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some situations the option of establishing a Cooperative (Joint) Venture
is more advantageous than establishing a normal Joint Venture.
Chinese law
was designed to be flexible so that unforeseen complications could
be solved by bending the law, rather than rewriting it. That is
pretty way of saying the Chinese left a lot of loopholes in their
law to get around the hang ups that Chinese regulatory bodies create.
One of those loopholes was the creation of a Cooperative Venture
(CV).
Under the CV
structure, a foreign investor does not need to set up a new corporation
in China. The foreign investor and the Chinese partner participate
in the joint venture by doing business using the Chinese business
license under a cooperative, contractual arrangement.
Originally the
CV structure was limited to export oriented companies. Recently,
this form of foreign investment has been utilized to allow foreign
investment in areas where foreign participation via the formation
of a joint venture would violate Chinese regulations. The author
participated in negotiations to allow a foreign corporation to participate
in the Chinese telecom service industry. The regulations from Chinas
Ministry of Posts and Telecommunications (MPT) prohibit foreign
investment companies from offering services in the telecommunications
industry. But, under a CV, the service provider is a Chinese legal
entity under a contractual arrangement with a foreign entity, and
the regulations of the MPT are met.
The CV structure
is also widely implemented in land and hotel development. Often,
a joint venture might be unreasonably encumbered by costly transfer
taxes payable once the Chinese partner transfers their interest
in a parcel of land into a joint venture company. Under the CV structure,
the land stays in the possession of the Chinese partner, and no
transfer taxes are due. The CV is also used for ventures where the
Chinese side has possession of the land, but does not have clear
title to the land, and would be required to purchase the land from
the Chinese Bureau of Land Control if he desired to transfer the
title. The CV structure can be used in this situation, as long as
the status of the Chinese partner is high enough to maintain possession
of the land (PLA, MPT, etc.).
The CV structure
is flexible in that it allows the percentage of ownership among
the partners in a CV to change. The purpose of this flexibility
is to allow the foreign investor to make a faster return on their
investment while at the same time ensuring the Chinese partner that
they maintain long term control over the CV. Often, Chinese entities
are very cautious about allowing a foreign partner to have control
over the joint venture outright. This arrangement provides the foreign
side with leverage to have a controlling interest in the CV at its
inception, with control transferring over to the Chinese side as
the CV becomes profitable. This helps the foreign partner overcome
the initial difficulty presented by changing the Chinese management
styles because they have the final word in operation while they
maintain the majority share. At the same the Chinese are provided
with the assurance that they will maintain control over their company
in the long run, while availing them the opportunity to learn modern
management and marketing techniques from their foreign partners.
In order to
gain approval for this type of joint venture, preparation of the
necessary documents should be handled through one of the larger
Chinese law firms. In general, these firms cannot be relied upon
for their legal expertise, (when I was in Beijing, I would have
to buy law books for my Chinese colleagues to use to conduct research).
However, they are extremely helpful in ironing out the personality
conflicts involved in foreign investment negotiations. In general,
it is better to go with private firms, rather than public firms,
simply because their success can be directly connected with the
success of the cooperative venture. Often, compensation for the
Chinese attorneys can be paid on a contingency basis.
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