By Olaf Griese, Dezan Shira & Associates, Partner
Among foreign investors, there’s a profound, and not unfounded, distrust of joint ventures in China; largely fueled by high profile JV deals that have gone wrong in recent years. Long considered investment structures to be entered carefully, different motivations to enter JVs are evolving. Here are five practical points to consider:
1. Evaluate Your Potential Partner Carefully
It is very important to fully evaluate your potential Chinese partner. Look at the key characteristics of the partner company, e.g. company culture, degree of good faith, public credibility, management capacity, standing with consumers (including name recognition), principals, etc.
Legal and financial due diligence generally involves hiring a company to conduct an extensive background and credit check, to examine the company’s files at the Administration of Industry and Commerce (AIC), to check with the relevant authorities about the company’s qualifications to operate in its specific industry, to go through the accounting books and annual compliance records, check the background of the principals, conduct customer interviews, etc.
2. Meet Face-to-Face with Local Officials
Regulations generally make the foreign investor feel very welcomed in JVs in China, but the extent to which this is true depends on the level of government. Every provincial or municipal government may have a different opinion on rules and regulations. These rules and regulations are often quite flexible. Sometimes even points that have no restrictions from a legal point of view will be called into question by the government.
We suggest you meet face-to-face with local officials you have to deal with in the JV establishment process, even if you have a good understanding about the specific rules and regulations. Do this before preparing essential documents.
3. Emphasize the Contract from the Start
Chinese parties tend to focus largely on making money, ignoring the legal, “technical details,” and the foreign investor is considered to be very far away from the whole situation. It is very important to remind the Chinese party of the importance of paperwork and the consequences of breaking the agreement.
4. Send Your Own Management
Send experienced management personnel and staff to China to run the business directly. For some trading companies, there is no need to do this, but for technical companies or manufacturing JVs, sending someone to China is necessary.
You can keep an eye on the Chinese party and look after your own interests to the fullest extent possible. We have seen a number of foreign parties who trusted that the contract and agreement would bind their Chinese counterpart however, things did not work out as they imagined.
5. Maintain Good Internal Control
Pay attention to the company seal (known as the “chop”) and bank accounts. Each company will have three very important seals – corporate, financial, and legal representative – controlling these three seals allow you to open bank accounts and issue checks. The legal representative’s seal is particularly important, as it is required on numerous company documents and regarded as a signature. Consequently, any person in possession of the legal representative’s seal may exercise their power to bind the company. In order to prevent unauthorized use, establish a procedure whereby seal use is closely monitored.
Before you get very far in the JV, lay the foundations for maintaining good internal control – we suggest the foreign company control these seals.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with nineteen offices in four jurisdictions, employing over 170 business advisory and tax professionals.
For professional advice, information and assistance, please contact us in Chengdu at [email protected] or visit www.dezshira.com.