Compared with other forms of investment, the advantages of setting up a joint venture are as follows: the existing plant, equipment and technology of Chinese companies, and even their market share and brand, can help foreign investors to expand their extension in China market, and finally obtain profits. Because the Chinese enterprises have the legal requirements to establish a company, foreign investors only need to invest foreign funds or technology, and then a joint venture can be established basically. Thus, joint venture has been an important way of foreign investment so far. However, without a clear knowledge of China's legal system immodestly, or without due diligence investigation of their partners, or in order to register efficiently, foreign investors usually acquiesce their Chinese partners or Chinese agencies to sign files, and thus hidden risks would be buried under the development of venture.
Specifically, the typical problems exist in setting up a joint venture are listed as follows:
1.Foreign investors are unfamiliar with special regulations in China' s law, which will delay their original plans and cause serious damages. For example, the land contributed by Chinese company is state-owned, so the use of the land is strictly limited and without the government' s permission, it can not be transferred for commercial. Thus, the Chinese company should transfer the land to be commercial land, which needs examination and approval of various departments. The period would be long, and the risk is large. If the joint venture can not set up in schedule, the loss is self-evident.
2.If the corporate structure of the joint venture (for example, the shareholding proportions of both, shareholders, etc) has not been regulated when negotiate with Chinese company, foreign investor may lose control of it and thus the aim to invest in china is difficult to realize.
3.Lack of due diligence of the creditworthiness, capital or current condition of the future joint venture partner. The joint venture can not operate normally if the Chinese company is in debt or does not have the expected capacity & technical ability.
4.In order to set up joint venture as soon as possible, foreign investors may entrust an agency with all the registration formalities without investigation in the aptitude or scale of this agency. Some ill-formed agencies just submit Chinese documents, and some are even signed by nominee companies. So, the foreign investors would know nothing about the contents in the documents, and this would not only provides the convenience of modifying documents to the Chinese company, but also cause troubles for changing registration in Industrial and Commercial Bureau later.
The above are the common problems foreign investors will meet when set up a joint venture in China. In order to avoid such problems, foreign investors must do enough study during the previous cooperation. It is suggested that foreign investors should turn to business consulting organization in China if they have the intention to invest, which will help them to learn the investing environment in China. After determine the cooperation partner, due diligence investigation is necessary to know each other well, which may avoid cooperating with the enterprises having bad condition of assets or business integrity to reduce the unpredictable troubles. What' s more, foreign investors had better entrust regular agent company with the registration, and request the agency provide English version of the documents. Don' t entrust the agency to sign the documents, because the Industrial and Commercial Bureau will contrast the signature, if the signature does not agree with the one on registration of establishment, register of alteration or other formalities can not be handled in the future.
In addition, the most important point is to employ a senior lawyer in China to draw up the cooperation intention, the proportion of capital contribution, the articles of association of the company and such important documents. A lawyer can also assist to do due diligence investigation, credit evaluation of the Chinese company to help foreign investors to get wise to the legal system and the special provisions in China, and thus help the investors understand the whole process of cooperation, to gain the initiative place in business negotiation, finally achieve the aims of investing in China: expand the China’s market, gain returning profit of the investment.
