China is seeing unprecedented outbound deal activity. In the first eight months of this year alone, Chinese outbound direct investment has hit a record high of more than $120 billion.
China-foreign joint ventures (JVs) and takeovers now span across key industries including technology, industrials, chemicals, utilities, real estate, and business services. Such ventures are also increasingly dynamic, with aggressive cross-border expansion and new growth in emerging markets.
Yet at the same time, we are beginning to see signs of breakdowns and ensuing JV disputes.
CROSS-BORDER JV CHALLENGES
One major problem lies in the planning for many such JVs — structures, management, projections, and exit strategies. Often, joint ventures between Chinese companies expanding overseas and their foreign partners face insurmountable challenges in the early years.
I have seen parties disagree about JV objectives after their inception, hold different expectations for projected revenues, and most importantly, believe in different growth strategies for expansion — especially in new markets. Of course, such challenges may not be unique to China-foreign JVs, but all too often these problems are exacerbated by cultural differences between Chinese acquirers and foreign JV partners or targets. For instance, what a Chinese JV party prioritises as being of strategic importance may not always be the same as the profit-maximising objectives of many foreign private corporations.
If parties don’t see eye to eye on critical management decisions, the focus is then on deadlock provisions in the JV agreements — be it unanimous dissolution, unilateral termination, or a buy-out or first-refusal option. Ultimately, the key is to pre-allocate the risks of a breakdown between the Chinese and foreign JV partners, so parties should think hard about which JV termination mechanism will suit their interests.
HOW TO PREVAIL IN A DISPUTE
If discord eventually escalates into a legal dispute, then this becomes a battle not to necessarily win on all fronts, but to secure what is most important, above all, for each side. For example, it may be that the Chinese JV party desires to exit a specific market, whereas its foreign JV partner is committed to stay and try to turn a profit.
Here, forum shopping will give either JV party the advantage of resolving the dispute in a preferred battleground.
It is important to select carefully so that a foreign JV party does not find itself in litigation before its JV partner’s provincial home court. But equally, Chinese JV parties do not want to end up with no choice but to sue in an unfamiliar common law jurisdiction. Venue selection often ends in a compromise wherein the JV agreement provides for disputes to be resolved in a neutral venue, such as the Hong Kong International Arbitration Centre.
Sometimes there may be out-of-the-box, result-oriented solutions for China-foreign JV disputes. For instance, if your JV counterparty is structured via offshore entities in Hong Kong, the Cayman Islands, or the British Virgin Islands, aggressively pursuing the offshore entity under a parent guarantee may generate additional leverage when bargaining for a settlement. The more you know about your JV counterparty, the better you can identify strategic pressure points to bring the other side to the negotiating table.
As China-foreign JVs increase and become more complex, it is more important now than ever for both sides to prepare themselves for any disputes that will inevitably follow. This year marks a record high for China outbound deals, but also the beginning of a new era for China-foreign JV disputes.
At the time of writing, Shaun Wu was a China outbound disputes lawyer at Kobre & Kim, a global disputes and investigations firm. He acts as lead counsel in high-stakes joint venture disputes, and has extensive experience in China-related matters.
