Difference Of Profit Distribution Between Equity Joint Venture & Contractual Joint Venture
Digest: This real case show how important the company’s legal structure . There are three main legal structure of foreign investor to set up a company in China: first is Wholly Foreign Owned Enterprise ( WFOE ); second Sino-Foreign Equity Joint Venture ( JV ); third Sino-Foreign Contractual Joint Venture ( CV ). The most foreign investors choose to set up a JV rather than CV if they can not open a WFOE in certain limited business areas due to their ignorance of the difference of profit distribution between JV & CV. Through this case readers will see how we help our client to convert its JV into CV, then it can legally wire out all its ten year’s business income in China to its mother company in Canada.
Facts: Back to 1997, a Canadian Media Company formed a JV called W Mass Media Consulting Co. with a state owned China company. At that time the Chinese law only permits the foreign investor to hold not more than 49% shares in such JV. However, China company had no enough money to hold 51% shares. Therefore, two partners drafted two agreements: one for government registration; one for themselves. In first registered agreement CMC has 49% shares and shall be distributed all business profits according to this ratio; in second non-register agreement CMC has 85% shares and shall be distributed all business profits according to this new ratio. In fact, CMC invested all register capital and cash flow into WMMC. Ten years later WMMC has made a lot of money, however, CMC can not get 85% shares income and only can wire out its income according to 49% shares ratio by registered legal documents. CMC came to us and asked for a complete solution.
Legal Issues:
- General background of relating foreign investing laws & regulations.
- The key difference of profit distribution between JV & CV.
- The legal solution for CMC’s problem.
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