Joint Ventures between Chinese and foreign companies have been a
prevalent source of dispute and frustration. While these ventures
provide advantages to both parties, at some point in time the
interests of the partners often begin to diverge, with at least one
of the parties having less incentive to compromise its own
interests for the benefit of the joint venture. When the primary
interests of the partners no longer point in the same direction,
the company will become a battleground. Having an exit strategy
ready to implement – and one that is enforceable
– can be the key to leaving the venture with your assets
and your money intact.
Recent developments in Chinese law will lend support to selling
your interest and leaving an inoperable venture behind you. Under
Chinese law and unless agreed otherwise in the Joint Venture
Contract or other documents, one party is free to sell out to a
third party. The joint venture partner only has the right of first
refusal, giving it the first option at the stake that is being
sold, but it does not have the right to refuse a sale altogether.
In practice however, a joint venture partner can still block the
deal by refusing its cooperation when completing the share transfer
procedures: it is near impossible for one party to sell its shares
without the support of its joint venture partner, since the
competent approval authorities generally require the signatures /
stamps of both parties before it will approve a share transfer. As
a result, it is not uncommon for one party in the joint venture to
pressure the selling party into accepting a price much lower than
what a third party is willing to bid.
Recently-issued interpretations of the Chinese Supreme Court
provide more guidance to a last resort to an investor that wants to
sell its shares to a third party but is denied cooperation from its
joint venture partner: by filing a lawsuit. Article XI of the
Interpretations of the Supreme People's court on Several
Issues Concerning the Trial of Disputes Involving Foreign-Invested
Enterprises ("Interpretations"), which came into
force on 16 August 2010, deals with the validity of share transfer
agreements, and will have particular effect on joint venture
partners seeking to transfer their stake to a third party.
Chinese law already supported claims against a joint venture
partner for unlawfully refusing cooperation in implementing a share
transfer, but the Interpretations go one step further: the Supreme
People's Court determines specific circumstances under which a
court should uphold such a claim:
The other shareholders have approved the transfer;
The other shareholders have received advanced notice of the
share transfer, and have failed to respond within 30 days; or
The other shareholders do not consent to the transfer, but also
refuse to purchase the shares from the transferring
While this new rule may help an investor to exit a joint
venture, the new regulations also add risk: where the Chinese
partner is the party that wants to get out, a foreign investor may
find itself forced into an unwelcome partnership with a third
party. It is entirely possible that this new regulation is used by
the Chinese party in a joint venture to allow the transfer of its
shares to a third party inappropriate as a partner to the foreign
party in the joint venture.
The best approach to minimize the risks of finding oneself in
either undesirable circumstance is to come to a clear agreement,
preferably when establishing the joint venture, on the conditions
for the eventual sale of equity. Such terms can be included in the
Joint Venture Contract, and will help to prevent a partner from
turning to unfair means to obtain maximum benefit. For example, an
agreement prohibiting the sale of shares to certain competitors
will be legally effective, while references to procedures for offer
and sale, and even on how the price of the shares should be
determined in case of a dispute, can be extremely useful. In this
regard, parties should always remember that while combining
strengths in a joint venture may well make commercial sense, such a
combination always has a limited lifespan.
But even with a clear plan and agreements in place, the only way
for one partner to press the sale of the shares to a third party
without its partner's cooperation (or to forcibly liquidate the
company, for that matter) is through a lawsuit. In practice,
forcing such an exit can be difficult, time-consuming and costly,
and a prolonged battle between the shareholders may leave neither
with any value. Except when the company or its remaining assets are
very valuable (and will remain so for a while irrespective of any
business), one must hope that the threat of such a lawsuit will be
sufficient to negotiating an acceptable exit.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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