Joint ventures in Hong Kong: overview

A Q&A guide to joint ventures law in Hong Kong.

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.

Contents

Domestic company joint ventures (JVs)

Regulation

1. Are JVs expressly regulated?

Hong Kong legal system

Hong Kong is not a separate country but a Special Administrative Region of the People's Republic of China (PRC) following its return to the PRC by the United Kingdom on 1 July 1997. It operates under the maxim "one country, two systems" and derives its constitutional position from the Basic Law. This is a leading document derived from the Sino-British Joint Declaration, signed by the United Kingdom and the PRC, which sets out the basic policies of the PRC towards the Hong Kong Special Administrative Region after the transfer of sovereignty in 1997.

Under the Basic Law, the commercial laws of Hong Kong continue unchanged, as does the courts' system, and so Hong Kong continues as a common law legal system entirely separate from the PRC.

However, given that it is part of the PRC, the majority of its commercial dealings involve the PRC with many businesses operating cross-border, the typical structure being a corporation incorporated outside the PRC, conducting business in Hong Kong (often headquartered, and raising capital there) and also in the PRC (for example, manufacturing, selling goods or services or exporting goods from there).

A number of approvals are required in the PRC when setting up a joint venture in Hong Kong to conduct business both in Hong Kong and the PRC because:

  • In many ways Hong Kong is treated as a foreign jurisdiction by the PRC (for example, PRC citizens require visas, there are exchange controls, and investments from Hong Kong are treated in the same way as foreign investments).

  • The PRC remains a socialist centrally planned economy.

On the other hand, Hong Kong is one of the most open and unregulated economies in the world.

In addition to the above, it has become the custom in Hong Kong to use offshore companies (notably BVI, Cayman and Bermuda) to hold Hong Kong assets (real estate, and so on), in the formation of JVs, and even in relation to companies formed to be listed on the Hong Kong Stock Exchange (HKSE). This practice adds to the complexity of setting up incorporated JVs in Hong Kong, but has become well established and there are a number of law firms qualified and registered in such offshore jurisdictions with offices in Hong Kong servicing this practice.

The answers to the questions in this Q&A relate to Hong Kong, but must be considered in the context described above.

Regulation of JVs

The term joint venture does not carry a specific legal meaning under Hong Kong law. It is commonly used as a generic term to describe a variety of situations in which two or more parties co-operate with one another by pooling resources (such as capital, know-how, marketing and management) together in a mutual business endeavour with a view to achieving certain business goals or to achieve a commercial objective (HKSAR v Gammon [2003] 3 H.K.C. 276 at para.14).

The exact legal relationship between the joint venturers is determined by the agreement between the parties. As is the case in England and other common law jurisdictions, the relationship between the parties is subject to a combination of common law and legislation (for example, company and partnership law, the newly gazetted competition law in Hong Kong, and laws governing intellectual property, commercial, trade and tax).

Types

2. Which types of JV are allowed?

Types of JVs

The following types of JVs are allowed in Hong Kong:

  • Incorporated.

  • Unincorporated (or contractual).

  • Partnerships.

Corporate JVs

Corporate JVs are very often formed using limited liability companies. The company may be a limited liability company formed under the Companies Ordinance (Cap. 622 of The Laws of Hong Kong) but it is very common in Hong Kong for the corporate vehicle to be incorporated in the British Virgin Islands (BVI) or the Cayman Islands, both British overseas territories located in the Caribbean Sea. BVI and Cayman companies are very commonly used in Hong Kong as investment vehicles and for JVs. The reasons for this are somewhat historic, but there are stamp duty savings and the BVI and Cayman rules in relation to statutory reporting are more favourable to shareholders.

Principally, the documents regulating an equity JV in Hong Kong are the articles of association (which may be modified to include rights in relation to share transfers, pre-emption rights, voting, appointment of directors, remedies for breach and so on, tailored to the specific terms of the JV) and a shareholders' agreement. There will also likely be ancillary documentation that would reflect the parties' intended relationship, such as loan documentation, technology transfer agreements, supply or distribution agreements, and licensing agreements regulating intellectual property rights.

Corporate JVs provide a flexible method of regulating a number of different JV relationships. For example the JV may be a 50/50 arrangement between two entities or groups, or one party may hold a majority (in which case the rights of the minority can be protected) or there may be a number of partners with different rights protected by using different classes of shares. Given the use of limited liability companies, the JV parties can be protected from liabilities arising from the business (perhaps by bringing in a private equity investor), the structure may facilitate financing the JV project or business, the JV may more easily be sold, and the parties can build in mechanisms to deal with changes in control and rights in the event of breaches of the JV agreements.

Contractual JVs

Contractual JVs are known by a variety of names, most notably consortia, strategic alliances, collaboration agreements, joint operating agreements and of course, joint ventures.

Where the JV involves a single undertaking or a project of relatively short duration, a contractual JV may be appropriate without the need for a JV based on a limited company. The contractual JV offers several advantages, namely the absence of public filing requirements and ongoing compliance requirements such as financial reporting and other requirements of the Companies Ordinance relevant to an incorporated JV. Each party in a contractual JV may give the other an indemnity in respect of loss caused by his failure or of defective performance on the part of his employees or subcontractor and the contractual terms of the relationship may preclude it from being a partnership with its ancillary duties. A contractual JV can also maintain a greater degree of privacy compared with corporate JVs. Apart from registering with the Inland Revenue Department under the Business Registration Ordinance (Cap. 310 of The Laws of Hong Kong), no other filing requirements apply for contractual JVs. Finally, depending on the parties' circumstances, certain tax advantages may be gained from the business structure as the JV is not taxed separately from the parties.

Partnerships

The parties may alternatively agree to establish a partnership to further their JV purpose. The main feature of this form is the joint and several liability of the partners. In Hong Kong, partnerships are governed by the Partnership Ordinance (Cap. 38 of The Laws of Hong Kong) and the common law (including the laws of agency). The partners may carry on the business under a firm name, but the partnership is not a separate legal entity and each of the partners is held out as a principal of the business. The formation of a partnership depends on the business relationship between the parties. A partnership arises where the parties are carrying out a business in common with a view to make a profit (section 4, Partnership Ordinance). For a further analysis on the difference between contractual JVs and partnerships, see Question 16.

 
3. Are corporate JVs subject to the corporate law?

Corporate JVs set up in Hong Kong often use BVI or Cayman companies, in which case the corporate laws of those jurisdictions apply. In addition to those laws, if the foreign corporation is registered in Hong Kong (as it must be if it has a place of business in Hong Kong), many provisions of the Companies Ordinance of Hong Kong will apply to it.

Formation and registration

4. Is the use of foreign language in a JV's founding documents (both corporate and contractual) restricted?

The documents required for incorporation of a company include the articles of association (section 67, Companies Ordinance). The articles of association, as well as the name of the JV company, must be in either Chinese or English. In the case of a contractual JV governed by Hong Kong law, there are no restrictions on the use of foreign language within the founding documents.

 
5. Are public officers (for example, public notaries) involved in a JV's formation procedure?

Public officers are not involved in the formation of a JV in Hong Kong.

 
6. Are JVs registered with any local registries? Are public sector bodies' authorisations required for a JV's establishment?

Local registries

Unincorporated JVs with a place of business in Hong Kong must be registered with the Inland Revenue Department in Hong Kong under the Business Registration Ordinance (Cap. 310 of The Laws of Hong Kong) within one month from the date of commencement of the business. This requirement applies to contractual JVs, limited partnerships and partnership JVs.

Incorporated JVs are registered with the Registry of Companies in accordance with the Companies Ordinance.

Public sector bodies

Certain types of businesses are regulated in Hong Kong and require licences or approvals before they can commence business. These include businesses operating in the fields of banking and money-lending, insurance, aviation, securities, telecommunications, broadcasting and media. The regulations governing these businesses are complex and specialised legal advice should be obtained. Certain other professions (for example, lawyers, doctors, and so on) are governed by local ordinances that restrict their ability to share profits and form JVs with non-qualified persons.

Hong Kong enacted its inaugural generally applicable competition law, the Competition Ordinance (Cap. 619 of The Laws of Hong Kong) in 2012 and it is expected to take full effect in 2015. The Ordinance prohibits agreements restricting competition (first conduct rule) and abuse of market power (second conduct rule), but it imposes no merger regulation except for the telecommunication industry.

 
7. What other formal requirements must be complied with to validly constitute a JV?

In principle, there are no other formal requirements to comply with. However, it is important to note that Hong Kong as a Special Administrative Region of the People's Republic of China (PRC) has very close ties with the PRC. If the business of the JV involves the PRC, for example, because manufacturing facilities are located there or the business of the JV is to be carried on both in Hong Kong or the PRC, advice should be taken at a very early stage to determine:

  • Whether approvals of PRC regulators are required.

  • Whether a separate legal entity should be established in the PRC (and if so what the nature of that legal entity should be).

  • How the proposed JV will be taxed in the PRC and Hong Kong.

  • How capital invested in the PRC is to be repatriated and so on.

These issues are complex and the laws in the PRC change often. A detailed analysis of the proposed business is required at the outset.

Permitted markets

8. Can the JV instrument be used in every market? Are there any restrictions to be considered and carefully assessed before investing?

The JV instrument can be used in every market in Hong Kong. Tax is the most important matter to be considered before investing, particularly because the taxation rates in the People's Republic of China are substantially higher than the rates in Hong Kong, and, in general terms, Hong Kong tax is only levied on profits earned in Hong Kong. Tax planning must occur at the outset.

Purpose

9. Can a JV be established with any purpose?

Both a contractual or a corporate JV can be established for any purpose. In practice, regulated businesses (see Question 6) must be carried on in an incorporated form, and there are some businesses and professions (for example, the practice of law) which impose restrictions on the legal form or structure that may be used (and the extent to which liability may be limited).

Share capital and participation

10. What possible forms of participation are there in a JV's share capital? How can a JV member contribute and are there statutory limits on the possibility to make contributions in kind?

Forms of participation

There are no restrictions or statutory limits on the forms of participations in a JV's capital.

Contributions

In the case of an unincorporated JV, capital can be contributed:

  • In cash.

  • By way of a loan.

  • By the contribution of value in some other forms (for example, shares in a company, land, know-how or the provision of services).

There is no requirement for capital to be contributed at all, and cash calls can be made from time to time, or bank loans obtained based on the credit of the participants.

Similarly, in the case of incorporated JVs, there is great flexibility in the manner in which capital can be contributed. Shares in Hong Kong incorporated companies no longer have a nominal value. Accordingly, there is no requirement for a share premium account since the new Companies Ordinance took effect in 2014.

The parties must also consider the manner in which any future finance is to be provided. Participants should agree in advance, as far as practicable, whether or not they are willing to be committed to provide further finance and, if so:

  • The time periods and monetary limits of any further finance.

  • The conditions under which they can be required to provide further finance.

These time periods and conditions are usually set out in the shareholders' agreement.

 
11. Can a corporate JV's share capital be indicated by making reference to a foreign currency?

Shares in a Hong Kong company may be denominated in any currency.

Duration and limits on membership

12. Are there statutory limits on a JV's duration?

Aside from the Perpetuities and Accumulation Ordinance (Cap. 257 of The Laws of Hong Kong), which provides that the perpetuity period for the disposition of property in Hong Kong can be specified by instrument, but cannot exceed 80 years, no statutory limits regulate the life of a JV. The life of a contractual JV is subject to the termination provisions if agreed to by the parties in the governing contract. The life of an incorporated JV continues until the company is dissolved or struck off the register in accordance with the Companies Ordinance, or the number of its shareholders is reduced to one.

 
13. Are there statutory limits on the number of members participating in a JV?

There are no statutory limits, although the numbers of members can determine the nature of the company that can be used (for example, a private company must limit the number of its members to 50, however the distinction between a private and public company for JV purposes is not of practical importance).

Public sector bodies

14. Can a public sector body enter into a JV agreement? Subject to what conditions? In particular, do public private partnerships (PPP) laws and regulations apply?

It is possible for a public sector body to enter into a JV with other public sector bodies or private parties. These are popular in Hong Kong. Public-private partnerships (PPPs) include:

  • Cross harbour tunnels.

  • Strategic landfills.

  • Chemical waste treatment plans.

  • The Asia World-Expo (the new exhibition and conference centre adjacent to the Hong Kong International Airport).

  • Hong Kong Disney.

There is no PPP-enabling legislation in Hong Kong that specifically sets the ground rules for PPPs. The Hong Kong Government has extensive constitutional and common law powers to make commercial contracts, including PPPs. However, such powers are subject to the government's non-delegable duties which limit the extent to which the government can transfer its legal responsibility to the JV. In some cases statutory authorities can be prohibited from entering into JVs, because to do so would be inconsistent with their role, purpose, or statutory function. In cases where the statutory authorities are empowered to enter JVs, the approval by the relevant government department can be required.

Non-competition and anti-trust clauses

 
15. Are there statutory constraints on the use of non-competition or anti-trust clauses in a JV agreement?

During period of effectiveness

A non-compete clause is prima facie anti-competitive, and can therefore be rendered unenforceable under the new Competition Ordinance. That said, non-compete clauses that are directly related to and go no further than necessary for the successful operation of the JV are likely to be lawful. The Competition Ordinance established two new competition authorities in 2014, the Competition Commission and the Competition Tribunal. The Competition Commission published draft guidance on how it will enforce the Ordinance, including provisions on block exemptions, application for which may be made in relation to certain non-compete clauses.

Apart from statute, common law principles apply to non-compete/restraint of trade provisions in JV contracts. A non-compete clause is enforceable only if there is:

  • A legitimate interest to protect.

  • The non-compete/restraint of trade agreement is reasonable (for example, in terms of business, time and geographical scope).

Following termination

Reflecting the principles stated above, a non-compete clause that applies after termination of a JV is only enforceable if there remains a legitimate interest to protect post-JV, and the limits of the non-compete, including time following termination, are reasonable.

De facto company/partnership

 
16. Must the contractual JV satisfy any conditions to avoid falling within the definition of de facto company/partnership?

Whether a partnership exists is a matter of law based on the facts of each case.

Partnership is the relationship which subsists between persons carrying on a business in common with a view to make a profit (section 3, Partnership Ordinance (Cap. 38 of The Laws of Hong Kong)). The relation between members of any company or association is not a partnership within the meaning of the Ordinance if it is:

  • Registered as a company under any Ordinance relating to the registration of joint-stock companies.

  • Formed or incorporated by or following any other Ordinance, or any enactment or instrument.

Therefore, if it is important to avoid a partnership, it is advisable to use an incorporated JV.

The Partnership Ordinance sets out, in section 4, a number of rules for determining the existence of a partnership (for example, the receipt of a share of profits is prima facie evidence of a partnership).

Parties to a contractual JV could wish to avoid creating a partnership because:

  • Any partner can bind the JV and the other partners regardless of his authority to do so.

  • All partners are responsible for the acts of other partners in the ordinary course of the business.

  • Each partner is jointly liable with the other partners for all debts and obligations incurred while he is a partner.

The parties to an unincorporated JV cannot determine that the JV is not a partnership simply by agreeing between them that it is not. Great care must be taken to exclude any implication that there is a partnership. For example, the JV agreement can:

  • Provide for separate ownership and disposal of assets or products of the JV.

  • Provide that JV assets are to be owned by the joint venturers in specified shares, as tenants in common.

  • Disavow mutual agency between the joint venturers.

  • For what it is worth, incorporate a provision confirming that a partnership is not intended. The fact that the parties to an agreement did not intend to create a partnership can be taken into account.

  • Consider drawing the attention of the customers and others dealing with the JV to the fact that it is not a partnership, and the JV parties do not have any authority to incur obligations on behalf of the JV or each other without certain prior approvals having been obtained.

Limiting member liability

17. Can a JV agreement provide that a JV member can participate without incurring any risk, loss or reward?

The JV agreement for an unincorporated JV can provide that a JV member can participate on that basis, but clearly it is unusual and the wording of the agreement requires careful and clear drafting. It must always be remembered that a third party dealing with a JV can assume that the parties are jointly and severally liable (and this is the case if the JV is a partnership, see Question 2, Partnerships) and join all the parties in any claim or litigation. In order to protect the JV member participating without incurring risk or loss, the JV agreement must include appropriate indemnities, and the credit of the party giving the indemnities must be carefully considered.

Anti-trust

18. Do any anti-trust rules, guidelines or policies apply to a JV agreement?

In Hong Kong, JVs will be subject to the Competition Ordinance as and when it is completely in force, which is expected in late 2015.

The Competition Ordinance prohibits agreements restricting competition (first conduct rule) and abuse of market power (second conduct rule).

Care must be taken to ensure that the JV does not amount to an illegal cartel.

Broadly, competitors must not give effect to a contract, arrangement or understanding which has the purpose or effect of:

  • Fixing prices.

  • Restricting outputs in the production and supply chain.

  • Allocating customers, suppliers or territories.

  • Bid-rigging.

Agreements that enhance overall economic efficiency are excluded.

The first conduct rule does not apply to an agreement that contributes to:

  • Improving production or distribution.

  • Promoting technical or economic progress. Accordingly, a R&D JV may well fall outside the first conduct rule under the Ordinance.

Governance and limits on directors

 
19. Can the parties to a JV freely regulate the JV or are they subject to certain restrictions?

In general, the parties to a JV are free to regulate the JV as they wish, subject to the normal rules that apply to the vehicle they choose (for example, the Companies Ordinance for an incorporated JV regulates the distribution of profits or the reduction of capital).

Many industry sectors are regulated either by a statutory body or a voluntary code of conduct. In some cases, licensing procedures regulate the admission and conduct of participants within a particular industry sector (for example, aviation, banking, financial services, broadcasting, telecoms and utilities). A company listed on the Stock Exchange of Hong Kong is subject to the listing rules and the Codes on Takeovers & Mergers and Share Repurchases, which can restrict:

  • The formation of a JV.

  • What the JV is able to do without obtaining further approvals.

  • Making public announcements.

Certain businesses or activities can require government approvals, such as environmental impact assessments or other land use approvals before the commencement of the JV.

The JV parties can also require the consent of banks or trustees under the terms of any loan agreements, debenture stocks or trust deeds which they have entered.

From a commercial perspective, the parties to the JV can seek comfort from their major existing customers or suppliers that they will continue to deal with the JV, and will give any necessary consents to the assignment of the benefit of contracts to the JV. Engaging in the business of the JV, or taking an equity interest in it, can also constitute a breach of restrictive covenants binding on a participant as a result of previous acquisitions or agreements with suppliers or customers.

All relevant contracts must be reviewed to determine the extent to which the consent of counterparties to those contracts is required. The obtaining of the counterparties' consent to major contracts must be a condition of the JV going ahead.

Lastly, if certain provisions of the shareholder agreement conflict with the articles of association or the provisions of the Companies Ordinance (for example, a provision which purports to allow the articles to be changed by ordinary resolution, or which tries to stop them being changed by special resolution), the articles of association/Companies Ordinance will have priority, and the contractual provisions can (depending on the drafting) be void.

 
20. Are there limits or restrictions on the eligibility of an individual as a member of the board of directors/statutory auditor?

Under the Companies Ordinance, at least one individual must act as the director of a private company. There are several restrictions on the eligibility of an individual to act as a director in the Companies Ordinance:

  • The minimum age of a director is 18 years old.

  • An undischarged bankrupt is prohibited from acting as a director.

The court can also order that a person is disqualified from acting as a director due to criminal activities or other conduct deemed unacceptable under Part IVA of the Companies (Winding Up and Miscellaneous) Ordinance (Cap. 32 of The Laws of Hong Kong), such as fraud or dishonesty.

There are no restrictions on nationality.

Termination

 
21. What legal regime applies to a JV's termination? Can a JV be terminated for just cause on request of one party?

The legal regime applicable to unincorporated JVs and incorporated JVs must be considered separately.

Termination of a contractual JV

The JV agreement usually contains provisions identifying the circumstances, in which one participant may terminate the JV. This can include the default of another party, and the agreement can restrict this right, limiting it to a serious breakdown of relations or a situation where damages are not an adequate remedy. Events which permit termination commonly include:

  • A material breach by the other party of the terms of the JV agreement (or of a material ancillary agreement), which the non-defaulting party elects to treat as a terminating event (usually following a period during which the breach can be remedied, if capable of remedy).

  • The insolvency of either party, although it can be more appropriate in such circumstances to grant the other party a call option to allow that party the opportunity to buy the insolvent party's shares in the JV.

  • The acquisition of the other party by a competitor.

Some JV agreements specify the events of default on which one or other of the parties must leave the JV. This can be for reasons that do not involve a breach of the agreement, for example where a participant undergoes a change of ownership or control which makes it inappropriate for that participant to remain in the JV with the others.

It is important to ensure that any consequences of default provided for in the JV agreement do not operate as a penalty. For example, a provision in a JV agreement requiring a defaulting participant to transfer some or all of its shares or interest to some or all of the other participants at a low price or for no consideration has been held to be invalid as a penalty. A provision of this kind is a form of agreed damages clause. An agreed damages clause is invalid as a penalty if the amount of damages stipulated is extravagant and unconscionable in comparison with the greatest loss that can conceivably be proved to have followed from the breach. The refusal of the courts to enforce such penalty clauses is based either on:

  • Infringement of a rule of the common law.

  • The exercise of an equitable jurisdiction to control penalties.

These tests must be borne in mind when drafting default clauses in JV agreements.

For example, in the context of JVs, a clause requiring a defaulting joint venturer to transfer its shares to the other parties in the JV was held not to be a penalty where:

  • The high risk and high cost commercial nature of oil exploration required forfeiture provisions to ensure an undisrupted flow of funds (Monarch Petroleum NL v Citco Australia Petroleum Ltd [1986] WAR 310 at 319 per Kennedy J).

  • The clause required the defaulting party to sell its interest to the non-defaulting party at market value less 5% after having been given 60 days' notice in which to remedy the default (CRA Ltd v NZ Goldfields Investments [1989] VR 873).

A JV agreement can contain a right of withdrawal, which can be triggered on the occurrence of certain prescribed events, for example the expiry of a definite term, or the completion of a particular project.

A party withdrawing in accordance with this type of provision is not in default. Depending on the trigger mechanism and the commercial position of the parties at the time of withdrawal, it can be necessary to determine whether the JV can continue without the participation of that member or if the venture must be wound up.

Termination of a corporate JV

The circumstances and manner in which an incorporated JV can be terminated are covered by detailed provisions in the JV/shareholders' agreement. The termination of a JV does not necessarily involve the winding up of the JV company or the cessation of its business. There can simply be a change of shareholder. However, the termination can result in a winding up under the Companies Ordinance depending on the circumstances. It is important to identify at the outset any events which terminate the JV. If the JV is to terminate (otherwise than through a transfer of shares), it is possible that the company can be wound up and its various assets can be sold (possibly by an auction to the shareholders themselves) or distributed in specie.

Oppression of the minority. A participant in an incorporated JV may be able to pursue statutory relief if it is being oppressed by the other shareholders. Sometimes, depending on the circumstances, this can lead to the court ordering the winding up of the incorporated JV or that one party buys out the other (the price depending on whether the court finds that a quasi-partnership exists).

Dilution. JV agreements sometimes deal with the default of a joint venturer by diluting the defaulting joint venturer's interest in the project. Such a provision usually sets out a formula for the reduction of the share of the defaulting joint venturer, and is generally used where the relevant breach may not necessarily be fundamental to the continuation of the enterprise and does not warrant termination of the joint venturer's interest. For example, in the case of a venture that requires significant capital expenditure in the future, such that the parties' commitments to provide future funding are key to the success of the venture, an appropriate default provision where a party fails to provide its share of the funding could be the dilution of the defaulting party's shareholding. If a joint venturer's interest in the project can be diluted as a consequence of a default under the JV agreement, then the dilution formula should be carefully examined to ensure that the rate at which the venturer's interest is diluted is not so harsh as to be a 'penalty' and consequently unenforceable.

Effect of termination. The exit provisions in a shareholders' agreement need to address the consequences for the leaver and for the remaining participants. An exiting party that has discharged its responsibilities would normally be treated more favourably than an exiting party that is in default. For example, the shares or JV interest of a non-defaulting leaver may be transferred to the other participants at fair market value, while those of a defaulting leaver may be transferred at a discount.

Factors to be considered in relation to the termination of the agreement include:

  • Whether a non-compete undertaking can continue, at least for a period, after termination.

  • The duration of confidentiality obligations after termination.

  • Whether loans from the leaving party must be repaid by the JV company on their exit, or required to be assumed by the continuing or incoming parties.

  • The treatment of employees.

  • Whether the continuing or incoming parties can assume the outgoing party's obligations under any guarantees or counter-indemnities given for the benefit of the JV company.

The effects which termination, ejection or withdrawal have on intellectual property rights (and the effects on any separate associated licences of such rights) must be addressed. The agreement could provide that on termination of the JV agreement the rights of the withdrawing party to further licences and any existing licences cease, or all existing licences continue.

 
22. Is the termination of a JV agreement subject to any public sector body's approval?

In general, no public sector approval is required for terminating a JV regardless of its structure, unless it involves the public body directly. For an incorporated JV, the Companies Registry must be notified with the de-registration of the company or its winding up. The company must also notify the Inland Revenue Department and any relevant licensing authorities that it has ceased trading.

Choice of law and jurisdiction

 
23. Are there constraints on the choice of the law and the jurisdiction applicable to a JV?

There are constraints on the choice of the law and the jurisdiction applicable to a JV but private international law and the rules in relation to 'forum shopping' are complex, and probably in practice irrelevant.

For unincorporated JVs with a connection to Hong Kong, it is standard practice to apply the laws of Hong Kong. Hong Kong's laws have changed very little since it was a British colony, and the same common law principles continue to apply. The rule of law continues to apply strongly in Hong Kong and the Hong Kong courts are independent and reliable. There is an active arbitration centre in Hong Kong, and parties to JVs with a connection with Hong Kong customarily choose the laws of Hong Kong and the jurisdiction of the Hong Kong courts or arbitration in Hong Kong.

The laws in relation to the enforceability of Hong Kong court/arbitral orders and awards in the People's Republic of China are also complex. As a result, the appropriate governing law of the JV, and whether disputes arising from the JV are determined by the Hong Kong courts or by arbitration must be considered at the outset.

For incorporated JVs, all of the above applies. In addition, the corporate vehicle is governed by the jurisdiction of its incorporation. It is common practice in Hong Kong to use BVI or Cayman companies, and the interaction of Hong Kong and BVI or Cayman law must be considered at the planning stage. In practice, because these are all British common law jurisdictions, with common legal roots, the laws in these jurisdictions are very similar and few difficulties arise, but in case of disputes, litigation in both jurisdictions can be required.

 

JVs with foreign members

Validity and authorisation

24. What are the rules relating to validity and authorisation of JVs with foreign parties?

Validity

The participants in a Hong Kong JV can be partially or entirely made up of foreign participants.

Limits

As with domestic companies, there are no such limits. However, if the members intend to maintain the company as a private (and not public) company they must limit the number of its members to 50.

Authorisation

No specific authorisation is required.

Effect of foreign membership

25. Are any of the rules relating to domestic company JVs (see Questions 1 to 23) different for JVs with members incorporated under, or governed by, the laws of a foreign country?

The rules relating to domestic company JVs are not different for JVs with foreign members.

Economic or financial incentives

26. Are there economic or financial incentives for foreign direct investments in a JV?

Hong Kong does not offer any special incentives to foreign investors. The economic incentives for foreign direct investments in a JV are the same as they are for local investors. However, Hong Kong remains attractive to foreign investors because of its:

  • Stable political environment.

  • Strong rule of law.

  • World class courts and judges.

  • Clean and efficient administration.

  • Strong financial institutions.

  • Deep capital pool.

  • Low tax rates.

  • Free-port status.

  • Close cultural and physical connections with the PRC (including preferential treatment in investing and conducting business in the PRC).

  • Government's policy of active non-intervention.

Minimum investments/contributions

27. Are there mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member?

There are no mandatory minimum thresholds for a foreign JV member.

 

The regulatory authorities

Companies Registry

Main activities. The government department responsible for:

  • Incorporation of local companies and registration of non-Hong Kong companies.

  • Registration of companies required by the Companies Ordinance and other legislation administered by the department.

  • Public services to inspect and obtain registered information; de-registering defunct solvent companies.

  • Ensuring compliance by companies and their officers with statutory obligations.

W www.cr.gov.hk/

Inland Revenue Department

Main activities. The government department responsible for:

  • The administration of personal salaries' tax, companies' profits tax, stamp duty, estate duty and other taxes.

  • Collection and enforcement of taxes and duties.

  • Registration of businesses for purposes of tax filings.

W www.ird.gov.hk/index.htm

Competition Commission

Main activities. Independent statutory body established under the new Competition Ordinance with the objective of prohibiting anti-competitive conduct and to prohibit mergers in the telecommunications sector that substantially lessen competition in Hong Kong.

W www.compcomm.hk/en/index2.html



Online resources

Bilingual Laws Information System

W www.legislation.gov.hk/index.htm

Description. The Bilingual Laws Information System (BLIS) website established and updated by the Department of Justice is the official electronic database of the legislation of Hong Kong. It provides bilingual (English and Chinese) texts of Ordinances and subsidiary legislation in force on or after 30 June 1997 (including the current version and past versions dating back to 30 June 1997) and is electronically text searchable. BLIS is generally up-to-date with amendments up to approximately three weeks prior. English text of the legislation is binding.



Contributor profiles

Fred Kinmonth, Partner

Minter Ellison

T +852 2841 6822
F +852 2810 0235
E fred.kinmonth@minterellison.com
W www.minterellison.com

Professional qualifications. Solicitor, England and Wales, 1974; Hong Kong, 1982

Areas of practice. Corporate and commercial; capital markets, private equity; M&A; major entertainment linked infrastructure projects.

Non-professional qualifications. LLB, University of Birmingham, 1971

Recent transactions

  • Advised C.H. Tung in relation to the restructuring of the OOCL Group.

  • Advised the Chao family and the Wah Kwong Shipping Group in relation to its restructuring.

  • Advised The Stock Exchange of Hong Kong Ltd on the new Chapter 18 of the Listing Rules (which applies to the listing of mineral and petroleum companies)

  • Advised Holdings Limited on the Hong Kong listing of its global share offering.

  • Advised Cheung Kong, Hutchison and the other founding shareholders on the promotion and listing of tom.com Limited on the Growth Enterprise Market of the Hong Kong Stock Exchange.

Geraldine Johns‐Putra, Partner

Minter Ellison

T +852 2841 6854
F +852 2810 0235
E geraldine.johns-putra@minterellison.com
W www.minterellison.com

Professional qualifications. Solicitor, Hong Kong, 2012; England & Wales, 2009; New South Wales, 2003; Victoria, 1998

Areas of practice. Corporate and commercial; M&A; private equity; intellectual property; technology, media and telecommunications.

Non-professional qualifications. LLM, Melbourne, 2001; LLB, Monash, 1997; B. Econs, Monash, 1995

Recent transactions

  • Advised Huatai Financial Holdings (Hong Kong) Limited, the financial flagship of Huatai Securities Company Limited, a leading securities company and listed company in PRC, in its subscription of HK$175 million 2% convertible bond due 2016 of China Environmental Investment Holdings Limited, a company listed on the Main Board of the Hong Kong Stock Exchange.

  • Advised United Nude International Limited, a footwear company in PRC, in its issue of new shares, representing 25% of the enlarged issued share capital, for a US$4.3 million subsidiary of C.banner International Holdings Limited (HKEx stock code: 1028), a company listed on the Main Board of the Hong Kong Stock Exchange.

  • Advised Aviate Global (Asia) Limited in its issue and allot of new shares in the amount of HK$7.9 million to its existing shareholder, Aviate Global LLP, a Financial Conduct Authority (FCA) regulated broker dealer in the UK.

Publications

  • Hong Kong Chapter, Joint Ventures: Jurisdictional comparisons, 1st ed., Sweet and Maxwell, 2012.

  • Hong Kong Chapter, International Business Acquisitions: Major Issues and Due Diligence, 4th ed., Wolters Kluwer International, 2014.

  • Hong Kong Chapter, Competition Law in the Asia Pacific, Wolters Kluwer International, 2014.


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