posted 2 hours ago
As China’s policy of opening up continues to advance into a new stage, an increasingly open, inclusive, and evolving investment environment has attracted a growing number of foreign enterprises to invest in the Chinese market. Many of these enterprises have formed strategic partnerships with Chinese companies, pursuing joint development and global expansion. Among the various entry mechanisms for foreign investors, the Joint Venture model remains one of the most significant forms of foreign investment in China.
When participating in the operation of a Joint Venture (JV), foreign investors must pay close attention to developments in China’s domestic legal framework governing foreign investment and corporate governance. Where the Chinese partner is a state-owned enterprise (SOE), however, the regulatory landscape becomes more complex. In addition to corporate regulations and foreign investment laws, the JV may also be subject to the specialized regulatory regime governing state-owned assets. As market entities funded by the state, SOEs must comply with dedicated laws and regulations concerning state-owned assets supervision in matters such as corporate operations, decision-making procedures, and the disposition of assets. This “dual-regulatory” structure may bring both opportunities and challenges. On the one hand, cooperation with SOEs may provide the JV with policy support and access to strategic resources. On the other hand, regulatory constraints and differing stakeholder interests may create uncertainties regarding the protection of foreign investors’ rights and interests.
Against this background, this article aims to systematically review the core legal framework governing foreign investment and corporate governance in China, together with the special rules applicable to SOEs. By focusing in particular on key issues related to amendments to JV articles of association (AoA), the article analyzes practical considerations in the governance of Sino-foreign joint venture. For foreign shareholders, it is essential to closely monitor the evolving legal regime governing JV in China—especially when partnering with state-owned enterprises—to effectively safeguard their rights and interests in accordance with Chinese law and maximize the value of their investments.
Within the regulatory framework applicable to all JVs in China, the implementation of the Foreign Investment Law of PRC (2020) and the Implementation Regulations for the Foreign Investment Law of PRC (2020) unified the regulatory regime governing foreign investment. Meanwhile, the Company Law of PRC (revised in 2023), as the fundamental statute governing corporate governance in China, further strengthened mechanisms for corporate governance and shareholder protection. In addition, the introduction of the 2024 Special Administrative Measures for Foreign Investment Access (Negative List) has expanded the sectors open to foreign investment. These laws and regulations collectively constitute the core legal framework governing Sino-foreign joint ventures. In particular, the comprehensive revision of the Company Law in 2023 has a direct impact on the corporate governance structure of JVs. Accordingly, these developments require close attention when amending the AoA of JV companies.
Following the promulgation of the Foreign Investment Law in 2019, China established a regulatory regime under which domestic and foreign investment are treated equally outside the scope of the negative list. The law and its implementing regulations introduced several key institutional arrangements, including the national treatment for foreign and domestic investors, the negative list management system for foreign investment, and comprehensive legal protections for foreign-invested enterprises. Under the Foreign Investment Law, foreign-invested enterprises established before it into force under the former regulation of the Three kinds of Foreign-Invested Enterprise (including Sino-foreign joint ventures, cooperative business, and exclusively foreign-owned enterprises) are required to adjust their organizational form, governance structure, and operational rules in accordance with the Company Law and other applicable regulations by 31 December 2024.
In practice, however, because JV contracts, AoA, and shareholders’ agreements often reflect different interests and positions between the Chinese and foreign shareholders, negotiations regarding amendments can be complex and difficult. As a result, many JVs have not completed the required adjustments during the five-year transitional period provided under the Foreign Investment Law, and continue to maintain governance structures established under the former legal regime.
According to the Foreign Investment Law and its implementing regulations, once the transitional period expires, JVs that fail to complete the necessary amendments to their AoA and governance structure may face regulatory consequences. In particular, the competent market supervision authorities may refuse to process additional registration matters and may publicly disclose the relevant non-compliance, which may adversely affect the company’s operations. Nevertheless, these regulatory pressures do not necessarily guarantee substantial progress in negotiations between shareholders regarding the required amendments.
The Company Law of PRC, as a cornerstone statute within China’s legal system, has played a significant role in promoting the sustained and healthy development of the market. With the revised Company Law entering into force on 1 July 2024, JVs that have not yet completed the aforementioned adjustments to their AoAs and governance structures will face an additional layer of compliance obligations, requiring further updates in accordance with the newly revised corporate governance framework in this revised Company Law.
Based on the foregoing legal framework, foreign shareholders should cooperate with the adjustments required under the Foreign Investment Law and Company Law, with particular attention given to the following issues:
During the revision of JV contracts, AoA, and shareholders’ agreements, particular attention must be paid to changes introduced by the revised Company Law regarding the approval authority and procedural rules of the shareholders’ meeting and the board of directors.
Under the former legal framework governing foreign-invested enterprises—commonly referred to as the three kinds of foreign-invested enterprise laws—certain major corporate matters required unanimous approval by the board of directors. These matters included amendments to the AoA, increases or reductions of registered capital, corporate mergers, divisions, dissolution, or changes in corporate form. However, under the revised Company Law, such matters are generally subject to approval by shareholders representing two-thirds or more of the voting rights at the shareholders’ meeting. For foreign investors holding minority equity stakes, this change may result in the loss of the effective veto power that previously existed under the unanimous approval requirement.
In response, minority foreign shareholders may consider negotiating protective mechanisms in corporate governance. For example, they may request that such major matters be subject to a higher voting threshold than the statutory two-thirds majority, or introduce procedural arrangements requiring that certain matters first be approved by the board of directors before being submitted to the shareholders’ meeting. However, whether such arrangements can be accepted by the Chinese shareholders in JV often depends on the bargaining power during negotiations, and may prove difficult in practice.
With respect to equity transfers in a JV, the revised Company Law allows shareholders to contractually determine specific arrangements, meaning that many provisions contained in existing agreements may continue to be maintained. At the same time, the revised law introduces a more streamlined framework for equity transfers, particularly in scenarios involving shareholder exit.
Under the previous Company Law, a shareholder intending to transfer equity to an external party was required to obtain consent from more than half of other shareholders, who also enjoyed a right of first refusal under the same conditions. The revised Company Law introduces two significant changes. One is the removal of other shareholders’ consent requirement in equity transfer to an external party. A transferring shareholder is only required to notify the other shareholders. If the notified shareholders fail to respond within the specified period, the consequence changes from “deemed consent to the transfer” to “deemed waiver of the right of first refusal.” The other change is clarification of the “same conditions” standard for the exercise of the right of first refusal. The law now specifies that these conditions refer to the quantity, price, payment method, time limits, and other terms stated in the equity transfer notice, thereby providing clearer procedural guidance for the exercise of such rights.
For foreign shareholders in JVs, these simplified rules for equity transfer may provide a more practical exit channel should they choose to withdraw from the JV.
With respect to profit distribution and the allocation of residual assets, Article 46 of the Implementation Regulations of the Foreign Investment Law of PRC previously allowed foreign-invested enterprises to continue implementing profit distribution and residual asset allocation arrangements agreed in the original JV contracts after adjusting their organizational form and governance structure.
However, the revised Company Law now contains more explicit provisions governing these matters—particularly in Articles 210 and 236—which set out clearer rules regarding profit distribution and residual assets distribution upon liquidation. Accordingly, JVs should adjust their arrangements in accordance with the requirements of the revised Company Law.
The revised Company Law introduces significant flexibility regarding corporate supervisory structures. It allows a limited liability company to establish an audit committee composed of directors in place of a supervisory board. For companies with a relatively small number of shareholders, the law also permits the company not to establish a supervisory board, and instead either appoint a single supervisor or dispense with supervisors entirely.
In this context, foreign shareholders may face proposals to abolish the supervisory board or the position of supervisor within the JV. Nevertheless, retaining a supervisor may still be advantageous. Where a supervisor is maintained, foreign shareholders may continue to nominate a supervisor to oversee the board of directors and senior management, thereby maintaining a channel for internal oversight. Another related issue concerns the feasibility of replacing the supervisory board with an audit committee composed of directors. Because the revised Company Law does not provide detailed rules governing the procedures and voting mechanisms of audit committees, the manner in which such committees should coordinate their supervisory functions within the board structure remains uncertain in practice.
The primary exit mechanisms available to minority shareholders include share repurchase rights and equity transfers. Equity transfers have been discussed above. With respect to share repurchase rights, the revised Company Law largely retains the circumstances under which dissenting shareholders may request the company to repurchase their shares. These include situations where (1) the company has distributable profits but fails to distribute them for five consecutive years; (2) the company undergoes a merger, division, or transfers its principal assets, or (3) the company should be dissolved but avoids dissolution through amendments to the AoA.
Building on this framework, Article 89(2) of the revised Company Law introduces an additional protection for shareholders of limited liability companies: where a controlling shareholder abuses its rights and seriously harms the interests of the company or other shareholders, other shareholders may request the company to repurchase their equity. This provision provides an important institutional safeguard for minority shareholders, while also imposing a significant constraint on controlling shareholders. Accordingly, under the revised Company Law, where a foreign investor holds a minority stake in a JV, the available exit pathways have become more structured and accessible.
II. Special Regulatory Regime for State-Owned Enterprises in JV Governance
In China, SOEs refer to enterprises in which the state—represented by the central or local government—performs the role of investor. This category includes wholly state-owned enterprises as well as enterprises in which such entities hold shares directly or indirectly. Where the state capital independently or jointly contributes investment and collectively holds more than 50% of the equity, and one of the state investors is the largest shareholder, the enterprise is generally classified as an SOE. Even where the shareholding ratio does not exceed 50%, an enterprise may still be regarded as an SOE if state capital is the largest shareholder and is capable of exercising de facto control over the company through arrangements such as JV contracts, AoA, or board resolutions. Furthermore, where such invested enterprises make external investments, their subsidiaries in which they hold more than 50% equity are likewise categorized as SOEs.
Because of the distinctive nature of state ownership, where a JV involves state-controlled capital, the company must comply not only with the Company Law but also with additional regulatory requirements applicable to SOEs. The principal regulatory authority responsible for supervising such enterprises is the State-owned Assets Supervision and Administration Commission (SASAC). SASAC operates under government supervision and is responsible for managing and supervising state-owned assets. Depending on the level of government ownership, an SOE may fall under the jurisdiction of central-level SASAC or a local SASAC, with the applicable regulatory framework determined by the ownership structure of the enterprise.
From a legal perspective, the regulatory framework governing SOEs extends beyond the Company Law and related judicial interpretations. It also includes a range of laws, administrative regulations, as well as normative documents issued by SASAC at various levels. Key legal and regulatory instruments include, among others:
In addition, normative regulatory documents issued by both central and local SASAC authorities play an important role in shaping governance practices. At the local level, operational guidelines issued by SASAC often carry strong practical influence. For example, the Shanghai SASAC has issued the Guidelines on the Articles of Association for Wholly State-Owned Companies under SASAC Supervision (2024 Edition) and the Guidelines on the Articles of Association for State-Owned Assets Holding Companies under SASAC Supervision (2024 Edition), which provide detailed requirements for the governance structures of SOEs within its jurisdiction.
With respect to the formulation of AoA, SASAC has also promulgated the Administration Measures on the Formulation of Articles of Association of State-owned Enterprises. Notably, SASAC has clarified in an official interpretation regarding this regulation that these rules primarily apply to group-level parent companies, rather than to subsidiaries at various levels. In principle, SOEs may formulate governance rules for their invested enterprises by referencing these measures and adapting them to actual circumstances. From a legal perspective, this approach leaves room for subsidiaries to tailor their own AoA. In practice, however, the policy orientation and governance philosophy of state capital often flow from the parent group downward through the corporate hierarchy. As a result, guidelines that are formally “for reference” may effectively become uniformly implemented standards throughout the group. Even second- or third-tier subsidiaries within an SOE group often follow internally consistent governance policies established at the group level. For example, in the notice accompanying the aforementioned Guidelines issued by Shanghai SASAC, it is stated that enterprises under its supervision may refer to the model provisions and, in accordance with statutory procedures, revise and improve the AoA of their subsidiaries. This demonstrates how regulatory expectations can be transmitted through multiple layers of an enterprise group, meaning that foreign investors cooperating with what appears to be a relatively low-level SOE subsidiary may still encounter strong governance constraints originating from the group level.
In addition to the legal and regulatory framework described above, Chinese SOEs are also required to comply with the internal regulations of the Communist Party of China (CPC). The Constitution of the Communist Party of China and the Regulations on the Work of the Party Groups of the Communist Party of China establish the institutional role of Party organizations within SOEs. These Party regulations require that Party-building activities be integrated into the core operations of SOEs. Consequently, the AoA of SOEs must clarify the roles and responsibilities of Party organizations in corporate governance, including their participation in decision-making, implementation, and supervisory processes.
In addition, ongoing policy reforms concerning state-owned assets and SOEs continue to influence governance structures within state-controlled enterprises. Over the past several years, policy initiatives have introduced reforms in areas such as restructuring corporate governance structures, mixed-ownership, technological innovation, ESG, and corporate compliance systems. These policy developments often translate into new requirements for the AoA of SOEs.
III. Practical Considerations When Forming JVs with State-Owned Enterprise Shareholders
Given that cooperation with local SOEs is often an important pathway for foreign investors seeking to unlock the potential of the Chinese market, foreign shareholders should remain attentive throughout the entire lifecycle of a JV—from establishment to operation and eventual exit. In light of the legal and regulatory environment outlined above, foreign investors should pay particular attention to the following practical considerations when entering into a JV or when revising JV contracts, AoA, or shareholders’ agreements.
Where the JV is controlled by an SOE, matters such as amendments to the JV contract or AoA, major investments, equity transfers, and profit distributions typically fall within the scope of the SOE governance principle known as “Three Major and One Large” (三重一大). This concept refers to: major decision, major personnel, major project, and large-scale capital operations. The purpose of this mechanism is to ensure that significant matters are handled through the group’s formal decision-making system, thereby promoting scientific, democratic, and compliant decision-making within SOEs.
For “Three Major and One Large” matters within the SOE governance framework, the core principles are particularly: Party committee pre-review, legally defined allocation of authority and responsibility, and hierarchical authorization. Accordingly, major decision-making must follow the internal compliance procedures applicable to SOE. Foreign shareholders may therefore consider refining the definition of “major” events and the corresponding voting mechanisms, by distinguishing between matters involving national strategy, important assets, or key employees and those involving routine operational decisions in the JV contract or AoA. By doing so, they can both facilitate the SOE partner’s compliance with internal governance procedures and ensure that the operational efficiency could stay unimpaired.
Where the SOE shareholder holds a controlling stake, the JV will generally be required to establish compliance and financial management systems that meet the requirements of state-owned asset supervision, and it may also be subject to audits and inspections by SASAC. When drafting or revising the JV contract and AoA, specific provisions can be made regarding the approval authority and decision-making rules of the board of directors, and by appointing supervisors to participate in the company’s decision-making process. With respect to profit distribution, the provisions should specify objective, measurable conditions such as statutory reserve allocations or audit completion, and fixed or trigger-based timelines to ensure predictability and enforceability. Regarding exit mechanisms, foreign shareholders should proactively integrate multiple statutory pathways under the newly effective Company Law, including the dissenting shareholder buyback right, transfer of equity interests, and voluntary dissolution, tailored to the specific governance constraints and policy obligations of SOE shareholders. Such forward-looking structuring mitigates regulatory and operational risks arising from SOE non-compliance and facilitates orderly, timely exits. Foreign investors must operate strictly within the statutory framework to ensure compliance, while simultaneously negotiating contractual safeguards that maximize legitimate rights and commercial flexibility for both parties.
Because SOE shareholders are subject to the policy objective of preserving and increasing the value of state-owned assets, they may adopt a more conservative approach to corporate decision-making. In some cases, this may constrain long-term strategies proposed by foreign shareholders—such as increased investment in research and development—if such initiatives are perceived as reducing short-term financial performance. Given that the market supervision authority’s registration requirement of AoA may limit the flexibility of certain governance arrangements, foreign investors may instead incorporate specific provisions into the JV contract. For example, the parties may agree on shared business principles, long-term development objectives, and profit distribution arrangements that balance short-term returns with long-term strategic development, thereby aligning their interests toward mutually beneficial cooperation.
When dealing with the institutional inertia of SOE group governance, foreign investors often need to seek room for negotiated exceptions within otherwise standardized governance frameworks. If the JV’s AoA must follow templates issued by regulatory authorities, the parties may instead incorporate key protective provisions—such as repurchase rights, liquidated damages clauses, or veto rights over specified matters—into the JV agreement itself. Although the AoA must be filed with regulators and may be constrained by standardized templates, the JV contract remains a commercial document legally binding between the parties. Through a dual framework of compliance of AoA and protection through arrangements, foreign shareholders can both satisfy regulatory requirements related to state-owned asset supervision and maximize the protection of their commercial interests in practice.
IV. Conclusion
The continued development of China’s legal framework governing foreign investment has created a more stable and transparent regulatory environment for foreign investors. As major participants in China’s economy, SOEs remain important partners for foreign investors seeking to tap into the potential of the Chinese market, and forming a JV with SOEs continues to be a significant pathway for market entry and expansion. At the same time, it must be recognized that cooperation with SOEs differs fundamentally from cooperation with privately owned enterprises. The key challenge lies in reconciling compliance with foreign investment regulations with the special regulatory requirements governing state-owned assets, while also balancing the commercial interests of foreign investors with the policy objective of preserving and increasing the value of state-owned assets.
From the national treatment principle established by the Foreign Investment Law, to the strengthened shareholder protection mechanisms introduced in revised Company Law, and the stringent regulatory framework governing SOEs administered by the SASAC, the legal landscape surrounding Sino-foreign joint ventures continues to evolve. In this context, foreign investors must remain attentive to ongoing legal and regulatory developments, and develop a comprehensive understanding of both general corporate and foreign investment laws and the special governance rules applicable to SOEs. Only by doing so can foreign shareholders effectively navigate China’s regulatory environment, make full use of the joint venture model, and ultimately achieve mutually beneficial and sustainable cooperation with Chinese partners and the broader Chinese market.
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