Foreign companies interested in establishing a presence in China opt sometimes for a joint venture (JV), attracted by the advantages of working with a local partner, familiar with the characteristics and culture of the Chinese market.
This is a common strategy pursued by many multinationals and foreign investors seeking to enter or expand their operations in the country. A JV allows entities to invest in sectors classified as restricted on China’s Negative List, which bans or limits foreign investment in certain industries. It also represents an opportunity to access local talent, sales channels, and distribution networks, facilitating early business operations and expansion.
Another fact that has popularized JVs among foreigners has been the travel restrictions imposed since the beginning of the COVID-19 pandemic. Having a local partner allows companies to access the market from overseas, eliminating the need to travel.
Though it is not common practice in China, under specific circumstances, companies may consider renegotiating the terms of their JV contract. This enables management from all sides to re-evaluate and amend JV contracts ex-post.
Over time, parties may find that their interests, rights, and liabilities have change. In this case, the terms of the contract can be renegotiated.
It may also happen that one or more parties may wish to renegotiate the initial shares partition and subscribe more capital in the JV to increase their participation – and subsequent influence in the partnership.
Since China started opening their economy, foreign partners have been allowed to have more equity ownership in JVs. In January 2022, China removed the cap on the share ratio of foreign investment in passenger car manufacturing. Immediately after that, BMW announced that its share in the Chinese JV, BMW Brilliance Automotive, was raised to 75 percent after JV term renegotiation.
When one or more parties believe that the share ratios in the original JV contract are not reasonable, they may want to renegotiate a few aspects of the contract. A 50-50 share is usually not recommended, as it can cause difficulties in decision-making process.
Another reason could be when a foreign party has changed its investment strategy and wishes to decrease its shares in the JV.
If both parties have a good relationship and have worked together for many years, chances are that conditions for the increase or decrease in the capital were already established in the original JV agreement. If so, renegotiation might not be needed.
Terms renegotiation can also happen when a new shareholder with considerable resources and funds joins the JV. The incoming new party may want to renegotiate the contract, especially if its contribution is significant and will enhance the business capacity to expand and navigate further towards success.
Effective since January 2020, China’s new Foreign Investment Law (the FIL) affects several of the structural requirements of JVs, including the ownership ratio, organizational composition, and certain transaction rules. Existing JVs that were established under the old laws need to change their governing structure within the five-year transitional period to the new structure in accordance with the Company Law.
The highest authority of the JV is the Board of Shareholders instead of the Board of directors. If JV intends to transfer the equity, in the past, all the shareholders shall reach a unanimous agreement on it. But under Company Law, it can be passed by a simple majority of votes cast by shareholders, unless otherwise agreed by shareholders.
To be compliant with the Company Law, existing JVs must renegotiate the terms to achieve such transitional adjustments.
Partners in a JV can initiate a friendly process to renegotiate the contract. Following due diligence, when proposing changes to the initial terms, shareholders can send the proposal to the other parties involved, or they can call a shareholder meeting. Once the shareholders agree to the new terms, the JV agreement shall be revised, or a supplementary agreement shall be prepared.
The Articles of Association (AOA) should be amended and updated as well. According to the requirements of Company Law, only the Board of Shareholders has the right to amend the AOA and pass the resolution.
As AOA’s amendment shall be deemed as a major voting item, the resolution shall be passed by shareholders holding two-thirds or more of the voting rights. While both the JV agreement and AOA of JV shall be amended at the same time after the renegotiation, normally, only the AOA shall be refiled with the local government authority.
There are a few significant legal terms in the official JV agreement that all partners should pay attention to, to safeguard their interests, such as establishing a correct proportion for voting rights and agreeing to the mechanism for distributing profits across shareholders.
When renegotiating the terms of a JV, similarly to the voting rights situation, it is important to discuss dividends rights and the mechanism according to which they will be set and distributed to each partner.
One of the main aspects of a company’s success is the accountability of its key positions. When renegotiating the terms of a JV, discussing top executive roles such as those of legal representative, chairman, CEO, CFO, and the CTO becomes as important as discussing rights of vote and profits.
It is a time-consuming process to find the proper partner and form a successful JV. Building a strong relationship takes time, just as doing the right due diligence. Joint ventures that succeed do not happen overnight.
When a business relationship is based on trust and a long-term collaboration, shareholders will try to build a prosperous future that benefits all parties rather than pursue agreements that are unlikely to last. If partners take their time to know each other and their business, there may never be a need to renegotiate terms.
However, it is important to understand two key elements for building a successful JV: design a clear, well-thought JV agreement to conclude a business relationship professionally and avoid or minimize future disputes, and second, get as much information as possible on the company you may want to form a JV with.
It is imperative to conduct all the necessary prior research and clearance on that business, to avoid facing challenging issues down the road.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at email@example.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.