Lawyer’s Perspective on JV Governance

I’m a lawyer by profession. However, in recent years, my team and I have dedicated over 70% of our time to consulting on corporate management issues, rather than focusing solely on legal matters.

This strategic shift has enabled us to enhance the quality of our services, encompassing both legal and commercial expertise, as we now possess a deeper understanding of the fundamental roots of problems from a broader perspective.

In a recent instance, the general manager of a joint venture tendered their resignation at short notice, prompting our client, the major shareholder, to seek our assistance. In very short period of time, I managed to put things on the right track by simply doing what I do as a lawyer, but functioning a bit more as a business management consultant. While the management team of a China business would typically feel that they don’t have the authority to say no to their major shareholder, we as attorneys and consultants were hired to tell our clients “we think you’re wrong about that.”

Here are some of our observed facts and exchanged opinions in discussing the above-mentioned case:

1. Most JV factory businesses in China fail simply because of inadequate communication between the Chinese and foreign shareholders. 

Quite often, each party would say things that they believe the other would understand exactly as intended. This is rarely the case.

My opinion: Recognize that miscommunications exist, and happen often. Make sure you don’t have a communication problem with your appointed personnel (GM/CFO) in China. Your sent personnel is the one who oversees everything here on behalf of you, and has powerful influence on the performance of local management.

You need to select your GM wisely. The best option is putting someone from your own team who could speak to the locals. The second-best option is engaging a trustworthy management expert who is bilingual. The third-best option is having your Chinese partner handle everything, which requires your Chinese partner to be 100% trustworthy.

2. Job responsibilities of the general manager and the production manager sometimes overlap. 

In the above-mentioned case, the production manager performed better while the previous general manager was gone, because he became responsible for whatever went wrong in the whole production department.

My opinion: Problems in responsibility often lie in the job description and not necessarily in the person assigned to the job. Many foreign shareholders fail to outline job descriptions for their management team as they expect that their people would work things out automatically. If the appointed management team members are expected to do everything together in the beginning, sooner or later the foreign shareholder would need to tell them each on what specific areas to focus and separate the roles.

3. More often than not, a joint venture business in China starts with poor financial budgeting, poor financial control or both. 

Since foreign shareholders typically reside overseas, and the Chinese party often ignores their accountant’s advice, the company would frequently, even in its early stages, find itself in a critical financial situation, such as overspending.

We find that when a foreign shareholder opposes to doing proper financial planning and budgeting, it is often because they are unwilling to reveal their actual finance situation or show how little they thought about it. Or they simply lack the experience of running a joint venture in China, which tends to require more cash flow than they estimated.

Our suggestions? A general rule of thumb for investors is to allocate a minimum of 20% of the budget to the total investment. In addition, a capable management team is essential for establishing and operating the business, while also diligently and continuously monitoring the budget and making necessary spending adjustments.

4. Employment management is often overlooked. 

Many foreign investors don’t realize that PRC employment and labor laws heavily favor employees and put heavy burdens on employers. When a foreign manager tries to fire an underperforming employee, s/he would often find that the price of doing so would be too high. When we help our clients do the job, we always advise or go ahead with preparing enough paperwork before pulling the trigger — just in case the company needs to prove that the dismissal was legitimate and strictly in compliance with PRC labor laws.

My opinion: This should be left to a local legal expert, an experienced local lawyer who specializes in employment and labor. Once you find a competent one, all you need to do is trust their judgment and advice. You may be surprised at how much compensation is necessary to safely let go of an employee.

5. Lack of long-term vision is common in Chinese partners. 

Chinese businessmen often prioritize short-term financial gains over the long-term development of a strong brand. While foreign shareholders sometimes blame their Chinese partner for that, they also fail to consider the interests of their Chinese partner in building better brand value.

My opinion: When discussing a vision focused solely on personal benefit, it’s natural for your partner to be reluctant to listen. For a healthy, mutually beneficial joint venture partnership, both domestic and foreign shareholders should invest time and effort in educating each other on how implementing certain measures could lead to improved operations, and how these changes would ultimately benefit both parties in the long term.

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Need help handholding your China business? Contact us now! We offer effective assistance in supervising and managing your business operations in China.

What do we do?

• Ongoing corporate governance consultancy, including but not limited to attending board meetings and supervising the incorporated business.
• Boost and facilitate better communication between you and your Chinese business partner.
• Improve the corporate structure in line with the company’s own practical situation and in compliance with local laws and regulations.
• Examine, revise and/or draft the company’s legal documentation in line with client’s interests.
• Provide client with information on relevant government policies, laws and regulations.
• Issue Lawyer Letter to opposing parties and negotiate dispute settlements (such as to prevent a small issue from becoming an impossible problem).
• Provide reliable and immediate responses to client’s requests for other legal assistance in China, which may include but are not limited to 1) mergers and acquisitions, restructuring, bankruptcies and liquidations; 2) changes in ownership/shares; and 3) litigation and arbitration.
• Introduce and recommend other professionals, such as accountant and intellectual property attorneys, for your China business.