Joint Ventures 2024

Last Updated September 17, 2024

China

Law and Practice

Author



Commerce & Finance Law Offices is a leading law firm in China with a global reach. The firm has offices in major areas of economic activity in China, including nine offices in Beijing, Shenzhen, Shanghai, Hong Kong, Chengdu, Hangzhou, Wuhan, Haikou and Suzhou and more than 800 legal professionals. The firm’s lawyers are characterised by profound professional knowledge, rich practice experience and forward-looking business thinking, and they are committed to providing efficient, accurate and innovative business solutions. During more than three decades of development, Commerce & Finance Law Offices has established a remarkable reputation in capital markets, M&A, private equity, dispute resolution, banking and finance, the new economy, anti-monopoly and competition, investment funds, restructuring and bankruptcy, supervision, labour, wealth management, real estate and construction, and intellectual property, among other fields. Over the years, the firm has received hundreds of awards from mainstream professional media/associations, at home and abroad, and has been on various international appraisal lists.

In the last 12 months, because of geopolitical conflicts, foreign investors have become more cautious about investing in China. According to data from the PRC Ministry of Commerce (MOFCOM), foreign direct investment (FDI) in China fell again in May 2024, continuing the downward trend since June 2023. In the first five months of 2024, FDI fell by 28.2% year-on-year, representing a greater decline compared with the 27.9% year-on-year decline seen in the first four months 2024. In addition, certain developed countries and regions such as the United States, the EU and Japan have begun to impose restrictions on investment in China, particularly in sensitive industries. For example, in August 2023, President Biden signed an executive order to establish an overseas investment review mechanism to restrict US entities from investing in China’s semiconductor and microelectronics, quantum information technology and AI fields. Similarly, during the COVID-19 pandemic, the Japanese government encouraged some high-value and highly dependent companies to relocate their production lines back to Japan.

However, to cope with the decline in investment caused by political factors, the PRC government promulgated the “belt and road” strategy and proposed a “dual circulation” development strategy to attract foreign investment. In 2023, the author found that more and more PRC companies had begun to implement the “going out” strategy to increase direct overseas investment in the countries along the belt and road, such as Iraq, the UAE and Tajikistan.

New Energy Vehicles

According to Global EV Outlook 2024, published by the International Energy Agency, in the first quarter of 2024, electric car sales grew by around 25% compared with the first quarter of 2023. It is necessary to develop new energy vehicles for the following reasons:

  • to achieve carbon neutrality and emission peak;
  • to improve energy security, where the development of new energy vehicles will increase the reliance on non-traditional energy and reduce that on oil resources; and
  • to develop related industries and technologies.

Middle Eastern Sovereign Wealth Fund (SWF) Investment in China

According to the Hong Kong Monetary Authority, Middle Eastern SWFs accelerated capital inflows into China in 2023, investing approximately USD2.3 billion. The expansion of Middle Eastern SWF investment in China is being driven by the following factors:

  • the growing political influence of China in the Middle East;
  • closer economic and trade relations between China and the Middle East – according to China Customs, from 2017 to 2022, China’s trade with the Middle East increased from USD262.5 billion to USD507.2 billion, representing a 93.22% increase; and
  • the increasing co-operation on energy transformation between China and Middle Eastern countries.

According to the Foreign Investment Law of China, all existing foreign invested enterprises (FIEs) established under the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Co-operative Joint Venture Enterprise Law and the Wholly Foreign-Owned Enterprise Law (“Three FIE Laws”) have to adjust their forms and organs according to the PRC Company Law (the “Company Law”) or the PRC Partnership Law, and must register these changes before 31 December 2024. Thereafter, the Three FIE Laws will be abolished, and the different types of FIEs will be as follows.

  • Traditional joint venture company (JVC) – foreign investors may jointly establish a JVC with other PRC investors.
    1. The advantages are as follows:
      1. shareholders’ liability is limited to their invested capital;
      2. it is easier for a JVC to obtain lending from banks;
      3. as an independent legal entity, a JVC may bear the liabilities for its debts with all its properties; and
      4. the transfer of shares and expansion of capital of JVCs is much easier.
    2. Disadvantages include the following:
    3. the establishment of a traditional JVC is complicated, and the operation cost is relatively higher;
    4. the decision-making process of a JVC is less flexible than that of a partnership; and
    5. taxes are higher.
    6. Partnership – partners of a partnership bear unlimited joint and several liability for the partnership’s debts.
    7. The advantages are as follows:
      1. all partners can actively participate in the operation and management of the partnership; and
      2. all partners can jointly share operation risks.
    8. Disadvantages include the following:
      1. partners are subject to unlimited liability, potentially risking personal assets; and
      2. the transfer of the property rights of a partner is relatively difficult because it is subject to unanimous resolution of all the other partners.
  • Limited liability partnership (LLP) – a limited partnership is composed of general partners and limited partners, and the latter are liable for the partnership’s debts to the extent of their subscribed capital contributions.
    1. The advantages are as follows:
      1. limited partners’ liabilities are limited to their contributions, and the risks are lower than those of general partners;
      2. limited partners can operate competing businesses; and
      3. decision-making with respect to LLP affairs is more efficient than in a partnership.
    2. Disadvantages include the following:
      1. limited partners do not participate in the management of the business; and
      2. the transfer of the property rights of a general partner is more difficult compared to limited partners.

Choosing the appropriate JV vehicle requires consideration of many factors based on the needs and nature of a project, rather than focusing on a single factor. For example, for JVs in heavy industry, since each shareholder needs to invest a large amount of capital or assets, it is usually necessary to establish a traditional JVC for the project to clearly stipulate the entitlement to assets and revenue, management structure and control or decision-making. As to foreign investment in asset-light industries, foreign investors may be reluctant to participate in the management, caring only about the rate of return. In such cases, an LLP might be a better vehicle, where all parties could focus on reaching agreement regarding the pooling of profits, the sharing of losses and risk, and accounting tax treatment. It is rare to choose a JV vehicle for a general partnership, because it is too risky for a foreign investor to assume unlimited liabilities under the investment.

The primary regulators of FIEs include MOFCOM, the National Development and Reform Commission (NDRC), the State Administration for Market Regulation (SAMR) and the State Administration of Foreign Exchange (SAFE).

MOFCOM is responsible for supervising and implementing the foreign investment information-reporting system, and the NDRC’s main function is to approve and file foreign investment projects; on matters of security, it jointly leads the national security review with MOFCOM.

The SAMR is mainly responsible for the registration of JV enterprises and review of antitrust filings, and it co-operates with the competent commerce department to implement the foreign investment information-reporting system. SAFE is mainly responsible for the supervision and management of foreign exchange (current and capital items), and it supervises the registration of direct investment foreign exchange through banks.

Major statutory provisions include but are not limited to the Company Law, Partnership Law, Foreign Investment Law, Antitrust Law, Anti-money Laundering Law (the “AML Law”), Special Administrative Measures (Negative List) for Foreign Investment Access, Anti-foreign Sanctions Law, National Security Law and other complementary regulations, statutes and normative documents.

At the national level, the Standing Committee of the National People’s Congress issued the AML Law, which specifies supervision and management, the responsibilities of obligated subjects, investigation, international co-operation, and legal liabilities in respect of anti-money laundering. The AML Law serves as the foundational legislation in the field of anti-money laundering, stipulating that the People’s Bank of China, as the State Council’s anti-money laundering administrative department, is responsible for national anti-money laundering supervision and management, while relevant State Council departments and institutions carry out anti-money laundering supervision within the scope of their respective duties.

The People’s Bank of China has established a basic framework through a series of regulations, including the Rules for Anti-money Laundering by Financial Institutions, the Notice of the People’s Bank of China on Further Strengthening Anti-money Laundering by Financial Institutions, and the Notice of the Money Laundering and Terrorist Financing Risk Management Guidelines for Corporate Financial Institutions (for Trial Implementation). In particular, the anti-money laundering system used by financial institutions sets up a customer identity-verification system, a large-value transaction and suspicious transaction reporting system, anti-terrorism financing procedures, and a supervision and management system, such as Administrative Measures for the Identification of Clients and the Keeping of Clients’ Identity Information and Transaction Records by Financial Institutions, Administrative Measures on Reporting of Large Amount Transactions and Suspicious Transactions by Financial Institutions, and Measures for the Supervision and Administration of Anti-money Laundering and Counter-terrorism Financing of Financial Institutions.

Additionally, various regulatory departments co-ordinate anti-money laundering efforts within the legal framework. For instance, the China Banking and Insurance Regulatory Commission (CBIRC) and the China Securities Regulatory Commission (CSRC) assist the People’s Bank of China in formulating anti-money laundering policies and monitoring suspicious fund transactions in the banking, securities, futures, and insurance sectors. The Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security are responsible for legislative and judicial activities related to money laundering crimes, including prevention and judicial adjudication thereof. The State Taxation Administration participates in formulating policies and taking administrative measures to combat and prevent tax violations related to money laundering, including tax evasion and fraud.

Anti-sanctions

According to the Anti-foreign Sanctions Law of the PRC issued on 10 June 2021, if any foreign country, in violation of international laws and basic norms governing international relations, uses various excuses or its own laws to contain or suppress China, adopts discriminatory or restrictive measures against Chinese citizens and organisations, or interferes in China’s internal affairs, China has the right to take corresponding countermeasures. Specifically, relevant departments of the State Council can decide to place individuals or organisations directly or indirectly involved in formulating, deciding or implementing such discriminatory or restrictive measures on the Countermeasures List. For those included on the Countermeasures List, the relevant departments of the State Council may take any of the following measures:

  • denial of visa issuance, denial of entry, deregistration of visas or deportation;
  • seizure, distraining or freezing of movable property, immovable property and other types of property within the territory of China;
  • prohibiting or restricting organisations or individuals within the territory of China from conducting relevant transactions, co-operation or other activities with individuals or organisations on the Countermeasures List; and
  • other necessary measures.

Antitrust

Foreign JV partners who acquire PRC enterprises or participate in concentration of undertakings shall be subject to anti-monopoly review under the PRC Antitrust Law.

National Security

The PRC has established a foreign investment security review system to conduct security reviews on foreign investments that affect or may affect national security according to the PRC Foreign Investment Law and the National Security Law of the PRC. If a foreign investment is found to pose a risk to national security, it may be prohibited from proceeding.

China’s antitrust legal framework is centred around the Antitrust Law issued by the Standing Committee of the National People’s Congress.

As revised in 2022, the Antitrust Law strengthens the foundational role of competition policy, establishes a fair competition review system, clarifies the scope and standards for identifying monopoly agreements, improves regulations on the abuse of market dominance in the digital economy and enhances penalties for non-compliance with reporting requirements.

The revised Antitrust Law also introduced the “safe harbour” provision. For example, as long as an operator proves that its market share is below a certain threshold and meets other conditions set by the State Council’s antitrust enforcement agency at the same time, even if any arrangement or agreement between it and its upstream suppliers or downstream customers or distributors constitutes an anticompetitive agreement for the form only, the arrangement or agreement will not be prohibited.

The updated Antitrust Law primarily targets monopoly agreements, the abuse of market dominance, operator concentration and the misuse of administrative power to exclude or restrict competition.

In the aforementioned areas regulated by the Antitrust Law, the State Council, the SAMR and other departments have further issued seven regulations to refine the relevant rules, including the Rules of the State Council on Declaration Threshold for Concentration of Undertakings, the Provisions on the Review of Concentrations of Undertakings, the Measures for the Computation of Turnover for Declaration of the Concentration of Undertakings in the Financial Sector, the Provisions on Prohibition of Abuse of Market Dominance, the Provisions on Prohibition of Monopoly Agreements, the Provisions on Curbing the Abuse of Administrative Power to Exclude or Restrict Competition and the Provisions on Prohibition of the Abuse of Intellectual Property to Exclude or Restrict Competition.

If a PRC-listed company invests in a joint venture (JV) and the establishment of the JV involves “major assets restructuring” or “purchase of assets by issuing shares”, it must be approved or recorded with the CSRC. Further, the PRC-listed participants to JVs shall comply with applicable regulations regarding listed company investment and information disclosure in the PRC, such as the Securities Law, Administrative Measures on Information Disclosure by Listed Companies, and other applicable regulations and rules as promulgated by the Shanghai Stock Exchange, Shenzhen Stock Exchange or Beijing Stock Exchange (as the case may be).

The People’s Bank of China and the SAMR jointly promulgated the Administrative Measures for Beneficial Owner Information on 30 April 2024, which will come into effect on 1 November 2024 and makes specific provisions on the filing and management of beneficial owner information. According to the regulation, a natural person who satisfies any of the following criteria shall be the beneficial owner of a filing entity (companies, partnerships and branches of foreign companies are currently regulated as “filing entities”):

(i) ultimately owning more than 25% of the equity, shares or partnership interest of the filing entity, directly or indirectly;

(ii) failing to satisfy the criteria stipulated in item (i), but ultimately enjoying more than 25% of the usufruct or voting rights of the filing entity; or

(iii) failing to satisfy the criteria stipulated in item (i), but exercising actual control over the filing entity, separately or jointly.

The scope of beneficial owner information to be filed includes not only basic details such as name, gender, nationality, date of birth, address of habitual residence or workplace, contact details and identity documents, but also the type of beneficial ownership relationship and dates of formation and termination (if any). For filings based on item (i), the specific equity ratio must be filled in; for filings based on item (ii), the proportions of usufruct or voting rights must be filled in; and for filings based on item (iii), the manner of actual control must be filled in.

The New 2021 Edition Negative Lists

The NDRC and MOFCOM issued the Special Administrative Measures for Foreign Investment Access (Negative List) (2021 edition) and the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2021 edition) on 27 December 2021. The negative lists both came into effect on 1 January 2022. Compared with the previous edition, the 2021 edition of the negative lists included the following changes.

  • Deepening reform and opening-up of the manufacturing industry. In the field of automobile manufacturing, the restrictions on the foreign equity ratio in relation to car manufacturing, and on the same foreign investor establishing two or fewer JVs in China to produce similar complete vehicles, were cancelled. In the field of radio and television equipment manufacturing, the restrictions on foreign investment in ground satellite TV receiving facilities and key parts production were cancelled.
  • Easing market access for the service industry in pilot free trade zones. In the field of market research, foreign investment access restrictions were cancelled, except for radio and television listening and viewing surveys. It is permitted for foreign investors to invest in social surveys.

Expansion of Service Industry Opening-Up in Six Cities

According to the State Council’s Reply on Approving to Carry out Comprehensive Pilot Projects to Expand the Opening up of the Service Industry in Six Cities, including Shenyang, the relevant provisions of the Interim Regulations on the Registration and Administration of Private Non-Enterprise Units, Regulations on Travel Agencies, Regulations on the Administration of Entertainment Venues, Regulations on the Administration of Commercial Performances and Special Management Measures for Foreign Investment Access (Negative List) (2021 edition) will be temporarily adjusted and implemented, as follows.

  • In terms of the Special Management Measures for Foreign Investment Access (Negative List) (2021 edition), the domestic internet virtual private network business is open to foreign investment in Shenyang, Nanjing, Hangzhou, Guangzhou and Chengdu (provided that the foreign shareholding ratio shall not exceed 50%); certain restrictions on the foreign shareholding ratio in value-added telecommunications businesses in Shenyang, Nanjing, Hangzhou, Guangzhou and Chengdu have been removed.
  • In terms of the Interim Regulations on the Registration and Management of Private Non-Enterprise Units, the establishment of non-profit medical institutions in Shenyang, Wuhan, Guangzhou and Chengdu is allowed through joint donations from China and foreign countries in accordance with relevant regulations to provide basic medical and health services. Foreign investors are allowed to donate funds to establish non-profit elderly care institutions in Hangzhou, Guangzhou and Chengdu.
  • In terms of the Regulations on Travel Agencies, foreign-invested travel agencies established in Shenyang, Nanjing, Guangzhou and Chengdu that meet relevant conditions are allowed to engage in outbound tourism business outside of Taiwan.

Various transaction documents may be signed during the negotiation stage of a JV, which usually include a due diligence questionnaire, a non-disclosure agreement (NDA), a letter of intent, a memorandum of understanding, heads of terms or a term sheet (TS) for the JV contract, and an exclusivity agreement to give the buyer or investor a period in which to conduct due diligence and negotiations without competition from other prospective buyers or investors. During the negotiating stage, the parties to the JV prepare, negotiate and finalise the JV contract, articles of association (AoA) of the JV and other relevant transaction documents, such a technology licence agreement, trademarks agreement and secondment of management agreement.

There are no market-standard provisions or guidelines in the PRC market at the pre-JV agreement stage, but it is common to cover the initial intent of the parties to establish a JV or co-operation, the form of organisation of the JV, the purpose and scope of the JV, the total investment amount and registered capital of the JV, the estimated share of the shareholders and the management structure in the TS at the pre-JV agreement stage.

According to JV information-reporting regulations:

  • JV enterprises shall submit an initial report of FDI to MOFCOM through the enterprise registration system when registering the foreign-invested enterprise with the SAMR;
  • when a foreign investor acquires a domestic non-foreign-invested enterprise through the purchase of equity, it shall submit an initial report of FDI to MOFCOM through the enterprise registration system when registering the change in the acquired enterprise with the SAMR; and
  • if the information in the initial report changes and involves a change in enterprise registration (filing), the JV enterprise should submit an updated report to MOFCOM through the enterprise registration system when registering the change in enterprise (filing) with the SAMR.

The parties to a JV shall apply for pre-registration of the JV’s name with the SAMR and shall submit a project report to the NDRC for project approval or recording.

In certain cases – for example to establish a bank or insurance company – pre-approval of the competent authority is required by the SAMR for registration of the JV. The parties to a JV must apply for and obtain the applicable licence or pre-approval before they apply to the SAMR to register the company.

Parties to a JV shall apply to the SAMR to register the JV and submit the initial FDI report to MOFCOM via the online information- reporting system. The data and information filed in the information-reporting system by the parties will be shared between the SAMR and MOFCOM, so the registration with the SAMR and report to MOFCOM can be performed simultaneously. After the completion of the registration, the SAMR will issue a business licence to the JV. The date of issuance of the business licence is the date of establishment of the JV.

After the registration and establishment of the JV, it needs to apply for FDI registration and open accounts at the local bank under the supervision of SAFE.

The terms in the documents may differ for different JV vehicles. Drafts of the terms shall comply with the requirements under applicable laws for different JV vehicles. If the FIE is legally structured as a JV company, the parties need to conclude a JV contract and articles of association for the JV. If the FIE is legally structured as an LLP or partnership, a partnership agreement between the parties is required, and there is no need to prepare AoA.

The main terms of a JV contract for a JV company usually include the parties to the JV, establishment of the JV (specifying its name, ownership structure and location), purpose, scope and scale of business, total amount of investment and registered capital, procedures for the transfer of equity interest, responsibilities of the parties, technology-licensing arrangement, management structure and voting rights (ie, shareholders' meeting, board of directors), operation of the JV, new investment into the JV, deadlocks, pre-emption of the shareholders, labour management, taxation, finance and auditing, termination and liquidation of the JV, liabilities for breach of contract and dispute resolutions.

For a FIE structured as a JV company, the Company Law stipulates the mandatory responsibilities of the shareholders’ meeting, board of directors, management and supervisors. These mandatory responsibilities and obligations must be included in the JV’s AoA. For matters not specifically mandated in the Company Law, the parties to the JV have the discretion to conclude the decision-making terms of the JV through commercial negotiation. Typically, the initial decision-making terms are also included in the TS during negotiation of the JV.

As required by the Company Law and Foreign Investment Law, all existing FIEs shall change their supreme decision-making authority from the board of directors to the shareholders' meeting before 31 December 2024.

For a FIE structured as a partnership, Partnership Law stipulates more flexible principles for the decision-making. Few affairs require consensus and consent of all partners under the Partnership Law. Partners can determine the decision-making principles for most FIE affairs in the partnership agreement at their own discretion.

JV entities are typically funded by cash contributed by shareholders or shareholder loans during their preparation.

For fixed-assets investment projects, in addition to equity investment, the shareholders usually apply for fixed-assets loans from banks. Therefore, JV entitles participating in fixed-assets investment are usually funded by a mix of debts and equity.

For TMT investment projects, it is difficult for a JV (especially one structured as a partnership) to apply for bank loans until it obtains stable cash flows. The JV could apply for working capital loans after it gains profits and maintains stable cash flows.

The JV agreement and AOA normally include future equity-funding terms. The ownership will not change if the future equity funding is from a shareholder loan or bank loan. If future funding causes an increase in the JV’s registered capital, amendments to the AOA and JV agreement, and registration of the JV capital increase with the SAMR, are required.

The JV agreement and AoA usually include a deadlock-resolution clause. A deadlock clause can be drafted in different ways, and one possible structure for a deadlock clause is set out in the following.

  • Step one – usually, the process begins with the sending of a “deadlock notice” by a JV partner to the other partners stating that, in its opinion, a deadlock has occurred, identifying the matter over which the JV partners are deadlocked.
  • Step two – the JV partners, acting in good faith, then use all reasonable endeavours to resolve the deadlock. This process is often performed by a senior representative of each JV partner. This step is usually limited to a finite period set out in the deadlock clause.
  • Step three – if the deadlock has not been resolved under step two, then a “buy or sell notice” may be sent by a JV partner, offering to:
    1. buy all (ie, not only some of the other JV partner’s shares; or
    2. sell all (ie, not only some) of its shares to the other JV partner for cash, at a price and for a period set out in the buy or sell notice. The notice needs to be sent within the time period specified in the deadlock clause.

If no JV partner opts to send a buy or sell notice within the specified timeframe and no alternative procedure is provided in the deadlock clause, Article 231 of the Company Law stipulates that, if a company meets any serious difficulty in its operation or management, and if the interests of its shareholders will be subject to heavy loss if the company survives that cannot be solved by any other means, the shareholders who hold 10% or more of the voting rights of the company may request the people’s court to dissolve the company.

In addition to the JV agreement, several other documents are typically required for establishing and operating a JV, as follows.

  • AoA or a partnership agreement – these are mandatory constitutional documents under PRC laws for the establishment of a JV.
  • IP licensing agreement – if the operation of the JV requires intellectual property licences, the IP owner will need to enter into a licensing agreement with the JV.
  • Asset transfer agreement – this document is necessary if a JV partner contributes assets rather than cash. According to the Company Law, besides cash, assets can also be used as contributions to the JV. If a shareholder uses non-cash assets for their contribution, an asset transfer agreement is required to officially transfer the ownership of these assets to the JV.
  • NDA – this is commonly used during the negotiation phase to ensure the confidentiality of information exchanged between JV partners.
  • Secondment agreement – if a JV partner wishes to assign one of its employees to a senior role within the JV while maintaining the employee’s existing employment relationship, a secondment agreement is used. This agreement outlines the terms of the employee’s temporary transfer to the JV, including their duties, status and compensation.
  • Trademark agreement – when establishing a JV, trademarks or names may be adopted from its shareholders; therefore, it is essential for the JV partners to sign a trademark agreement to govern the use of these trademarks.

According to the Company Law, the board of a JV corporate entity shall be constituted by at least three directors. The participants are allowed to appoint directors based on their shares, and the controlling party usually appoints the major seats of directors in the board.

Minority shareholders for private equity/JVs who decide not to engage in the operations of the JV might choose not to appoint any director of the board. However, it is still possible for such minority shareholders to require a veto on critical issues of the JV.

Weighted voting rights are used by the board under the Company Law.

The director shall assume the obligation of loyalty and duty of diligence to the company, shall avoid conflict between their own interests and those of the company and may not seek any improper interests by taking advantage of their powers.

Unless otherwise provided in the AOA, or the shareholders’ meeting elects someone else, the directors are the persons responsible for the liquidation of the JV and shall form a liquidation group to carry out liquidation when the cause for dissolution occurs.

The JV board could delegate the functions to subcommittees in accordance with applicable laws and the AOA. The JV may establish an audit subcommittee or compensation and evaluation subcommittee based on its operation and business requirements.

According to the Company Law, the director shall not seek any improper interests by taking advantage of their powers.

It is not deemed inappropriate for a person to take a seat on the JV company board as a consequence of their position in the JV if such person can in good faith comply with their obligation of loyalty to the JV and due diligence duties.

If certain IP is the key operating factor of a corporate JV, or if a JV participant decides to invest in a JV with its IP rights, the transfer of IP ownership and what IP will be transferred to the JV should be considered.

Since JV contractual collaborations do not create a legal entity, the licensing of IP should be considered. If IP transfer or licensing is needed, the JV agreement usually covers the IP to be transferred/licensed, the use of the IP, the term of the licence, royalty fees, IP ownership and validity, and the termination of the licence.

If the IP is critical to the business operations of the JV, or the JV partner decides to invest in the JV with its IP rights, then the IP rights should be assigned to the JV. If the IP rights are assigned to the JV, the JV will become the new owner of the IP rights and will enjoy the absolute rights thereunder.

If the IP is not critical to the operation of JV, or the IP owner will continue using the IP by itself, then the IP is usually licensed to the JV.

Importance of ESG

ESG is of great significance to enterprises, investors, society and the entire economic system for the following reasons:

  • promoting sustainable resource use and development – ESG encourages enterprises to devote attention to environmental protection, taking social responsibility and promoting a good governance structure;
  • promoting social fairness – ESG covers the protection of labour rights, consumer protection and community development, encouraging enterprises to actively fulfil their social responsibilities and promoting the realisation of social fairness and justice; and
  • reduced risks of operation – ESG policies help companies identify and mitigate environmental, social and governance risks that could impact their operations or reputation.

Recent ESG Legal Developments

The Interim Regulations on Carbon Emission Trading Management were promulgated by the PRC State Council on 5 January 2024. They apply to carbon emission rights trading and related activities in the national carbon emission rights trading market;

The Opinions of the CPC Central Committee and the State Council on Comprehensively Promoting the Construction of a Beautiful China (the “Opinions”) were promulgated by the PRC State Council on 11 January 2024. The Opinions highlight that, by 2035, green production and a green lifestyle will be widespread, carbon emissions will peak and then steadily decline, and the goal of a beautiful China will be largely achieved. This reflects the determination of the highest level of the Chinese government to support the development of ESG in China

ESG-related provisions (Articles 19 and 20) have been incorporated into the new Company Law, which was promulgated by the National People’s Congress on 29 December 2023. When engaging in business activities, companies shall comply with laws and regulations, demonstrate social morality and commercial ethics, be honest and faithful, and accept supervision from the government and general public. Further, companies shall take into full consideration the interests of stakeholders such as employees and consumers, as well as social public interests such as ecological environment protection, and assume social responsibilities. The PRC government encourages companies to participate in social welfare activities and release their social responsibility reports.

JV participants or the JV entity shall take actions in connection with ESG in accordance with applicable laws, including measures required under the Company Law, and disclose ESG reports or information as required by the competent authorities or regulations.

There is not yet any unified ESG legislation in China, but the policy and legislative framework related to the sustainable development goals of society – with respect to the environment, climate, energy, labour, corporate governance, consumer rights protection and anti-unfair competition – has been formed, essentially covering the following three areas of ESG governance:

  • environmental – the environmental protection obligations of enterprises are mainly covered by the Environmental Protection Law, Environmental Impact Assessment Law, Pollution Discharge Permit Management Regulations, Air Pollution Prevention and Control Law, Water Pollution Prevention and Control Law, Solid Waste Pollution Prevention and Control Law, Soil Pollution Prevention and Control Law, Noise Pollution Prevention and Control Law, and Clean Production Promotion Law;
  • social – existing laws and regulations in the PRC mainly focus on labour rights protection and product liability, including the Labor Law, Labor Contract Law, Labor Dispute Mediation and Arbitration Law, Employment Promotion Law, Labor Dispute Mediation and Arbitration Law, Labor Security Supervision Regulations, Disability Employment Regulations, Work Injury Insurance Regulations, Labor Protection Regulations for Female Employees, Regulations on the Prohibition of Child Labor and Product Liability Law; and
  • governance – corporate governance and corporate behaviour has also been focused on in the Company Law, Anti-Unfair Competition Law and Corporate Governance Guidelines for Listed Companies.

A JV company registered under the Company Law may be dissolved or winded up for any of the following reasons:

  • expiration of the term of the JV company or any other cause of dissolution, as specified in its AoA or JV contract and determined among the investors;
  • the shareholders’ meeting determines to shut down the JV company;
  • dissolution due to a merger or demerger of the JV company;
  • business licence revoked; or
  • being ordered by a competent PRC authority or a PRC court to close down the JV company.

Investors may add more commercial causes of dissolution to the JV contract and AoA, such as achievement of the JV’s purpose, default, ceasing to carry on business, becoming bankrupt and deadlocks.

A JV partnership registered under the PRC Partnership Law may be dissolved under any of the following circumstances:

  • partners decide not to carry on business upon expiry of the partnership term;
  • occurrence of any dissolution event as stipulated under the partnership agreement;
  • all partners decide to dissolve the JV partnership;
  • the JV partnership fails to reach a quorum of partners for 30 days;
  • objectives stipulated under the partnership agreement have been achieved or cannot be achieved;
  • the business licence of the partnership has been revoked or the partnership has been ordered to close down; or
  • any other circumstances stipulated by the laws and administrative regulations.

The following matters need to be handled for the termination of a JV:

  • a liquidation committee shall be established and registered with the SAMR;
  • notification of the JV’s creditors of the dissolution;
  • the liquidation committee shall conduct a thorough examination of the JV’s assets and liabilities, and develop a liquidation plan for approval at the shareholders’ meeting;
  • paying off of the liquidation expenses, wages of employees, social insurance premiums and statutory compensations;
  • paying off of all overdue taxes;
  • liquidation of the JV’s assets and settlement of all of its outstanding debts;
  • distribution of the remaining property to the investors after all the debts of the JV have been paid off; and
  • deregistration of the JV with the SAMR and other relevant authorities.

For PRC state-owned JV participants and listed company participants, the transfer of assets to other participants may be subject to special requirements under applicable PRC laws, such as audit, evaluation of assets, information disclosure, approval by a state-owned assets supervision department and transfer in public state-owned equity exchanges.

Cross-border payment/transfer of considerations of assets between the JV participants shall be subject to review and registration by the SAMR and SAFE.

The assets or cash contributed by the JV participants to the JV as capital will be owned by the JV as its own assets and property. There will be no distinction between the transfer of assets originally contributed to the JV by a participant and assets originating from the JV itself.

Commerce & Finance Law Offices

12-14th Floor
China World Office 2
No. 1 Jianguomenwai Avenue
Beijing 100004
China

+86 189 0134 0220

+86 10 6563 7181

zhaibing@tongshang.com www.tongshang.com
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Law and Practice

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Commerce & Finance Law Offices is a leading law firm in China with a global reach. The firm has offices in major areas of economic activity in China, including nine offices in Beijing, Shenzhen, Shanghai, Hong Kong, Chengdu, Hangzhou, Wuhan, Haikou and Suzhou and more than 800 legal professionals. The firm’s lawyers are characterised by profound professional knowledge, rich practice experience and forward-looking business thinking, and they are committed to providing efficient, accurate and innovative business solutions. During more than three decades of development, Commerce & Finance Law Offices has established a remarkable reputation in capital markets, M&A, private equity, dispute resolution, banking and finance, the new economy, anti-monopoly and competition, investment funds, restructuring and bankruptcy, supervision, labour, wealth management, real estate and construction, and intellectual property, among other fields. Over the years, the firm has received hundreds of awards from mainstream professional media/associations, at home and abroad, and has been on various international appraisal lists.

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