By Tao, Jingzhou
The China Business Review , Vol. 25, No. 6
"Sharing the same bed but having different dreams"-this Chinese proverb may sound familiar to many foreign investors "engaged" to Chinese partners through joint ventures. Indeed, investing in China by means of a joint ven
ture (JV) with a local partner has traditionally been preferred to establishing a wholly foreign-owned enterprise (WFOE). But of the roughly 316,280 foreign-invested enterprises (FIEs) approved since 1979, 30,000 have already been dissolved. Though China's economy now stands as a model of stability compared to its neighbors, it has not escaped from the side effects of their economic struggles. The Asian financial turmoil has already acted as a catalyst for some JV dissolutions, and more premature endings are likely. Thus, the question of how to dissolve a JV has become more prominent in recent years, for this and other reasons.
Many of the first JVs, set up in the early and mid-1980s, have now reached the end of their terms of 10-15 years. Though the Implementing Regulations of the PRC Equity Joint Venture Law (EJV Law) generally allow for terms as long as 30 years, many of the foreign and the Chinese parties investing in these first JVs were cautious about jumping into unknown investment territory and preferred shorter terms. Other JVs are struggling as a result of fewer export opportunities in and reduced investment funds from financially strapped Korea and Southeast Asia and are now considering exit strategies. But even foreign investors in profit-making JVs have encountered problems: some Chinese partners have attempted to kick them out of the venture in order to conduct the business-and reap the profits-alone.
Meanwhile, the number of foreign firms choosing to go it alone by forming WFOEs instead of JVs is on the rise. As Beijing has liberalized China's economy, conducting business through WTOEs is less daunting to foreign investors than it once was. The former disadvantages of WFOEs, which included a lack of local support and access to resources and markets in China's planned economy, have diminished considerably.
Thus it is no surprise that JV dissolution is becoming an increasingly popular option. Investors' continuing difficulties in predicting either their JVs? future economic development or the relationships between the parties suggest that foreign investors will continue to pay particularly close attention to the possibility of dissolution. As illustrated by the recent case of a Sino-European joint venture that was ordered to dissolve because the Chinese partner had falsified copies of the constitutive documents remitted to the approval authorities, foreign investors would be smart to strictly monitor the lawfulness of operations, especially the procedures undertaken by their Chinese partners, at each step of the establishment of their JV.
EXITING BY THE BOOK
Compared to the legal tools available in most industrial countries, the Chinese legal framework governing enterprise dissolution is relatively undeveloped. But various rules now exist regarding the acceptable grounds for and consequences of JV dissolution. The regulations governing the termination and dissolution of JVs are contained in the EJV Law and its Implementing Regulations, which are applicable by analogy to cooperative joint ventures (CJVs). According to the EJV Law, a JV may be dissolved when it incurs "heavy losses" or when one party fails to execute its obligations. If a loss is incurred due to a breach of contract, the violating party shall bear financial liability for the loss. The Implementing Regulations elaborate additional grounds for terminating a JV contract and dissolving a JV: expiration of duration; inability to continue operations due to heavy losses caused by force majeure; inability to obtain the desired objectives of the operation while simultaneously seeing no future for development: and occurrence of other reasons for dissolution as prescribed by the contract and articles of association. …