J.P. Morgan Chase & Co.'s fourth-annual
China Conference gets underway Wednesday in Beijing. The three-day event is jam packed with more than 50 sessions on topics ranging from China's environmental challenges to surviving a U.S. recession in an emerging market. Of particular interest to corporate development types is a session on the pitfalls of establishing joint ventures in China to be led by Steve Dickinson, a China-based lawyer with boutique international law firm
Harris & Moure pllc and co-author of the
China Law Blog.
Fortunately, for those of us not in Beijing for the conference (I assume that's most of us), Dickinson addresses many of those pitfalls in the latest issue of
China Brief, the monthly magazine of the American Chamber of Commerce in China. The biggest mistake U.S. companies make in running China-based JVs is unintentionally ceding control of the venture to their Chinese partners. According to Dickinson:
Foreign investors too often assume that a Chinese joint venture company
is managed according to a common Western model, under which a board of
directors has controlling power
over the company. Since the board is elected by a majority vote of
company owners, most foreign investors will strive to obtain a 51%
ownership interest in the [equity joint venture]. As majority owner, the investor then
assumes he has the right to elect the entire board, and thus
effectively
control the company.
But true control over the venture, says Dickinson, resides with the partner that controls day-to-day management of the operation -- not the board. We've seen cases, he says, where a Chinese partner "concedes on the percentage ownership issue in
return for control over the two key management positions in the
company."
Most U.S. companies understand that a thorough vetting of a potential Chinese JV partner is mandatory. As Dickinson makes clear, a thorough understanding of ownership rules is just as important.
- Suzanne Stevens
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