Foreign investment in joint ventures: Regional regulatory guide

Foreign investment is welcome in joint ventures, however each jurisdiction has its own unique rules. Our regional guide explores international JV structures and regulations in three key jurisdictions

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Structure and regulation of Sino-foreign joint ventures

In recent years, the volatile world economy and geopolitical tensions have further complicated the development of Sino-foreign joint ventures in China. Such developments have given rise to a series of innovative models of Sino-foreign joint ventures, including the Model 2.0, in which the foreign industrial investor provides technology and/or injects specific businesses, the Chinese and foreign financial investors provide funds, and an employee incentive platform is set up to provide equity incentives. China has also recently promulgated and implemented a number of new laws and regulations on foreign investment, company law, IPOs and compliance.

Legal and regulatory system

To encourage foreign investment in China, the Foreign Investment Law, effective since 1 January 2020, and its implementation rules have laid down the principle of equal treatment for domestic and foreign investment in sectors beyond the negative list. Foreign-invested enterprises are required to adjust their organisational form and structure in accordance with the Company Law and other applicable laws before 31 December 2024 (such as shifting the highest authority of the joint venture from the board of directors to the shareholders’ meeting).

In addition, the revised Company Law, effective on 1 July 2024, has made major adjustments to the registered capital system and the responsibilities of directors, supervisors and executives, and corporate governance of companies (including foreign-funded enterprises). For example:

• In terms of capital rules, the new Company Law further strengthens the principles of capital replenishment and maintenance, setting a five-year limit on capital contribution of shareholders of limited companies after subscription. The existing companies are in principle required to adjust their capital contribution timeline within the three-year transitional period that ends on 30 June 2027;
• Relevant obligations and liabilities of directors are strengthened and refined, including the obligation to prevent illegal withdrawal of capital and related compensation liabilities, urging shareholders to pay capital contributions, compensation liabilities for illegal capital reduction or profit distribution, and liquidation obligations and related compensation liabilities;
• Adjustments are made to the corporate governance structure, such as allowing a limited company to set up an audit committee composed of directors in place of the board of supervisors, and exempting small companies from appointing supervisors or setting up a board of supervisors with the unanimous approval of shareholders.

Sino-foreign joint ventures, especially existing ones, facing both the transitional period under the Foreign Investment Law nearing its end and the transitional period under the revised Company Law, should review and set or adjust their corporate governance structure and capital contribution timeline in line with both laws to ensure a smooth transition.

Exit options

IPOs provide a significant return on investment for Chinese and foreign investors, enhancing the visibility of joint ventures, expanding fundraising channels and improving corporate governance. China’s capital markets, young and fast-growing, have multiple exchanges and boards serving a variety of companies and investors, including the main boards of the SSE and SZSE serving large and well-established companies, the SSE Star Market and SZSE ChiNext targeting innovative tech firms, and the BSE and the National Equities Exchange and Quotations targeting small and medium-sized businesses.

China adopted a registration-based IPO system across the board from February 2023. With information disclosure at the core, the system emphasises the basic legal compliance and financial discipline of enterprises under the principle of materiality, loosening the IPO requirements regarding financial indicators, ownership clarity and special voting rights.

For example, ChiNext supports the IPOs of eligible unprofitable enterprises, and cancels the IPO requirement of “positive net profit in the past year” for red chips and enterprises with special equity structures.

On the other hand, the Opinions of the State Council on Strengthening Supervision, Preventing Risks and Promoting High-Quality Development of the Capital Market, issued in 2024, tightened domestic IPO regulation across the board to protect investors (especially small and medium-sized investors) more effectively and expedite building safe, standardised, transparent, open, dynamic and resilient capital markets, with a focus on strong supervision, risk prevention and high-quality development. Against this backdrop, M&A may remain a major exit option for many foreign investors at present.

Employee incentives

Employee incentives are an important part of the structure design of Sino-foreign joint ventures. In particular, businesses engaged in high-tech research and development, and intelligent manufacturing, are more eager to provide employee incentives to attract, retain and motivate top talent to create and maintain a competitive edge.

A sound and effective employee incentive mechanism will link employee income with the growth of enterprise value, boost employee morale and control cash spending effectively.

For joint ventures, employee incentives may take the form of equity incentives (e.g. options, restricted shares and employee stock ownership plans) or cash incentives. Equity incentives, if adopted, are generally divided into direct ownership (directly holding shares in the company, subject to statutory requirements on the number of shareholders) and indirect ownership (holding shares in a limited partnership established as an employee incentive platform).

In addition, key considerations in incentive planning include the scope of eligible employees (Chinese and foreign employees and/or external consultants), approval and management of the incentive plan, the source of funds, exit arrangements, tax planning, share payments and alignment with an IPO and M&A. Under the new Company Law, such issues as employees’ payment of consideration and fundraising should also be considered in line with the time limit for registered capital contribution.

Compliance

Due attention should also be paid to compliance issues under China’s laws regarding the establishment and operation of joint ventures, including the following.

First, the declaration of concentration of undertakings. When Chinese and foreign investors establish joint ventures or acquire shares of joint ventures, it is necessary to assess whether they constitute a concentration of undertakings under the Anti-Monopoly Law. Where the deal constitutes a concentration that reaches the turnover-based declaration threshold, the investors shall make a declaration prior to concentration. Laws and regulations such as the revised Anti-Monopoly Law and the Rules of the State Council on Declaration Thresholds for Concentration of Undertakings have raised the turnover-based declaration threshold, and also raised the liabilities and consequences of illegal concentration.

Second, national security review. If foreign investors invest in the military industry or other fields related to national defence and security, or invest as de facto controllers in important agricultural products, important energy and resources, key technologies and other important fields related to national security, they shall take the initiative to declare it prior to investment.

Third, with the Cybersecurity Law, the Data Security Law, the Personal Information Protection Law and other applicable laws, regulations, rules and standards promulgated, joint ventures shall exercise greater care in the collection, storage, use, processing and transmission (especially cross-border transmission) of data and personal information in the course of business.

In addition, due attention shall be paid to China’s legal and regulatory requirements on foreign exchange, taxation, customs and technology import and export with respect to the establishment and operation of the joint ventures as the requirements are updated from time to time.

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Expect the unexpected in Japanese joint ventures

Forming a joint venture in Japan presents foreign investors with a unique set of opportunities and challenges. The large Japanese economy offers a stable business environment, advanced infrastructure and a highly skilled workforce. However, careful planning and execution is required to manage the complexities of Japanese regulations on foreign direct investments, particularly the Foreign Exchange and Foreign Trade Act, and the country’s guidelines on business collaboration with various business sectors, including startups.

This article explores critical aspects of the Foreign Exchange and Foreign Trade Act, and practical implications for foreign investors, including recent regulatory enhancements. The article also discusses practical negotiation points for the formation of a JV with Japanese counterparties, and outlines the Ministry of Economy, Trade and Industry’s new guidelines for JV investment in startup companies, published in May 2022.

Strengthened procedures

When acquiring shares in a corporation to set up a JV in Japan, foreign investors must comply with a foreign direct investment (FDI) regime that is mainly governed by the Foreign Exchange and Foreign Trade Act.

The act aims to ensure proper development of foreign transactions in Japanese and international business communities through controls over, and co-ordination of, transactions involving foreign investment. The aim is to contribute to the sound development of the Japanese economy.

The Japanese government’s policies and measures for FDI aim to promote foreign investment while scrutinising incoming investment with the potential to pose national security concerns.

Under Japanese regulations, unlike in other Asian jurisdictions, foreign investment may usually be carried out without restriction, regardless of the intended shareholding ratio – unless the investments are in highly regulated business sectors such as media, telecoms and aviation businesses. However, the act requires certain FDI to be reviewed by the Ministry of Finance and other ministries.

Prior notification

Under the Foreign Exchange and Foreign Trade Act, investment originating from countries without treaties with Japan about inward direct investment may require a clearance from the Japanese government after the submission of a pre-closing FDI notification. Foreign investors must also notify the authorities through the Bank of Japan before investing in certain designated sensitive business sectors.

Following notification, a 30-day waiting period is typically imposed, during which authorities review potential national security implications of the investment. This period may be shortened or extended, depending on the sensitivity of the investment. Even where such prior notification is not required, foreign investors are usually required to submit a post-closing report to the authorities.

The act has come under the spotlight since the latter half of 2019, when Japanese authorities started announcing upcoming changes to FDI regulations. The changes which drew most attention were:

• The scope of transactions requiring the filing of a prior notification has been expanded to include businesses relating to: information and communication technology (equipment, software and services); and manufacture of certain pharmaceuticals and specially controlled medical devices.
• Subject to some limited exemptions, the threshold for the obligation of prior notification has been lowered from 10% to 1% of the listed company’s shares or voting rights.
• There is an obligation to file a prior notification in connection with an appointment of directors and transfer or abolition of businesses in designated business sectors.

These trends correspond to recent movements to strengthen restrictions on foreign investment in the US, EU and other economies. The authors feel it is possible that the Japanese legal framework on foreign investment may continue to be strongly influenced by future policies of other governments.

JV implications. Potential foreign investors in Japan are advised to thoroughly analyse whether their proposed JV may fall within the expanded list of sensitive business sectors and, therefore, be reviewed by the Japanese government. Early identification of these requirements can help avoid delays and ensure compliance with Japanese law.

Practical issues. Japanese regulations on foreign investment are relatively relaxed and do not severely limit potential investment. Nevertheless, having satisfactory contractual arrangements with Japanese counterparties is a material point for potential foreign investors.

Tips for foreign investors

While practical issues with the negotiation of JV contracts do not differ greatly from those in other jurisdictions, some major points of focus for foreign investors include the following:

• Overall structure. A well-known feature of Japanese people and companies is that they are very averse to disputes and conflicts. This feature leads to a unique stance in their negotiation of JV contracts, where they prefer most of the difficult issues to be eventually resolved through good-faith discussions. Foreign investors should give sufficient respect to this mindset, while requesting appropriate provisions to avoid uncertainties for critical matters.
• Management structuring. JV contracts should clearly address whether the foreign investor may appoint any management personnel to the JV company. While it is important for foreign investors to acquire their desired control over the management, it is equally important to ensure their nominees fully understand the unique Japanese business culture.
• Preventing and resolving conflicts. Fostering collaboration and respect among JV employees, who will likely be predominantly Japanese, would be another important point to ensure a practically workable JV. In the event that JV partners clash over differing ideas about management, it is essential to include JV contract provisions to prevent and address such conflicts among the parties – such as a deadlock clause.
• Reflection of JV provisions on articles. In many jurisdictions, provisions in JV contracts are mirrored in the JV company’s constituent documents. Japanese companies, however, usually do not have direct provisions relating to the shareholders’ agreements in their constituent documents, although this is not legally prohibited. Foreign investors should expect their Japanese counterparties’ resistance in having articles of incorporation reflect the provisions in a JV contract, and consider a balanced solution in each specific circumstance.

It is also worth noting that in Japan there are no “model contracts” for shareholders’ agreements, such as the National Venture Capital Association’s model contract in the US. Contracts are often freely negotiated case by case.

Startup investment

JV structures are increasingly utilised in Japan for investing in startup companies. Potential foreign investors should remember that there are practices and provisions which may differ from those in other countries.

As part of its efforts to promote so-called “open innovation”, the Japanese government has been taking measures to promote collaboration between startups and mature companies. In March 2022, the Ministry of Economy, Trade and Industry released the Guidelines for Business Collaboration with Startups and Investment in Startups.

The guidelines outline the several key principles and recommendations for successful collaboration with and investment in startups in Japan, including:

• Fostering open innovation – encouraging the integration of mature companies’ resources with the innovative capabilities of startups.
• Ensuring mutual benefit – structuring agreements to ensure that all parties gain from the collaboration.
• Adopting flexible business models – allowing for agility and rapid adaptation to market changes.

Contractual provisions

The guidelines also discuss typical provisions to be included in investment and JV agreements for startup companies. In addition to the above-mentioned practical issues for JV contracts, the following are some of the guideline provisions for balancing control of businesses and protecting investments:

• Management. In view of the difference in economic position between investors and startups (who receive funding), the guidelines discuss the essential nature of addressing co-ordination of the work and defining the duties and compensation of startups’ management.
• Trade secrets. Due to ambiguity about what information constitutes “confidential information”, investors frequently face a risk of unintentionally leaking a startup’s confidential information to third parties, including other investors. Therefore, it is necessary to thoroughly understand the business and clarify and define the scope of confidential information precisely in the agreement.

Conclusion

Overall, Japan provides a JV-friendly environment, both legally and economically. Nevertheless, understanding and addressing contractual, regulatory and cultural considerations are vital for foreign investors to navigate the complexities of the Japanese market and to foster strong and mutually beneficial JVs in Japan.

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International JV structures and regulations in Taiwan

The joint venture (JV) is a commonly adopted investment structure for foreign entities to enter into the Taiwan market and expand their business presence with local partners. Setting up a JV in Taiwan enables the foreign and local investors to combine their capital, resources, expertise and market knowledge, share risks and costs, and develop new technologies and markets jointly. Foreign investors should be aware of the relevant rules governing the establishment and operation of JVs in order to benefit from the competitive advantages.

Corporate forms for JVs

There are four types of companies in Taiwan: (1) unlimited liability company; (2) limited liability company; (3) unlimited company with limited liability shareholders; and (4) a company limited by shares.

For foreign investors, a company limited by shares is the most favourable form as it could be established by two or more shareholders, and the liability of each shareholder is limited to the amount of the capital injected. A JV partner could subscribe preferred shares and enjoy dividend rights, voting power, veto right, a certain number of board seats, and/or a preferential conversion ratio.

To strengthen the JV structure, a closely held company (also limited by shares but comprised of no more than 50 shareholders) can stipulate share transfer restrictions in its articles of incorporation (AOI) to restrict any transfer of shares not in line with the agreement between the JV partners, ab initio (from the beginning). Considering that prevalence use of a company limited by shares, this article focuses on the major features of this particular corporate form.

Foreign investment approval

Similar to the foreign direct investment regimes adopted in other jurisdictions, before a foreign investor establishes a JV, a foreign investment approval (FIA) must be obtained from the Department of Investment Review (DIR), under the Ministry of Economic Affairs (MOEA). The requirements applicable to investments by investors from China – excluding Macau and Hong Kong (PRC investors) – are different from those applicable to investments by other foreign investors.

In general, a foreign investor can freely invest in a JV company unless: (1) the JV company engages in any of the prohibited or restricted businesses on the “negative list” published by the government; or (2) the JV partnership would pose a risk to national security, public order, good morals or national health. A PRC investor may only invest in the industries on the “positive list” published by the government, and is subject to a more stringent review by the DIR.

When reviewing an application for an FIA, the DIR will closely examine the shareholding structure and proposed business plan of the JV. In addition, the DIR may request further information, consult intra-governmental bodies, and/or conduct ad hoc reviews on a case-by-case basis to ensure the compliance of relevant rules.

Depending on the size and complexity of the investment, the review process by the DIR typically takes one to two months for foreign investments, and four months or longer for PRC investments.

Corporate governance

Under the Company Act, the board is entrusted with a wide range of power and authority over the daily business operation of the JV company, while shareholders retain the power to decide on certain major matters prescribed under the Company Act, for example, amendments to the AOI, capital reduction, liquidation and dissolution, and approval of a merger or spin-off agreement. Except for the matters requiring shareholders’ approval under the Company Act, the operations of a company are by and large determined by the board.

The board of a company limited by shares with two or more JV partners must have at least three directors, unless its AOI permits one or two directors acting in lieu of a board. Each JV partner, as a corporate shareholder, may itself be elected as the director of the JV company, designate a representative to serve as its director representative, and replace such representative at any time, a unique feature recognised under the Company Act.

Alternatively, a JV partner may appoint a representative to be elected as a director of the JV company and serve in the representative’s personal capacity. While a JV partner may appoint multiple representatives to be elected as directors or supervisors, its representatives cannot serve as a director and supervisor concurrently. If the JV partner’s representative has already been elected as a director, the supervisor appointed by the JV partner should be elected in his/her personal capacity to ensure a check and balance.

Shareholders and ‘reserved matters’

The Company Act prescribes a list of matters requiring a majority (majority vote from at least half a quorum) or supermajority (majority vote from at least two-thirds of a quorum) approval at a shareholders’ or board meeting (reserved matters). In the past, JV partners can freely stipulate a higher quorum and voting threshold for a customised list of reserved matters under its AOI.

However, in 2019, the MOEA adopted a more conservative view that a company may stipulate higher quorum/voting requirements in its AOI only for those reserved matters that are explicitly permitted under the Company Act. Hence, when formulating the reserved matters to be incorporated in the AOI, JV partners should pay special attention and ensure compliance with the Company Act.

The JV partners can still rely on the reserved matters captured in the JV agreements without reflecting them in the AOI. While the Company Act permits shareholders to reach an agreement on voting and other governance matters, in the event of a dispute, the court will need to verify whether the underlying arrangement contradicts the MOEA’s stance or the Company Act, and determine the validity/enforceability of such reserved matters.

A deadlock

Taiwan law is generally silent on a deadlock situation between JV partners, leaving the parties a wide latitude of discretion to resolve the discrepancy. In practice, provisions on a deadlock situation are baked into JV agreements, which may include a cool-down period, negotiations between executive officers of JV partners, buy-out of shares and so on.

If a consensus cannot be reached, JV partners may choose to dissolve the JV company or exercise the call/put option as a last resort. However, without the adoption of preferred shares or closely held company, if a JV partner transfers its shares to a third party in breach of the JV agreement in the event of a deadlock, such a share transfer might still be valid due to the limitation of specific performance, and the non-breaching JV partner may only claim for damages and other remedies available under the JV agreement.

Dividend distribution

Under Taiwan law, a JV company may distribute dividends to its foreign JV partners either quarterly or annually as stipulated under its AOI. Before paying dividends, the JV company should first make up any losses, pay taxes and set aside a legal reserve. In addition, dividends/bonuses cannot be paid if there are no surplus earnings.

In terms of tax, dividends distributed to foreign JV partners are subject to a 21% withholding income tax, or a lower rate if provided under an applicable tax treaty. Furthermore, profits of a JV company for the current year that are not distributed by the end of the following year will be subject to a 5% retained earnings tax.

It is important to note that the amount paid as retained earnings tax cannot be offset against the income tax payable on the distribution of said retained earnings to the JV partners.

Exit of JV partners

In the event that a foreign JV partner wishes to exit the JV company, it should first obtain the DIR’s prior approval for the transfer of shares. At the closing of the share sale, where physical share certificates are issued, a securities transaction tax at 0.3% of the transfer price will be levied against the seller to be deducted and payable by the buyer.

Conclusion

Forming a JV could be a strategic and beneficial move for foreign investors to expand into a new geographical market like Taiwan. It is important for foreign investors to carefully assess through due diligence the potential financial, cultural, legal and regulatory challenges and risks involved in forming and operating a JV company. This article serves as an introduction to the JV structure and regulations in Taiwan, while in-depth consultation with the experts in the relevant fields would be advisable for foreign investors to make informed decisions.

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