Cooperative and Equity Joint Ventures

1
Co-operative and Equity Joint Ventures

• Donald J Lewis
• Faculty of Law
• The University of Hong Kong

2
Co-operative Joint Ventures

• Most flexible form of PRC joint venture
• Foreign and Chinese parties have substantial
  contractual freedom to structure JV according to
  business objectives
• Profit distribution determined by contract not by
  equity interest

3
Co-operative Joint Ventures

• Two types of Co-operative Joint Venture (CJV)
• Non-legal person CJV
• Legal Person CJV
• Non-Legal Person CJV
• Contractual arrangement between the parties
• Similar to PRC partnership concept

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Co-operative Joint Ventures

• Non-Legal Person CJV
• Partners incur joint unlimited liability for
  debts
• Joint management committee (not a Board) directs
  business activity of the venture
• Legal Person CJV
• Closely resembles PRC equity joint venture (EJV)
• Organized as a limited liability company
  (although residual concerns about limited
  liability)

5
Co-operative Joint Ventures

• Legal Person CJV
• Like EJV, detailed JV Contract and Articles of
  Association
• Board of Directors is normally highest body of
  corporate governance
• Management Office conducts day-to-day business
  activities

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Co-operative Joint Ventures

• Legal Person CJV vs. EJV Comparison
• Profit distribution determined by contract not
  equity
• Capital recovery (plus a reasonable return on
  capital) during venture term permissible
• Methods of capital recovery
• Preferential distribution of
• Profits
• JV products
• Other revenue source

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Co-operative Joint Ventures

• However, if capital recovery during the term, JV
  Contract must stipulate that all fixed assets of
  the JV are transferred to the Chinese party at
  the end of the venture term
• Foreign party may also have to arrange a
  guarantee from PRC financial institution if
  capital is recovered during the JV term

8
Co-operative Joint Ventures

• No requirement for establishment of EJV deputy
  manager system
• Unilateral termination permissible in case of
  breach of JV Contract

9
Equity Joint Ventures

• Previously the preferred FIE of both the Chinese
  government and foreign investors
• Organized as a limited liability company
• Detailed JV Contract and Articles of Association
  (see MOFTEC Model Joint Venture Contract)
• Board of Directors is highest body of corporate
  governance

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Equity Joint Ventures

• Management Office conducts day-to-day activities
  of the EJV
• General Manager is in charge of Management Office
  and has significant powers
• However, deputy manager system has been
  mandatory and operates as a potential check on
  powers of general manager
• Minimum registered capital of 25 of total
  registered capital
• Net profits must be distributed according to
  equity proportions

11
MOFTEC Model JV Contract

• A species of PRC governmental standard-form
  contract
• Based on PRC equity joint venture legislation,
  but goes much further
• Extremely one-sided favours the Chinese party
  and government
• Must be modified/supplemented, but may be used as
  a basic guide in negotiation/drafting JV Contract

12
JV Contracting

• Contract as Risk Management Allocation
  Mechanism
• A primary function of investment documentation
  (e.g., JV contracts) is to allocate/manage
  identified and unforeseen project risks
• Several sections of the JV contract serve this
  risk distribution function
• Representations and warranties
• Conditions precedent
• Contract effectiveness
• Termination
• Force majeure