Since the outbreak of the COVID-19 pandemic, we have observed a new trend in China’s foreign direct investment (FDI) area: more foreign investors have shown intention to choose the joint venture (JV) structure to enter the China market than compared to past practices.

In this article, Dezan Shira & Associates experts share their experiences in reaching China joint venture agreements.

7 things to consider when reaching a formal JV agreement

The JV partners are suggested to pay special attention to and make proper arrangements for the below key legal clauses in the formal JV agreement so as to protect the interest of their own.

1. Shareholding ratio and capital contribution

According to PRC Company Law, the shareholding ratio of a limited liability company is normally subject to the capital subscribed by each shareholder. Therefore, the shareholder of a limited liability company shall cautiously consider the percentage of the total registered capital subscribed by itself and the shareholding structure of the JV.

2. Commitments and inputs of each JV partner

Each shareholder may have different obligations to the JV. For example, the foreign investor may provide brand, technology, machinery, advanced management experiences, and develop the overseas market, while the Chinese investor assists in exploring the domestic market, sourcing for the materials, and running the operation locally. Under such a scenario, the JV agreement shall specifically arrange certain clauses to put the oral agreements on record, and schedule corresponding default clauses in case either party does not fulfill its promises.

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Dezan Shira & Associates is happy and able to provide advisory and relevant support when needed, and we welcome investors who intend to adopt the JV structure for their China business to come to us for further discussion or email us at vivian.mao@dezshira.com.