access rights
• Investment return negotiable (dividend payment schedules,
ownership of assets during and after the project)
 not strictly linked to the party’s share (e.g. BOT projects)
• No binding system for voting rights (Board of Directors)
 High flexibility in the JV organization, but complex, lengthy
negotiations: suitable for certain projects
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9. The Advantages
• Shared risks and costs when expanding to Chinese market
• Market access: only way to invest in closed industries
• JV is a Chinese Ltd. Co.: higher chance in government
procurement biddings
• Simplifies dealing with government authorities
• Benefits from Chinese partner’s network and local business
practices (cost control)
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10. The Disadvantages
• Equity transfer requires government approval
• Difficult to control: Chinese partner may be involved in active
management – who controls daily operations?
• High risk of dispute:
 Different goals and expectations for the future direction?
 Culture: different business/management mentalities
• Exposure of IPR and confidential information:
 Who is the owner of the IPR when JV is closed?
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11. When Joint Ventures Fail…
• Common dangers for the foreign party:
Conflicts of  Chinese partner may share land, machinery and
interest employees where JV is located nearby Chinese
investor
Favoritism  Contracts with relatives in unfavorable conditions
 Secret (e.g. night shifts) manufacturing of own or
Secret
competitive products to generate higher margins
Manufacturing
 Supplying relatives with IP and know-how to
produce counterfeits
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12. Minimizing Risks, Maximizing Chances
Establishment JV Agreement
Intellectual
Partnering
Property
Due Diligence Confidentiality
Influence Dispute
Control Settlement
Exit Strategy
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13. Minimizing Risks, Maximizing Chances (2)
• Partnering: What are the roles of each partner in the JV?
 Are individual interests/goals understood?
Focus on best-fitting partner, not the most obvious one!
• Due Diligence: check on partner’s finances, assets, business
license, reputation, internal structure/decision-makers
• Influence Control: Not just a matter of majority share –
optimal balance when appointing decision-makers
 Key personnel like legal representative/GM important to
control daily business operations
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14. Minimizing Risks, Maximizing Chances (3)
• Detailed Agreements (Articles of Association and JV Contract):
 Intellectual Property: contractual rules regarding
ownership, use, transfers and licensing of IPR
 Confidentiality and anti-competition agreements
 avoid exploitation of sensible information and IP
 Dispute Settlement: how are disputes solved? Mediation?
 Exit Strategy: rules on fair evaluation and sale of equity
share in case the partners disagree on future direction
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15. When are JVs the Right Strategy?
Legal • Foreign investor seeks entrance in
Restrictions restricted industry
• Chinese partner’s market knowledge,
Resources capital contribution or other resources
crucial to success
 If not, WFOE may be more suitable:
 Easy set up without complex negotiations
 100% Control over corporate management and operations
 Control over IPR and confidential information
 Straightforward exit: easy to close
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16. Companies that want to do business in China may benefit from contact with
a professional services firm such as R&P China Lawyers. If you would like a
free-of-charge discussion on how we could assist you, please contact us:
Robin Tabbers (International clients)
Email: tabbers@rplawers.com Mobile: +86 13641605259
Lukas Steinberg (International and German-speaking clients)
Email: steinberg@rplawyers.com Mobile: +86 15221461321
It is always a good idea to gain a preliminary understanding of any legal issue before you seek
professional advice, by reviewing materials such as introductions and articles which are free
and easily available online. One convenient place to find more information on the legal
aspects of doing business in China is www.rplawyers.com. Available titles include: ‘Guide on
Establishing a Chinese Company’, ‘Dealing with Chinese Customers and Suppliers’, ‘Protecting
Intellectual Property’, ‘Hiring Employees’, and ‘Dealing with Disputes’.
© R&P China Lawyers 2012
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17. About R&P China Lawyers
Foreign-managed Chinese PRC Law Firm
 Corporate / Investment
 Commercial Transactions
 Employment
 Intellectual Property
 Taxation / Forex / Customs
 Dispute Resolution
2011
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18. Good luck in your China venture!
Shanghai, 2012 www.rplawyers.com