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Dec 4, 2011

The Basics of Entering the Chinese Market through a Joint Venture

A client, a minority shareholder in a company in China, is involved in litigation with another company shareholder over issues the client had with the majority and other shareholders over his three years in this venture.

The majority shareholder (controls the representative director) has been helping himself to the company profits through creative expenses and interested transactions with the company and his personal company. The majority shareholder is also threatening to block distributions and is possibly increasing the stickiness of his fingers.

Like situations WILL occur in many cases where a JV is not completed through a carefully drafted shareholder agreement and articles of association. A majority shareholding will not prevent this situation from occurring, because of the nature and power of a China managed company.

I have said this numerous times, if you don’t want to support my extravagant lifestyle (actually I don’t have an extravagant lifestyle), get an experienced lawyer/solicitor to draft your China shareholder agreement and articles of association. Make sure the attorney knows what the heck he is doing- many of the foreign and Chinese attorneys - don’t.

Make sure the attorney is not merely going to give you form agreements. Every joint venture agreement in China is different and form agreements are a sign of a lack of care and trouble in the future. Don’t skimp at this stage and thus don’t use form articles, form shareholder agreements, and form by-laws drafted by hacks, attorneys that quote the lowest price and only accountants and agents.

Joint Venture Basics in China
  • Due Diligence, Due Diligence, Due Diligence; 
  •  Limit the Powers of the Company Directors and Managers;
  •  Retain the Power to Appoint and Remove the Directors; 
  •  Maintain Control over the Company Seal; 
  •  Retain Majority Control or include other Minority Protection Clauses;and
  •  Hire an Independent Accountant and Utilize a Neutral REAL Auditor.
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SeanHayes@ipglegal.com