The 50-50 Sino-Foreign JV as a Success Story

April 20, 2010 Posted by Chris Devonshire-Ellis Reading Time: 3 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

Apr. 20 – China-focused legal wisdom generally has it that 50-50 joint venture structures in China are always a very poor choice and are to be avoided. While stories and tales of awful investments having been made by foreigners in China who have had their fingers well and truly burnt are legion, the time is ripe to reevaluate the managerial position of why, in some circumstances, a 50-50 JV may well be in the best interests of both parties.

The general concept of a JV that is formed between two equally important partners is that the 51-49 split is vital in order to ascertain full control of the company by one of the investing partners. Most foreign lawyers will opt for the majority to be held by the foreign partner and will equally as strongly suggest that the management make up ratio should favor the foreign investor. The risk in doing so is that the party that loses out in the negotiations feels put upon, and permanently in a negative position. When that partner is an essential part of the business, such unequal divisions can prove intellectually divisive or even place the formation of the potential business union in jeopardy. On the assumption that the Chinese party has a track record and that the required due diligence checks out, such a one-sided viewpoint, especially with China’s state owned enterprises, may be a rash one to take.

Increasingly, foreign investors are finding the 50-50 JV to be the way forward. In doing so, the onus is on the combined company management to truly work together to solve problems, as opposed to one side always putting its foot down and getting its way. In short, the age of the truly democratic JV is now upon us. Chinese SOEs, now armed with 15 to 20 years management experience in dealing with foreign partners, and with better quality, often overseas educated management, are recognizing the need to properly manage a jointly owned business. In short, in the new success stories of China joint ventures, the quality of leadership is now dependent upon joint decision making.

Legally, in such cases, someone still has to have the casting vote in the event of a decision making deadlock. However, the majority of successful JVs that I have seen have extended the swapping of roles between one side and the other every two to four years, and not just the chairman. The roles of financial controller, general manager and so on may also be alternated between joint stock companies according to the contract. That doesn’t mean to say it has to be implemented just because the contract says so. If a Sino-foreign 50-50 JV is performing well with a particular combination of staff, even if one-sided, why change the makeup of a successful executive team?

Having a 50-50 JV with shared managerial duties, in today’s global environment where China based JVs are increasingly dominating the balance sheets of U.S. and European companies is now often the way to go. It breeds better management, better and faster decision making, and a more constructive partnership to work with. The days of the bad JV may not be entirely behind us, but at the corporate end of the equation at least, quality leadership in the most successful JVs is based upon the mutual sharing of responsibilities, and is increasingly not obtained via the deviance of an equity differential.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and has been involved with the structuring of China joint ventures for the past 18 years. The firm also maintains a significant business advisory division with offices handling the negotiation and establishment of Sino-foreign joint ventures, led by a team of foreign and Chinese legal professionals. Please e-mail legal@dezshira.com if seeking joint venture negotiation or structuring advice.

Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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