Establishing Joint Ventures

The basic development issues

• Letter of Intent or Memorandum of Understanding

These are helpful as they make both parties sit down and work out what each party wants from the JV. As such much time is often spent on them in negotiating salient points, exclusivity of distribution, non-competition clauses, investment mechanisms, technology transfer, IP rights and so on.

JV structuring absolutely requires an in-depth understanding of Chinese Commercial law, and if you don't have this you are already in danger of agreeing an inappropriate deal because you didn’t understand all the issues at stake. A common mistake to make is to allow your engineer to negotiate — fine for production and quality issues, but not so good at legal niceties, and this is where mistakes can occur. Get a consultant in who knows what they're doing.

MOU's once signed, form the basis of the JV structure, and the Contract and Articles themselves, so once signed, it's very difficult, and frustrating, to re-negotiate terms. Pay attention to the MOU, get it right, and start off on the correct footing.




• Due Diligence

There are various levels of due diligence, but some at least must be conducted as a must. Details of who is actually who in the Chinese company and details of their limited liability — requiring copies not just of the business license, but also of capital verification (confirming they really are capitalized properly), are pre-requisites. If Land is to be injected as part of an asset in a JV, then you need to see Land use rights certificates to establish if they own it or not.


Due diligence can also extend to forensic accounting on a partners books, as well as political risk and other issues, especially if the JV is sizable, however this is unlikely to worry most SME JVs and may not be necessary for a simple production unit. However, again, take advise — take care of the pennies and the pounds will look after themselves.



JV Contracts & Articles
These lengthy documents have to be filed as part of the Application process and approved by the local government investment bureau. The contract sets out the roles and responsibilities of either party, while the articles contain the operating rules. Much of this will have been worked out in the MOU, but details as to certain matters must be highlighted and attention to detail paid to them:


• Profits Repatriation for the Foreign Partner
• Management Control
• Buy-Out Mechanisms
• Technology Transfer and IP Issues
• Work Force