Deadline for Corporate Governance Changes at Joint Ventures in China: What Investors Need To Do Now

published on 25 September 2024 | reading time approx. 3 minutes

A joint venture was a frequently utilised corporate structure for overseas enterprises seeking to penetrate the Chinese market. In certain sectors and industries, a joint venture between a foreign and a Chinese company constituted the sole viable investment vehicle. Nevertheless, the stipulation of a joint venture, as exemplified in the automotive industry, has now been largely rescinded.

In accordance with the 'Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures" (Equity Joint Venture Law), which remained in force until the beginning of 2020, joint ventures exhibited distinctive characteristics in their corporate governance. To illustrate, the Board of Directors constituted the company's highest governing body, as opposed to the shareholders' meeting under the Chinese Company Law. Such structures were also replicated, to some extent, in older wholly foreign-owned enterprises.

The Equity Joint Venture Law and other legislation pertaining to foreign investment in China were superseded by the Foreign Investment Law of the People's Republic of China (FIL) on 1 January 2020.

The FIL allows for a five-year transition period for Sino-foreign equity joint ventures established prior to the law's enactment, during which time they may adjust their corporate structure in line with the Company Law.

The transition period will end on 31 December 2024. Foreign-invested companies and their shareholders should undertake an immediate review of their corporate structure and associated documentation, with a view to making the requisite adjustments to ensure compliance with the FIL by the prescribed deadline. It is recommended that the following points be considered:

Amendment of the company's articles of association and, if applicable, of the joint venture contract or a shareholder agreement to comply with the provisions of the FIL and, in particular, with the Company Law.
Powers previously held by the board of directors need to be transferred to the shareholders’ meeting. In this context, voting rights, majorities and quorums may also need to be redefined.

The revised Company Law of the People's Republic of China, which came into force on 1 July 2024, also provides for numerous changes regarding the powers, duties and voting rights of the shareholders' meeting, the board of directors, the appointment of management, employee participation, the rights of minority shareholders and the liability of board members and officers. It is also necessary to consider these changes and, if appropriate, address them in the context of the forthcoming amendments resulting from the FIL.

The revised Company Law introduces a five-year deadline for the payment of the registered capital. For companies that were incorporated prior to 1 July 2024, a transitional period will be in effect until 30 June 2027. During this period, the deadline for the payment of the registered capital must be adjusted, if necessary. In the event that an adjustment to the payment period is deemed necessary, it is imperative to consider the potential implications for existing agreements, particularly those pertaining to investments with industrial zones and local authorities.

Affected joint ventures and their shareholders should allow sufficient time for the necessary adjustments to be made. The registration process is typically straightforward and can be completed within one to two weeks. Nevertheless, the amendment of the articles of association and the joint venture contract must be negotiated with the joint venture partner, which may require a significant investment of time in individual cases.

Furthermore, delays in registration may occur if certain information subject to registration has not been registered previously or has been registered incorrectly.

In practice, it can currently be observed that the competent market regulation authorities (AMR) are proactively approaching joint ventures and affected wholly-owned enterprises and request them to amend their corporate documents. It can therefore be assumed that in the future, the AMR will, in individual cases, conduct thorough examinations to ascertain whether the companies concerned already meet the requirements of the FIL.

The repercussions for corporations that fail to implement the requisite modifications by 1 January 2025 could be significant. As is already the case with the requisite amendments under the revised company law, the AMR will only accept applications for the registration of other corporate law amendments, such as changes of address, capital increases, replacement of corporate bodies, etc., from 1 January 2025 if the company concerned has aligned its corporate structure with the requirements of the FIL. Furthermore, the companies in question may be subject to a negative entry in the register, which is publicly accessible.

Should you require further clarification on this topic or assistance in amending your corporate documents, our experienced team will be pleased to assist.