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China

Decision making in joint venture companies

Legal regulations concerning equity joint venture companies in the People's Republic of China require a quorum of over two thirds of the directors for meetings of the Board of Directors . However, to date, statutory regulations did not offer solutions if the quorum was not reached where one party obstructed board meetings by not sending its directors. Strictly speaking, even if according to the joint venture contract board resolutions were permitted without the number of participating directors reaching the quorum, there was a risk that these resolutions were invalid.

In its recent Notice (1998) Wai Jing Mao Fa No. 302, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) now explicitly states that the joint venture parties should address the above situation in their joint venture contract or in the articles of association. The Notice even contains a model clause according to which a party not sending its directors to a board meeting on an important matter, can be notified by the other party to participate in a further board meeting to be held at the earliest 60 days after such notice. If the notified party fails to reply to the notice within 45 days, it is taken to have waived its right of participation. In such a case further board meetings are not subject to the quorum requirement. But resolutions without quorum have to be made unanimously. A MOFTEC official has confirmed that the model clause is not mandatory and the parties may agree on a different solution to the problem.

Item 5 of the Notice contains a special regulation addressing cases in which one party wants to terminate and dissolve the joint venture company because the joint venture company is unable to continue its business due to serious deficits or for other reasons. The Notice provides that if in such cases board members of one party fail to participate in board meetings for more than two years (a period which seems excessively long), thus preventing a board resolution for the dissolution of the joint venture company and if such a party has not replied to repeated requests in writing by the other party, the other party may apply to the authorities in charge to approve the dissolution of the joint venture company. But the approval authorities still have discretion on whether to approve the dissolution. The Notice fails to clarify whether the principles of Item 5 will also apply if a joint venture company is dissolved due to reasons of termination other than incapacity to continue operations, for example termination by one party because of breach of contract by the other party. The Notice further is not clear whether the parties could agree on different solutions to the problem, for example on a deadline shorter than the two year term stipulated in Item 5. Although it seems that Item 5 will only be applied if the respective joint venture contract is silent on the matter, it remains to be seen whether the Chinese authorities will approve clauses different from Item 5 in the future.

In summary, the most important message of the Notice is that the parties to a joint venture contract may include clauses dealing with the non-participation of certain directors where a quorum to carry out a board meeting is not reached and that such clauses are to be approved by the Chinese approval authorities.

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