Hoow to Form a China Joint Venture, Part 2, The Initial Questions to Ask

This is Part Two of our new series laying out the issues companies typically face and the steps our China company lawyers typically go through when forming a China Joint Venture. In Part One, we talked about how despite the increasing difficulties with doing business in China (or perhaps because of those difficulties), our China corporate lawyers are seeing an increase in foreign companies looking to do joint ventures in China. We then discussed how the first thing we do is try to determine whether going into China via a joint venture makes both business and legal sense for the foreign company that has retained us.

Once both we and our client are satisfied that doing a China Joint Venture actually makes sense generally, we see our next task as helping our client determine whether the Chinese company with which they are looking to form the joint venture is the right company for a China joint venture.

Because this is much more of a business decision than a legal decision, we usually put the onus of this determination on our client. But because few companies have ever done a joint venture anywhere in the world and even fewer companies have done a China joint venture, we usually end up provided them with a tailored set of questions to pose to their potential China joint venture partner that will help determine whether the two companies are a good fit.

As we so often point out, China joint ventures are notorious for their high failure rate. An old Chinese saying often applied to joint ventures is “same bed, different dreams.” This Chinese saying (同床异梦) predates joint ventures and is used to apply to any sort of partnership without a meeting of the mind. The sooner you know whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether to keep spending time and money in trying to do the joint venture deal.

The following lists of fairly general are what our China lawyers use as the foundation for drafting more specific questions to aid our clients in deciding whether there is sufficient commonality to move forward with the joint venture deal. We suggest our clients pose these questions to their potential China joint venture partner.

• What is your company seeking to accomplish with this joint venture?
• What will your company contribute to the joint venture? Property? Technology? Intellectual property? Money? Know-how? Employees? What will our company contribute?
• What will your company do to advance the business of the joint venture, once formed?
• What do you see our company doing to advance the business of the joint venture, once formed?
• Who will make business decisions for the joint venture and what mechanisms will we use for reaching the various sorts of decisions that will need to be made? Who will control what? Who will make what decisions? The more specific you get here, the better.
• If the joint venture loses money, who will be responsible for putting more money in?
• How will we resolve disputes? Note that Chinese companies love responding to this with something like “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything.” If you get that sort of answer, you should push them to explain exactly how they see day to day disputes getting resolved so the joint venture does not collapse.
• Can either of our company’s use confidential JV information for our own business? Can our own businesses compete with the JV? Can our own businesses do business with the JV?
• How and when will the joint venture end? What if one of us wants to buy the other one out?

In part three of this series, we will talk about the sorts of things we look at to make sure the joint venture is not being proposed by the Chinese side as a mere front for getting access to our client’s intellectual property.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.