Related Content. Are we losing joint venture legal work because of this reputation or do we get more such work because people believe that if we give their joint venture the go-ahead it really is as good as they think it is. It’s a venture that belongs to one party, someone with a lot at stake and an incentive to make it work. Takao Satow. With control shared between often commercially competitive shareholders, the opportunities for conflict are rife. Which of the two companies will control what? July 2016 | FEATURE | MERGERS & ACQUISITIONS. This can assist both parties to the agreement to stay onside and work within defined parameters. The initial transaction is more difficult (and apparently risky) at the start, but then the door is open to success. By entering into a joint venture, overseas investors may benefit from marrying the expertise and knowledge of local conditions from the Chinese side, with the advanced technical knowledge and management expertise they bring to the table. He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer. A joint venture strategy in China works differently for different businesses at different times. ISSN: 0268-3946. “Well, we only have a bit at stake here, so work on something else, something where we have to take all the blame.”. Moreover, foreign partners must ensure that their objectives are continually aligned with those of their Chinese partner. A change in leadership styles is a key characteristic of joint ventures. Do you want to move forward? Goldman Sachs will buy out its China joint venture partner to make it the most advanced foreign bank to take full ownership of a mainland securities business. In 2017, the company ranked third in terms of output making 3.3 million vehicles. Avoiding Mistakes in Chinese Joint Ventures. Just today I had the following conversation with a potential client (modified ever so slightly for dramatic effect): Me: I am not clear from your email about what exactly you want to do with your Chinese manufacturer but it sounds like you want to enter into a joint venture with them and that will almost certainly be a bad idea. However, with competition for assets growing, and with many Chinese sellers unwilling to sell 100 percent stakes in their organisation, a joint venture may be the only viable option. Few joint ventures are fast and easy. Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. It provides a roadmap for avoiding what is probably the biggest and most common mistake that gives Chinese joint ventures such a bad name. Pushing through the dip is the only way for a venture of any kind to succeed. The case is a highly visible test of China’s commitment to rule of law in matters involving foreign business. Your Chinese JV counterpart chooses to buy (possibly inferior) products and services at inflated prices from his or her own companies, including from the company that is your JV partner. We often see this done by using one of the following two tactics: For better or worse, our law firm has developed quite a reputation for not liking joint ventures and so it is not uncommon for us to get calls from potential clients that start with them saying they know we don’t like joint ventures and then explaining why their doing a joint venture is either necessary or will be different from the ones we write about. By putting your dreams to the test before you wed. China joint ventures are notorious for their high failure rate. The Chinese company will then either go silent or — if it still needs the foreign company — it will provide it with fake documents showing the joint venture was in fact formed with the foreign company having ownership in it. The side that appoints the representative director will have significant control over operations. You need an answer that explains exactly how day to day disputes will be resolved so your joint venture does not collapse. Today, newly-formed WFOE’s outnumber new JV’s in China. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice. What can be done to ensure neither company goes out of control? It’s natural, then, for fearful people on both sides of a joint venture to back off when it gets scary. One side buys the right to use an asset that belongs to the other. In this post, we are going to assume that your Chinese counterpart is legitimate and truly wants to do a legitimate JV with your company. The joint venture was started in … Why do you think that is a bad idea? Miscommunication between partners, conflicting management styles and cultural differences are just a few of the potential flashpoints which could arise during the course of a joint venture. The Chinese side will also often claim they cannot use their political connections unless their own people are the representative director and general manager. After winning the struggle for percentage ownership the foreign investor will frequently give the Chinese side the authority to appoint the joint venture’s Representative Director and the company General Manager. Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where … What mechanisms will we use for reaching JV decisions? What if one of us wants to buy the other one out? As certain Chinese markets liberalise and allow foreign investors, the local expertise offered by Chinese joint venture partners could prove invaluable. Joint ventures simply tend too to be a bad way to conduct business. Of all the China legal work my law firm does, setting up and dismantling joint ventures is probably my favorite. It is necessary to have control over the day-to-day management of the joint venture company. Money? There is a long, documented history of this seemingly minor consideration dooming EJVs. Aligning management structures inside the framework of the JV will help to create a unified culture for the operation. Firms choosing to partner with a local firm in a joint venture can get a competitive advantage, but determining who your partner should be is a task which must not be taken lightly. Our vast experience handling China-specific entity formation, contracts, intellectual property matters, and dispute resolution gives our clients the security of knowing they have a truly seasoned legal team behind them. Chinese requited Joint Ventures are a mechanism for forced technology transfer. Wrong. As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. Whatever the outcome, China’s joint ventures increasingly look like unfruitful unions. Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain. However, many analysts argue that for a company looking to enter the Chinese market, a joint venture should be its last resort. Many joint ventures failed to endure, and as multinationals gained experience in China, and foreign investment restrictions loosened, multinationals found it easier in many sectors to start a business from scratch—or to acquire an existing one outright—than to negotiate, establish, and manage a joint venture … What sorts of bad things? Not only are joint ventures popular with companies embarking on investment into the Chinese market, they are also popular with the Chinese authorities. In many cases, technology transfers are effectively required by China's Foreign direct investment (FDI) regime, which closes off important sectors of the economy to foreign firms. Intellectual property? Care must be taken, however, to tailor the joint venture processes to the local context, to avoid running afoul of local rules and regulations. Since the board is elected by a majority vote of company owners, most foreign investors will strive to obtain a 51% ownership interest in the EJV. The joint part and the venture part. If you get too many answers you do not like to the above, you move on. He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. Fake and Exploitive China Joint Ventures The first thing you should know is that Chinese companies will often use the false promise of a joint venture to entice foreign companies to provide them with the foreign company’s technology. Journal of Managerial Psychology. He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. Ideally, multinationals should pair with local companies that explicitly share their strategic goals. Americans are feeling less optimistic about doing business in China. China Briefing looks at the experiences of Starbucks and McDonald’s to capture important lessons. Pak-China joint ventures vital to face emerging geo-strategic challenges: COAS Air Exercise Shaheen-IX | Gen Qamar Javed Bajwa says what makes PAF second-to-none is the high morale. The Chinese side will intentionally angle to ensure this outcome, often by offering to concede majority ownership to the foreign investor in return for control over these two key management positions in the joint venture company. Just as a quick aside: there is a 99.99% chance you will never see a dollar from your joint venture if you use your joint venture partner’s attorney or even any attorney chosen for you by your joint venture partner or you use no attorney at all. Ever. Overseas managers often use an adaptation of their home culture. We will be discussing the practical aspects of Chinese law and how it impacts business there. If you do not, you will not have control over the joint venture’s day-to-day management. If Chinese law does not legally limit market entry to joint ventures, we then seek to determine whether a joint venture makes business sense. You should see these justifications for exactly what they are: red herrings used to disguise the Chinese company’s efforts to gain operational control over the joint venture company. What will your company do to advance the business of our joint venture? A joint venture in China is a legal entity with limited liability established on the basis of a joint venture contract between Chinese and foreign parties. Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. When the project is a joint one, the pressure to push through the dip often dissipates. Local partners, for their part, welcome this added sophistication in their domestic offerings. I think it’s a great idea and here’s why. The U.S.-China trade war started heating up in … The sooner you seek to discern whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether it makes sense for you to keep spending time and money trying to do the joint venture deal. They must utilise legal advice, both domestic and Chinese, to protect their interests. In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and you need to be able to serve process on the defendants under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Our deep knowledge of China’s legal system, culture, and business climate make our China practice one of the most sophisticated in the US. As such, strategic JVs can bring success and mutual benefit to both partners. For you to maintain control over your Chinese joint venture you need the following: The Chinese side to a joint venture will usually refuse to agree to these three measures by claiming it is more efficient to have the Chinese side control day-to-day management of the company. What do you want our company to do to advance the business of our joint venture? Goldman plans to rename the joint venture, Goldman Sachs (China) Securities Company, when it takes full ownership. With competition for outright acquisitions of Chinese companies increasing, many businesses have turned to joint ventures to gain an inroad. With China’s economy in a downturn and so much uncertainty regarding the future of US/China (and even EU/China) relations, our China business lawyers have of late been seeing a massive uptick in companies looking to do China joint ventures “to share in the risk.” When done right, China joint ventures do share risk. China’s government mandates that foreign investors in certain industries form joint ventures with a domestic Chinese partner. Abstract. The common practice of appointing the same person as both representative director and general manager is a mistake. Once formed, the JV becomes a new legal entity in which the liability of the shareholders is limited to the assets they brought to the business. But when done wrong they actually increase the risk, but only for the non-Chinese company. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner. December 19, 2020. A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Chinese investors, who together share the profits, losses and management of … Our China lawyers have seen countless exploitive “joint ventures” but most of them start in the same way. There are a number of risks associated with conducting business in China. The foreign company believes it owns part of the China joint venture even though it does not. Intellectual property? In many respects, the country is an attractive proposition for investors and acquirers, yet misjudging the landscape can be disastrous for an outsider. Joint ventures in China: overview. Once these three control mechanisms are under the control of your Chinese joint venture partner, you will likely quickly learn that you have relinquished power to run the JV and bad things will likely result. The common Chinese company response will be something like “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything. After winning the struggle for percentage ownership, as a concession, the foreign investor will frequently allow the local side to appoint the representative director and the company general manager. Know-how? The article then goes on to note how “thoroughly vetting your joint venture partner” will “dramatically increase your likelihood of success,” but states that most China joint ventures fail because the foreign partner made the “fundamental mistake” of believing its 51% ownership gave it effective control over the joint venture: Foreign investors too often assume Chinese joint venture companies are managed according to a common Western model, under which a board of directors has controlling power over the company. There is an old Chinese saying that applies to any sort of partnership without a meeting of the minds: “same bed, different dreams” (同床异梦). His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt. Now suppose your JV should have 200 employees but your JV partner hires 350 employees, thereby wiping out any profit for the JV. If our joint venture loses money, who will be responsible for putting more money in? As a result, the investor’s struggle for board control is rendered meaningless. In its latest survey, the American Chamber of Commerce in China found that more than three-quarters of US-based … It must be made clear that the general manager is an employee of the joint venture company who is employed entirely at the discretion of the representative director. Just to be clear, we love forming joint ventures, but only when they truly do make sense and well over half the time we end up counseling our clients against doing the joint venture. How to Whip Your China Employee Handbook into Shape, SMEs and China: Much Opportunity but Little Room for Error, How to Avoid China Employment Law Problems: Employer Audits, China Employment Contracts: Do Them in Chinese, China Expat Pay: Splitting with Hong Kong is Illegal and Dangerous, serve process on the defendants under the Hague Convention. Property? That alone ought to tell you how difficult they can be. We use a dataset that accounts for all joint ventures in China from 1998 to 2007 to show that this policy is successful in its aim of encouraging technology transfers from foreign investors to domestic operations. Furthermore, given the importance attached to intellectual property in today’s business world, it is vital that foreign investors take adequate steps to protect their IP from appropriation. Before you do a joint venture with anyone you should make sure the two (or more) of you are truly on the same page regarding what will go into the joint venture and how it will operate once formed. Money? Know-how? The automaker also runs China joint ventures with SAIC Motor and FAW Group. Suppose your Chinese JV partner can make the JV hiring and firing decisions. ● Control over the company seal, or “chop.” The person who controls the registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers. The article starts out by noting that with “the exception of some market sectors, China is remarkably open to foreign investment, and in the past several years WFOEs [Wholly Foreign Owned Entities] have become the most common vehicle for foreign investment, partly due to investor skittishness as stories about past problems with Chinese EJV [Equity Joint Venture] partners made the rounds.”. Allogene Therapeutics has started a joint venture with Overland Pharmaceuticals, a newly formed Chinese biotech, to bring allogeneic, or "off the shelf," cell therapies to greater China and other Asian countries. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake. Me: [Jokingly] Did I say I thought it a bad idea? By forming a joint venture, companies gain access to new markets and distribution networks, along with new (and often greater) resources – both human and non-human. So any venture begins with some question marks. Our law firm has handled at least a dozen of these matters where our ten minute search revealed there never was a joint venture. Tweet. While many companies are shying away the Joint Venture structure due to the large amounts of inherent risk, it still has several advantages. Our lawyers have earned international acclaim for providing cutting-edge legal solutions to US- and foreign-based companies doing business in or with China. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. 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