I recently read an email from co-blogger Steve to one of our existing clients. Our client was seeking legal advice regarding a potential China joint venture investment. Steve responded with a very long email, some of which I can reveal here and some of which I cannot. I am running an excerpt from that email because it nicely highlights some of the basic issues that typically and initially arise when dealing with a China joint venture investment.
Here’s Steve’s email:
If you plan to invest in China, you will need to do so via a joint venture company. If the existing company in which you are interested in investing is already a joint venture, you will be able to come in as a new joint venture owner. If the existing company is not a joint venture, it will need to be converted into a joint venture. In general, we will need to cover the following:
- Due diligence to ensure that the Chinese entity is legitimate. Many China companies with Taiwanese investment were NOT properly formed in China.
- You will need a very careful joint venture agreement that sets out the rights of all the various investors.
- You will need sales/distribution and related agreements to cover the purchase rights of your side of the deal. Many people forget to do this and this can be a big mistake. We have handled a number of matters for American companies who went into a joint venture just assuming they would get the joint venture product at a discount and that ended up not being the case. In fact, in some cases, the joint venture has refused to sell to them at all.
- If you are transferring any technology, you will need agreements to protect your technology.
- Normally, it will be best for your investor group to establish a company in Hong Kong first and then have this Hong Kong company be the investor in China. This almost always provides substantial tax benefits. It also provides flexibility, since you can deal with the investor group issues in Hong Kong as opposed to in China. This can be quite important if you will have changing investors over time. Changing ownership in Hong Kong will nearly always be considerably faster, cheaper and easier than doing so in China.
In any event, the first step is to do due diligence on the Chinese side and to design the basic structure of the deal. Also note that the business you are looking at is in a very hot indsutry and so you should take extra care to make sure you are dealing with people who can perform. There are many, many fraudulent companies operating in this industry in China.
What do you think?
