China Joint Ventures: What Can You Do?

CLB’s own Steve Dickinson was interviewed today by New Zealand newspaper, The Dominion Post, regarding Sanlu melamine tainted milk, in an article entitled,  What Fonterra Didn’t Know.

Some facts first. Wikipedia tells us this about Fonterra:

Fonterra Co-operative Group Ltd (NZX: FCGHA), generally known as Fonterra, is New Zealand’s largest company by turnover. A cooperative, Fonterra is owned by approximately 11,000 farmers throughout the country. It is the sixth-largest dairy company in the world, and the most influential by far when it comes to determining international dairy trade, handling over a third of all international dairy trade.

In 2005, Fonterra paid $153 million for a 43 per cent stake in the SanLu joint venture.

Now let’s get to the law. What sort of control can a foreign company expect to have as a 43% stakeholder in a Chinese joint venture? Steve very bluntly tells us in the article:

Steve Dickinson, a partner at law firm Harris Bricken, has been based in China since the 1980s, and is heavily involved in the food industry.

“The reality is if you’re a 43 per cent shareholder in a joint venture in China you’re nothing,” he said. “You don’t know anything, you don’t have any power.”

Okay, but let’s say you are a minority shareholder in a Chinese joint venture entity and you learn of something along the lines of  tainted milk? Steve did some research on this issue today by, among other things, meeting with a cadre of Chinese lawyers who focus their practices on foreign investment, company law, and criminal law. Steve’s conclusions from those meetings is as follows:

Chinese law on this sort of thing is really no different than the law of most any developed country:

● If a company director learns of a problem, he or she has a duty to report it to the company board and to call a meeting if the matter is serious.
● Once the report is made, the obligation of the director ceases.
● If the board takes action contrary to the advice of the director, it is the duty of the director to follow the decision of the board.
● In particular, the director has an affirmative duty to maintain the secrecy of the information, regardless of what the director thinks about the matter personally. The duty of the director is to the company, not to the general public.

Though these rules raise some obvious moral issues, in the Sanlu case, the alleged decision to hide the problems and delay a recall almost certainly will end up hurting Sanlu economically. The international dispute resolution lawyers at my law firm have worked with a number of companies on recalls and in every single instance (of which I am aware), our client company pursued its recall as quickly as it possibly could so it could minimize any legal and publicity fall out.

It appears Fonterra had three directors on the Sanlu JV board and those three directors pressured the Joint Venture to do something about the tainted milk and it also appears Sanlu did indeed do something: it reported the problems to the local authorities but there was no recall. It is here that things get rather fuzzy. The media talk about Sanlu needing to comply with governmental wishes, but I do not know why Sanlu could not have itself publicized the problems or even issued its own recall. Some of the articles talk about how Sanlu could not do this without compromising critical governmental relationships. Eventually, it seems the New Zealand government went to Beijing about this and Beijing acted.

We will continue trying to monitor this case and report back if we learn more.