Joint ventures in China: overview
A Q&A guide to joint ventures law in China.
The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.
This Q&A is part of the Joint Ventures Law Global Guide.
Domestic company joint ventures (JVs)
The legal regime of the People's Republic of China (PRC), allows both contractual JVs and corporate JVs. In addition, partnership JVs are also permitted.
Contractual JVs are established under a contract that stipulates that each participant operates the business independently from each other, and respectively assumes civil liabilities, rather than joint and several liabilities.
A corporate JV can be established by enterprises or by an enterprise and an institution. A corporate JV is a newly-established economic entity that must independently assume liability and is subject to the Company Law. Under the Company Law, a JV can be a company with limited liability or a joint-stock limited company.
A partnership JV can be established by enterprises or by an enterprise and an institution. Partnership JVs are subject to the Partnership Enterprise Law and operated according to a partnership agreement.
Formation and registration
The founding documents will probably be required for review by the competent authorities in China for the purpose of registration or anti-monopoly approval, and the competent authorities will only accept the founding documents in Chinese. If these documents are executed only in a foreign language, the competent authorities normally request these documents to be translated into Chinese by a certified translation company with affixation of the company seal or by personal signature of the legal representative. In practice, the competent authorities may also accept bilingual founding documents.
A corporate JV or a partnership JV must be registered with the local branch of the State Administration for Commerce and Industry.
Public sector bodies
If the business scope of a corporate JV or a partnership JV contains any item which is subject to the relevant regulatory authorities' approval prior to the JV's registration, as required by relevant laws and regulations, such approvals must be obtained from the relevant regulatory authorities before the registration.
The establishment of a JV (corporate JV, partnership JV or contractual JV) is also subject to the Anti-Monopoly Law in certain circumstances. Unless prior approval is obtained, the Anti-Monopoly Law prohibits the formation of JVs that would have the effect of restricting and eliminating competition. The formation of a JV can be interpreted as a formation of concentration by contract. Therefore, it is potentially subject to the prior approval by the Ministry of Commerce when the revenue of the JV participants reaches a certain threshold.
These approvals or filings are compulsory and cannot be bypassed through self-assessment by the JV parties themselves.
Subject to the relevant authorities' requirements on a case-by-case basis, there are no other formal requirements that must be complied with to validly constitute a joint venture other than those described in Question 6.
A domestic JV is subject to local or state regulatory approval, depending on its proposed business sectors. Historically, certain industries have been exclusively run by state-owned enterprises and are not open to private enterprises. These include:
National grid systems.
However, the government now allows private parties to invest in some of these sectors.
For a contractual JV under the Contract Law, the purpose must be legitimate and not harm national interests and social interests. Otherwise, the JV contract will be deemed invalid.
Both corporate and partnership JVs must:
Comply with all laws and administrative rules and regulations.
Observe social morals and business ethics.
Conduct business in good faith.
Subject themselves to the supervision of the government and the public.
Fulfill social responsibilities.
The business scope of a JV is also subject to the regulations of State Administration for Commerce and Industry registrars.
Share capital and participation
For a corporate JV, the share capital can be contributed in cash or contributions in kind, including:
Land use rights.
For a partnership JV, the general partner can make the contribution in:
Land use rights.
Provision of labour.
Contribution (however, contribution by way of provision of labour by the limited partner is not permitted).
Since the participants operate the business independently under a contractual JV, there is no share capital contribution issue for a contractual JV.
Duration and limits on membership
Under the Company Law, there are no statutory limits on the duration of a company in China. However, since the expiry of the term of a company is a key event for the termination of a company, the Registration Rules provide that the term of a company is a statutory item for registering a new company and must be included in the articles of association.
Under the Company Law, the minimum number of members of a JV in the form of a limited liability company is two and the maximum number of members is 50. For a joint-stock limited company, the Company Law sets out a requirement that, to establish a joint-stock limited company, the numbers of promoters/initial members of a joint-stock limited company must be between two and 200, more than half of whom must be domiciled in China.
The Partnership Enterprise Law provides that the participants of a limited partnership must be between two and 50 and at least one participant must be the general partner.
There are no statutory limits as to the number of members participating in a contractual JV.
Public sector bodies
Practically, it is possible for a public sector body to enter into a JV agreement with a private sector body. The PPP model is playing an increasingly significant role in various sectors, especially in the public infrastructure sector. However, currently there are still no unified and specific PPP laws and regulations in place. Laws and regulations applying to PPP projects exist in different relevant areas of laws. The main rules governing PPPs are scattered throughout various administrative regulations and local policies.
It is notable that, in a partnership JV, any of the following cannot be a general partner bearing unlimited liability of the partnership:
A wholly state-owned company.
A state-owned enterprise.
A public welfare institution.
A public organisation.
Non-competition and anti-trust clauses
Since the Anti-Monopoly Law came into force on 1 August 2008, non-competition clauses in a JV/shareholders' agreement are treated cautiously by the Anti-Monopoly Enforcement Agency.
According to the Anti-Monopoly Law, the Anti-Monopoly Law Enforcement Agency must be notified in advance where the "concentration" of market players reaches the prescribed threshold. Until obtaining the approval, they cannot proceed with the proposed co-operation. The Anti-Monopoly Law Enforcement Agency will weigh up the anti-competitive effect with any pro-competitive effect of concentration. According to Article 28 of the Anti-Monopoly Law, "if the operators concerned can prove either that the favourable impact of the concentration on competition obviously exceeds the adverse impact, or that the concentration is in harmony with the public interests, the Anti-Monopoly Law Enforcement Agency under the State Council may decide not to prohibit the concentration".
In some circumstances, the Agency can decide to impose restrictive conditions, such as the removal of the non-competition clause, in order to reduce the adverse impact of the proposed structure on competition.
De facto company/partnership
Limiting member liability
The consequence of including such a clause into a corporate JV is that such a clause may cause the whole agreement to be void. According to the Explanatory Note on Certain Issues on Review of the Disputes of Business Contract by the Supreme Court of the PRC (only applicable to the corporate JV/members), there are two circumstances that will make the contract/agreement void:
If one of the JV members invests in the business and participates in the operation but only shares the profits without bearing any risk/loss, the clause will be invalid and the member must return the extra benefits obtained under the clause to the JV.
Where one of the JV members invests in the JV but never participates in the operation and never bears the risks/losses. This will violate a key legal principle under PRC laws and the JV arrangement may be deemed as an illegal lending activity that will cause the whole contract to be void. If there are individual participants/members, the principle of free will is likely to be adopted by the court, as set out in the Contract Law.
A partnership JV can reach any agreement in relation to risk and loss sharing between its members.
The Anti-Monopoly Law, including, but not limited to, abuse of dominant position and regulation of mergers and acquisitions activities, is applicable to a JV agreement. The Anti-Monopoly Law Enforcement Agency must be notified in advance where the "concentration" of market players reaches the prescribed threshold. Until obtaining the approval, they cannot proceed with the proposed acquisition by entering into a JV agreement.
Governance and limits on directors
Under the Company Law, the shareholders' meeting is the governing authority of a company/domestic JV. Shareholders' voting rights depend on the proportion of their respective equity interests. The board is responsible to its shareholders.
A partnership JV and contractual JV can have flexible arrangements in relation to the governance in their respective partnership/contractual agreements.
Generally under the Company Law, the following individuals are not eligible to be appointed as a member of the board of directors, board of supervisors or senior management:
Those with no (or limited) civil capacity.
Those sentenced for a crime within the last five years.
Those bankrupt within the last three years.
Those that served as the legal representative of a company or enterprise whose business licence was revoked due to its violation of law, and that were personally responsible for the revocation, and the revocation occurred less than three years ago.
Those in default of a personal debt of a significant amount.
However, directors, supervisors and senior managers in certain sectors (for example, a securities company or listed public companies) are regulated by different laws or regulations in relation to their appointment eligibility. There are no limits or restrictions on the nationality and the place of residence of the individual as a member of the board or as statutory auditors.
Under the Company Law, a JV can be terminated:
On the expiry of the term of the JV, or as set out in the articles of association.
As per the approval of the shareholders.
Due to merger or division of the JV.
Where the business licence of the JV is revoked by law or the JV is ordered to terminate or be cancelled.
Where the JV is dissolved by the court in accordance with the Company Law.
In some special circumstances, such as the business of the JV becoming "significantly bad", shareholders (more than 10% of voting rights) can apply for a termination of the JV by the court.
For a partnership JV, it may be dismissed when:
The term of the partnership expires and the participants decide not to extend the term.
A cause of dismissal specified in the partnership agreement occurs.
All the partners decide to dissolve.
The number of partners does not meet the statutory requirements for 30 days.
The objective of the partnership specified in the partnership agreement has been achieved or is impossible to achieve.
The business licence is revoked, or is ordered to be closed down or is dissolved according to laws and regulations.
Other reasons provided by laws or regulations occur.
A contractual JV can be terminated under the Contract Law, namely through mutual agreement or under statutory conditions for the unilateral termination, or one of the termination conditions provided in the JV contract is satisfied.
In addition, in the event where the parties to the JV cannot agree with each other in resolving a dispute, they may be able to terminate the JV through arbitration and ultimately court procedures.
Choice of law and jurisdiction
JVs with foreign members
Validity and authorisation
It is permitted to have foreign parties in a JV in the PRC. There is no requirement on the minimum or maximum number of Chinese parties and it is possible for two foreign investors to form a JV in China and that the JV is then categorised as a wholly-owned foreign enterprise, subject to restrictions under the foreign investment policy and other relevant laws and regulations.
Effect of foreign membership
Laws and regulations
Sino-foreign JVs are subject to the PRC Law on Sino-foreign Equity Joint Ventures (SFEJV) or the PRC Law on Sino-foreign Contractual Joint Ventures (SFCJV).
Public sector and restrictions
The establishment of a JV with foreign members are subject to the approval of the Ministry of Commerce (MOFCOM) or its local counterparts. For JVs with foreign parties, certain documents provided by the foreign parties must be notarised by the notary public at the country of the foreign parties and authenticated by the Chinese Embassy or Consulate based in that country.
JVs with foreign members are subject to restrictions and prohibitions in a number of sectors under the Foreign Investment Industries Guidance Catalogue (Catalogue) jointly issued by the National Development and Reform Commission and MOFCOM from time to time. Therefore, it is important to carefully check whether the sectors to be invested in are subject to any restriction or prohibition.
So far, four free trade zones (in Shanghai, Tianjin, Shenzhen and Fujian respectively) have been established, in which the "Negative List" regime is adopted. Under this regime, JVs with foreign members are only restricted or prohibited from investing in areas or sectors contained on the Negative List. The Negative List has fewer items than the Catalogue does and is expected to be updated annually to remove more items.
MOFCOM has also issued the Foreign Investment Law (Draft) (Draft FIL) to seek public comments. According to the Draft FIL (among other things) a negative list management method will be established, and except for some special investments, most foreign investments will no longer be subject to administrative examination and approval. Therefore it is expected that JVs with foreign members will be subject to fewer restrictions and will be treated as domestic company JVs in the administration by the authorities.
JVs with foreign members can refer to a foreign currency as the denominated currency for capital contribution.
As the governing authority of a JV with foreign members is the board of directors or joint management committee (for SFCJV only), it can be terminated under the termination provisions of the articles of association or by the approval of the board of directors. Also, under the SFEJV Law and SFCJV Law, a SFEJV or SFCJV must be dissolved in any of the following situations:
Expiration of JV terms.
Where a serious loss occurred where the JV is unable to continue its operation.
Failure of either party to fulfill its obligations defined by the contract or the articles of association, due to which the JV is unable to continue its operation.
The enterprise cannot continue to operate due to serious losses due to force majeure.
Other reasons as defined by the JV contract and the articles of association.
Under the SFEJV Law, if an SFEJV is unable to obtain the desired objectives of the operation and does not have a prospect for future development at the same time, it must also be dissolved. The SFCJV Law provides another situation under which the SFCJV must be dissolved (where the SFCJV is ordered to close down in accordance with the law due to a violation of laws and/or statutory regulations).
The termination of an SFEJV and SFCJV is subject to the approval of the examination and approval authority that originally approved the establishment of the JV, after which, the JV must be de-registered with the local State Administration for Commerce and Industry.
Economic or financial incentives
At a national level, China adopts a flat rate for enterprise income at a rate of 25%. This was introduced by the Enterprise Income Tax Law in 2007, which abolished the differentiated treatment between domestic enterprises and foreign-invested enterprises. Local governments and the sub-economic or development zones may also have the power to incentivise foreign-invested companies. Therefore, it is important to also examine local regulations before making any investment.
The regulatory authorities
Ministry of Commerce (MOFCOM)
Main activities. Regulating foreign trade, export and import, foreign direct investments and market competition.
State Administration for Commerce and Industry (SAIC)
Main activities. Corporate registration and licensing.
Description. The official site of MOFCOM, the legislation is updated regularly.
Description. Official website of the SAIC. The legislation is updated regularly.
Yi Yi Wu, Partner
Minter Ellison Shanghai Representative Office
Professional qualifications. Shanghai, China 1986; Victoria, Australia, 1998
Areas of practice. Corporate and commercial; mergers and acquisitions; foreign direct investment; corporate finance; employment and real estate.
- Acted for Gloucester Coal on its recently proposed AU$8 billion merger with China's Yanzhou Coal Mining, work including provision of advice on PRC regulatory approvals, participating in negotiation with Yanzhou's team and assisting in the relevant issues.
- Acted for Yankuang Group, a top Chinese state-owned enterprise, in its coal-power aluminium project in China and overseas, including drafting legal documents in both English and Chinese, advising on relevant legal issues regarding mergers, land use rights, overseas investment and conducting a legal audit.
- Acted for China Development Bank on a number of projects including a facility of US$2.6 billion for an iron ore project in Australia, a New Zealand debt loan restructuring project, hedging arrangement with a Chinese company and Sydney Metro project. Work included participating in negotiation with the borrower, reviewing and amending legal documents in both English and Chinese, advising on various legal issues and providing legal opinion.
- Acted for Qantas, on its sale of business, acquisition of equity interests, commercial arrangements with service providers, investments, and daily compliance issues, anti-trust issues, in China.
- Acted for the listing company, MaxiTRANS, on its equity transfer of a joint venture from Chinese shareholder to foreign shareholder and then to its management team, involving conducting legal due diligence, drafting transaction documents, negotiating with other parties, handling PRC governmental approval process and so on.
- Acted for Toll, on its buyout of equity interests held by a state-owned enterprise in China and on the equity transfer of its Shanghai operation of a logistics company, including conducting legal due diligence, preparing relevant approval documents, liaising with several PRC governmental authorities and assisting with its daily operation issues.
- Acted for PSA China Pte Ltd for a number of joint venture projects in developing, leasing and/or operating container terminals in a number of places in China. Work included negotiating terms and conditions of the shareholders' agreement, joint venture documents, escrow agreement, leasing and other related documents, reviewing and amending these documents in both English and Chinese.
Languages. Mandarin; English, Shanghai dialect