Doing Business with China

Equity joint ventures

EJVs represent a compromise of China's initial preference for technology licencing rather than investment and they have been allowed and regulated since 1979. An EJV is a limited liability company created pursuant to the EJV Law in which the investor parties share investment, control, risk and profit in accordance with the equity split. The Board of Directors plays the role of shareholder and board because, since no shares are issued, there are no shareholders. Equity interests are certified by qualified accountants .

The industrial sectors open to EJVs are more numerous than those open to WFOEs. The Guideline Catalogue of Foreign Investment Industries classifies sectors as encouraged, permitted, restricted and prohibited . With WTO accession these categories have all increased, except for the prohibited category. There are many sectors where EJVs are, but WFOEs are not, allowed. In some sectors the foreign equity is limited to a certain percentage.

EJVs are established via the following process:

• the parties negotiate and sign a Letter of Intent which, although not necessarily legally binding, is very important and should be treated seriously. The LOI should cover all important issues related to the project and be broad enough to allow a party to alter its position if necessary. It is wise to include exclusivity and confidentiality provisions in the LOI and to state that they are intended to be legally binding;

• the Chinese party prepares a project proposal report to be submitted to MOFTEC/COFTEC;

• the LOI is then submitted to the approval authorities for preliminary approval, which includes permission to negotiate the project;

• following preliminary approval, a joint feasibility study is undertaken. As the FS is the basis for formal project approval, it effectively defines the permitted project in the eyes of the Government. Again, while the FS is not necessarily legally binding it is extremely critical and should be treated as such. Although the Chinese investor may be willing to take charge of the FS work, the foreign investor should participate and be sure that it represents its views as well. Both parties must sign;

• while the FS is under way the parties negotiate the joint venture contract and its annexes which typically include the articles of association, technology licence, export agency agreements and other important contracts or documents;

• the FS, JVC and articles of association are then submitted to the approval authority (MOFTEC or COFTEC). The contracts take effect upon approval;

• the joint venture company registers with the Administration of Industry and Commerce and receives its business licence;

• within 30 days of the issuance of the business licence, the company must process registrations with customs , tax, the State Administration for Foreign Exchange and other government agencies.

Throughout the approval process it is a good idea for the foreign party to establish and maintain good relationships with government officials and departments rather than leave the matter to the Chinese partner. In general, approval levels for productive projects are: $100 million of registered capital and greater “ The State Council; US$30 million to US$100 million “ MOFTEC; less than US$30 million “ COFTEC. The local COFTEC approvals are seen as easier to obtain than MOFTEC approvals even though COFTEC is a branch of MOFTEC. Because of this the local partner might suggest the project be broken into parts within the limits allotted to COFTEC. This might work to the disadvantage of the foreign investor and should be avoided.

The Chairman of the Board is the legal representative of the company, and, as such, anything (ie anything which is within the legal scope of business of the company) he/she does in his/her capacity as Chairman binds the company vis   vis a third party. The chief executive officer of the company is the General Manager who is appointed by the Board along with other senior management. This person manages the day-today operations. The Chairman and the General Manager may be foreigners as well as Chinese and they are assisted by deputies. Usually, the Chairman is appointed from nominees of the PRC investor and the Deputy Chairman from nominees of the foreign investor. There is a provision in the law for one or more Deputy General Managers as well.

The Board meets at least once per year. Certain critical corporate decisions ( amendments to the articles of association, assignment or increase in registered capital, dissolution and merger), by law require unanimous consent of the Board.

While EJVs are the FDI format most acceptable to MOFTEC, they are not allowed in every sector and, where allowed there may be limitations on the equity interest held by the foreign investor.