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Four Steps to a Successful Joint Venture in China

A less risky Chinese JV may be as simple as one, two, three, four
By Richard Weiner | March 18, 2011

Creating a joint venture with a Chinese company is a popular way for American biofuel companies to gain a foothold in China. Unfortunately, however, many of these Chinese joint venture companies fail and are ultimately liquidated and dissolved because the American biofuel company fails to understand how to take control of the joint venture company.

In order to control the business activities of a Chinese joint venture company, an American biofuel company should take the following four simple steps:

1. Conduct thorough due diligence on the Chinese joint venture partner.

Many Chinese companies operate honest, legitimate and professional businesses. Unfortunately, some do not. Thoroughly investigating the business activities of the Chinese company and the backgrounds of their executives will help the American biofuel company determine whether its joint venture candidate is one of the former or the latter. Since every joint venture relationship is built on trust, that trust cannot be established unless the American biofuel company believes that the Chinese company will treat it in an honest and professional manner.

2. Prepare and sign a complete and straightforward joint venture contract.

The American biofuel company and the Chinese company must prepare and sign a complete, thorough and straightforward joint venture contract that lays out the rights and obligations of each of them in the joint venture company. The joint venture contract must be well-negotiated and well-drafted, and should not leave any important aspects of their relationship to future discussions or contradictory interpretations. This can make the negotiations between the companies tedious and, at times, uncomfortable. But it is far better to raise the difficult issues in the relationship at the outset and resolve them than to leave them to fight over another day.

3. Hold the chop.

Every company in China has a chop, the corporate seal with which the company is required to sign contracts. The company that controls the chop determines the contracts that the joint venture company will sign, and to which the joint venture company will be bound. The American biofuel company should make every effort to control the use of the chop. Allowing the Chinese company to control the use of the chop relinquishes to the Chinese company the ability to determine which contracts the joint venture company will sign and the obligations to which it will be bound.

4. Appoint the representative director and the general manager.

The representative director of the Chinese joint venture company oversees the business operations of the joint venture company. The American biofuel company should have the right to appoint and, if necessary, remove the joint venture company’s representative director, even if such right would require the American biofuel company to transfer one of its own employees to China to take on this role. Ceding the power to appoint and remove the representative director to the Chinese company effectively cedes control over the business operations of the joint venture company to the Chinese partner.

The general manager of the Chinese joint venture company operates its business affairs on a day-to-day basis. The American biofuel company should have the right to appoint and, if necessary, remove the joint venture company’s general manager, even if such right would require the American biofuel company to engage an employment search firm in China to assist it in finding a qualified and experienced general manager to run the business operations of the joint venture company. As with the joint venture company’s representative director, if the American biofuel company relinquishes to the Chinese company the right to appoint and remove the joint venture company’s general manager, the American biofuel company effectively hands the Chinese company the right to control the joint venture company’s daily affairs.

Entering into a joint venture in China with a Chinese company can be a risky proposition. By following the four steps laid out above, an American biofuel company can take control of the joint venture company and make the operations of the joint venture a lot less risky.

Author: Richard Weiner
Vice President, Fredrikson & Byron
(612) 492-7009
rweiner@fredlaw.com

 

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