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Businesses must familiarize themselves with the new Foreign Investment Law to ensure they are complying with the latest corporate establishment and due diligence regulations in China. This article is to introduce basic information and a few points regarding setting up a Joint Venture in Shanghai for your reference.
Structure of JV under the new Foreign Investment Law
Under the new Foreign Investment Law, which is set to come effect on January 1, 2020, the distinctions between the EJV and CJV structures will be abolished.
Article 42 of the new law will repeal the Law on Sino-foreign Equity Joint Ventures (EJV Law), and the Law on Sino-foreign Cooperative Joint Ventures (CJV Law).
Instead, foreign-invested enterprises in the form of a CJV or EJV will need to change their governing structure to a three-tier structure in accordance with the Company Law – establishing the board of shareholders, the board of directors, and manager.
Existing JV companies will have a five-year transitional period.
The Foreign Investment Law is set to change many of the structural requirements of JVs, such as the shareholding ratio, organization formation, and regulations surrounding the internal governance of joint ventures – although the exact details are yet to be released.
Finding the right partner in China
Before moving to incorporate a JV in China, the foreign investor needs to find one or more local partners.
It is important to conduct thorough due diligence on the intended JV partner.
While a large part of the due diligence is best left to trained professionals, there are a few elementary steps that investors can perform themselves:
Checking the partner’s business license and operation status:
This can provide the investor with valuable information as to who is authorized to make certain decisions in the company, what its registered capital is, the duration of the business license, the address, etc.
Checking the partner’s land use rights:
If the Chinese party is providing land, it is important to make sure it actually holds the title to that land and is valued correctly. Illegal land acquisition is a common problem in China, so foreign investors need to be particularly careful when the JV partner intends to inject land as its part of the JV contribution.
Checking financial reports: It is important to ensure that the financial information in the company books is an accurate representation of the company’s financial position as Chinese tax authorities often subject foreign enterprises to a higher level of scrutiny. If in doubt, one can engage a certified asset appraisal firm to conduct an asset appraisal report.
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