Considerations for adjusting JV governance structures

By Jin Rihua, AnJie Law Firm

According to the Foreign Investment Law and its implementing regulations, Chinese-foreign equity joint ventures (JVs) established before 1 January 2020 under the Law on Chinese-Foreign Equity Joint Ventures (the old law) and its implementing regulations are now required to adjust their corporate governance structures and amend their articles of association according to the Company Law (the new law) before 1 January 2025. This article introduces the main differences between the governance structures of JVs under the old law and the new law, and addresses considerations that should be taken when JVs adjust their governance structures.

Jin Rihua
AnJie Law Firm

Setting organisational structure

Under the old law, a JV was organised as a limited liability company. As a JV has no shareholders’ meeting, shareholders cannot directly decide on major matters of the company. The board of directors is the highest authority and decides all major matters of the company. Shareholders can indirectly influence the company’s decision-makings by appointing or replacing directors, managing directors and other personnel. The old law attached importance to the peer-to-peer relationship between shareholders. The positions of chairman, vice chairman, managing director and deputy managing director were held by each party to the JV, respectively.

Under the new law, a limited liability company shall set up a shareholders’ meeting, which is the highest authority of the company (a one-person limited liability company has no shareholders’ meeting, and the shareholders shall exercise the same functions and authority as those of the general meeting of shareholders). Shareholders can directly participate in major decision-making of the company through the shareholders’ meeting.

A board of directors shall be set up under the shareholders’ meeting (however, a limited liability company with a small number of shareholders, or of a small size, may have an executive director instead of a board of directors). The board of directors is accountable to the shareholders’ meeting, implements the resolutions of the shareholders’ meeting, and exercises the authority and functions stipulated by laws and the articles of association.

Under the board of directors, senior management consists of officers such as managers, deputy managers and financial directors. The appointment or dismissal of a manager is decided by the board of directors, while the appointment or dismissal of a deputy manager and financial director shall be decided by the board of directors, according to the nomination by the manager.

In addition, a board of supervisors shall be set up under the shareholders’ meeting. However, a limited liability company with a small number of shareholders, or of a small size, may appoint one or two supervisors instead of setting up a board of supervisors.

Different from the old law, the personnel administration right of a particular director or officer does not lie with a certain shareholder, but the relevant organisation of the company. Therefore, an individual shareholder of a JV has less control over specific personnel within the company.

For example, under the new law, shareholders may stipulate the number or proportion of directors that they have the right to designate in the articles of association. However, if one shareholder rejects the director candidate nominated by another shareholder at the relevant shareholders’ meeting, resulting in his or her defeat, the matter needs to be resolved through dispute settlement, such as inter-shareholder litigation, and shareholders cannot directly designate directors bypassing the shareholders’ meeting.

Moreover, the new law stresses that directors and officers are accountable to their superiors or the whole company, rather than to some shareholders, so as to maintain the independence of the corporate legal person.

Therefore, in terms of setting organisational structure, a JV needs to add the shareholders’ meeting as its highest authority, and the board of supervisors, and clarify the relationship between various organisations according to the new law.

Decision making

At the highest authority level, shareholders’ rights under the old law (signing the articles of association, appointing or replacing their own directors and senior officers) and the functions and authority of the board of directors (deciding on major issues such as enterprise development planning, articles of association amendments, dissolutions, capital increases or reductions, mergers, spin-offs, etc.) are basically enjoyed by the shareholders’ meeting under the new law. In addition, the new law provides detailed stipulations on the decision-making matters of other organisations under the highest authority.

Under the new law, the decision-making matters of each organisation can be divided into statutory and supplementary decision-making matters (other functions and authority stipulated in the articles of association). When amending the articles of association, statutory decision-making matters may be stated directly using the wordings in the new law, which may be further detailed as necessary, while supplementary decision-making matters may be separately stipulated according to the actual needs of the company.

The parties to a JV should also pay attention to the impact of the differences in the way the various organisations make decisions under the old law and the new law. For example, under the old law, articles of association amendments, capital increases or reductions, mergers, spin-offs and dissolutions all required the unanimous approval of all directors. Under the new law, such matters require the approval of shareholders representing more than two-thirds of the voting rights. Therefore, if shareholders holding less than one-third of the shares need to maintain their veto power on such matters, it should be clearly stipulated in the articles of association.

Consultation between parties

The governance structure adjustment of a JV involves the redistribution of important rights, obligations and responsibilities, which will have a substantial impact on the parties to the JV, the JV, and its directors, and requires consultation between all the parties. In the process of consultation, disagreements between the parties to the JV are inevitable. The parties may wish to take the opportunity to expand their rights, or may fail to reach an agreement on some issues – a deadlock may occur.

In addition, if the adjustment results in substantial changes in the control rights of the parties to the JV, it is also necessary to consider compliance in accounting (consolidated statements) and anti-monopoly (concentration of operators).

Therefore, to achieve a smooth transition from the old law to the new law, the parties to a JV need to start consultations as soon as possible on the premise of accurately understanding the old law, the new law and other relevant laws, based on the JV’s operation, and in the principle of good faith.

Jin Rihua is a partner at AnJie Law Firm

Dong Xiao Zhao Huili AnJie Law Firm International arbitration

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