With China’s economy in a downturn and so much uncertainty regarding the future of US/China (and even EU/China) relations, our China lawyers have of late been seeing a massive uptick in companies looking to do China joint ventures “to share in the risk.” When done right, China joint ventures do share risk. But when done wrong they actually increase the risk, but only for the non-Chinese company. This is part one in a series of posts intended to help you spot China joint venture risks and avoid them.
The first thing you should know is that Chinese companies will often use the false promise of a joint venture to entice foreign companies to provide them with the foreign company’s technology. This South China Morning Post article, US entrepreneurs make a choice: rewards of doing business in China often outweigh risks of losing trade secrets, nicely explains the technology/joint venture interlay.
Our China lawyers have seen countless exploitive “joint ventures” but most of them start in the same way. The Chinese company convinces a foreign company to do a joint venture and then gets the foreign company to contribute money, technology, or know-how to the joint venture. The Chinese company is put in charge of setting up the joint venture because that only makes sense, right? Wrong.
Instead of actually setting up a joint venture that gives the foreign company an actual ownership stake in the joint venture company, the Chinese side takes the assets from the foreign company but never forms a joint venture. The Chinese company will then either go silent or — if it still needs the foreign company — it will provide it with fake documents showing the joint venture was in fact formed with the foreign company having ownership in it. The foreign company believes it owns part of the China joint venture even though it does not.
Eventually (usually many years later) the foreign company starts getting frustrated about never receiving any money or even news from the joint venture and contacts a China lawyer for help. Our law firm has handled at least a dozen of these matters where our ten minute search revealed there never was a joint venture. The good news is that this sort of thing never happens to foreign companies that use their own qualified China lawyer, as opposed to their joint venture partner’s lawyer or a lawyer not familiar with China. The bad news is that there is usually nothing that can economically be done to help a foreign company in this sort of situation.
In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and you need to be able to serve process on the defendants under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Foreign courts generally will deny jurisdiction in a case involving ownership of a Chinese company and even if they did, Chinese courts are not likely to enforce whatever judgment that foreign court renders. All this combines to mean that in most instances the duped party has no good recourse.