China Joint Ventures: BEWARE

Regular readers of this blog know we are not big fans of Chinese joint ventures. Though they are sometimes required under Chinese law for entry into China and they are also sometimes a near necessity for business reasons, they should generally be avoided if possible. Some incidents our China lawyers have seen over the last few months have really brought this home, only one of which I can discuss online.

My law firm got its third call the other day from a man with a successful US manufacturing company.  He keeps calling, but the facts never get any better. This person is married to a Chinese woman and had come to believe this alone qualified her to essentially act as his company’s legal counsel.

He keeps calling us to see if we can assist in remedying a dire China joint venture problem without resorting to litigation. The short answer: not in a million years.

The problem is that the wife/legal counsel had informed the company that because it owned 51% of the Chinese joint venture, it would be able to completely control the joint venture in China. Unfortunately, the Chinese company with which the US company entered into the joint venture sees things very differently and about as soon as the ink had dried on their joint venture contract, the Chinese company took over full control and essentially kicked the United States company out. The joint venture agreement gave the Chinese company the power positions in the company and it has gone ahead and run the company as though the US company (and its quite large JV investment) are completely immaterial. The Chinese company also used one of the oldest JV tricks in the book by hiring relatives and friends at inflated salaries to make sure the joint venture itself will never be profitable and thus never have any profits it will need to share with its American joint venture partner.

I mention this joint venture not to argue that all joint ventures are bad, but to highlight the risks of joint ventures and that there are usually better options for doing business in China. This also highlights the dangers in assuming that all Chinese people are qualified international lawyers, when incredibly few truly are.

WFOE anyone?

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