A good friend and China watcher recently posted a CNN article on LinkedIn regarding issues with the Taishan Nuclear Power Plant in Guangdong Province. As I read the article, I could not help but see the glaring issues that tend to arise in China joint ventures, even where the non-Chinese JV partner takes as many legal precautions as are available to them.
In this situation, the China partner, China General Nuclear Power Group, is the majority owner of the power plant, which is what you would expect from a highly regulated industry like nuclear power. The minority partner, a French company named Framatome, became concerned when what it terms an “imminent radiological threat” occurred at the plant. If the plant had been based in France, it would have had to shut down, but China is not France.
The French partner did not publicly call on its Chinese partner to shut down the plant for at least three reasons: (1) there is no faster way to be forced to sell your interest in a Chinese JV at a steep discount than by publicly criticizing your Chinese JV partner that is either an SOE, a subsidiary of an SOE, or closely connected with the Chinese government; (2) there is no way the Chinese JV partner would have responded and taken the necessary steps in the face of a public demand; and (3) it doesn’t make economic sense to criticize your JV partner unless you are sure the relationship is over and you have nothing left to lose except reputational risk.
There is likely a fourth reason many people would not immediately consider: the JV agreement would have given ultimate decision making authority of this type to the China JV partner.
When people (even lawyers) throw around terms like “joint venture,” “partnership,” and “business partner” they often assume that each of these relationships reflects equal rights in the arrangement, which is often not the case, even if the underlying legal documents appear at first glance to grant equal rights to both or all of the business partners.
We have seen plenty of JVs between entities where a 50/50 JV on paper meant 50/50 for net profits but not voting or director or officer selection rights. And you can imagine the poor business decisions that result in you being entitled to 50% of the net profits for a venture where your JV partner has sufficient control over the JV to make decisions regarding the business expenses that are “necessary” prior to the distribution of your 50% net profit.
The rights in a JV relationship depend on the relative bargaining power of the JV partners, which gets woven into the underlying JV agreement. But the relative bargaining power continues to shift as the JV moves ahead, based on who has operational control and audit rights.
Minority or non-operationally controlling JV partners with strong audit rights can still protect themselves and the integrity of the JV. And you should have strong rights drafted into your JV agreements even if you are in a non-regulated industry. We have seen plenty of majority-owned JVs go wrong. Don’t be that company.
For more on how to protect your company in a Chinese joint venture, see: