Shanghai paves the way for Chinese Individuals to become Shareholders in Sino-Foreign Joint Ventures
Joint Ventures are still a popular investment vehicle for many foreign investors who do business in China. Sino-foreign joint ventures can take the form of equity joint ventures or cooperative joint ventures. As to the qualification requirements for Chinese joint venture partners, the current Chinese laws on national level provide that only Chinese companies or other economic organisations can become shareholders of joint ventures. This means that so far Chinese individuals could not become shareholders of newly established joint ventures, but were forced to first set up a company as investment vehicle.
An exception exists for the establishment of sino-foreign joint ventures by means of mergers and acquisitions. If a foreign investor acquires shares from individual shareholders of a domestic company and as a result this company is transformed into a sino-foreign joint venture, according to the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, the individual Chinese shareholders can stay on as shareholders of the joint venture.
Despite these clear statutory stipulations, in practice some examination and approval authorities, especially those at the local level have approved green-field joint ventures with individual Chinese investors in the past. However, for foreign investors to be involved in such projects is risky, because according to the opinion of the highest examination and approval authority, the Ministry of Commerce, such contracts are void.
Now, for the first time establishment of green-field joint ventures with Chinese individuals will be officially allowed on a trial basis in Shanghai Pudong New District. The Trial Measures on Establishment of Sino-Foreign Equity Joint Venture Enterprises and Sino-Foreign Cooperative Joint Venture Enterprises invested by Domestic Nature Persons in Pudong New District (“Trial Measures”) took effect on May 1, 2010.
According to the Trial Measures, Chinese individuals can now become shareholders of green-field joint ventures. However, the joint ventures can only engage in business which falls into the encouraged or permitted categories as provided by the Guideline Catalogue on Foreign Investment Industries. As generally the case, capital contributions can be provided in the form of cash or in kind, subject to the limitation provided by the PRC Company Law that at least 30% of the registered capital must be contributed in cash.
The Trial Measures provide for a trial term of 2 years. In China it is very common that new regulations are first tested in a limited region and for a limited period of time. If they work, they are then expanded to cover all of China. Therefore, it can be expected that in the future, joint ventures with Chinese individuals will be permitted all over China.