Common Market Entry Options for Operating Business in China
Establishment in China
Foreign companies may operate business in China by setting up a long term establishment in China commonly known as foreign investment enterprises (FIEs). The FIEs are limited liability companies incorporated in China as one of the following entities:
- Sino-foreign equity joint venture ("EJV");
- Sino-foreign contractual joint venture ("CJV");
- Wholly foreign-owned enterprise (" WFOE"); and
- Foreign invested companies limited by shares ("FCLSs").
Registration of an FIE in China is subject to the enterprise registration system as well as the company registration system managed by the relevant PRC State or Local Administrative authority. In choosing the suitable type of FIE, foreign investors should take into account their long-term business need, finance feasibility and tax implications involved in the various business structures.
The most commonly used type of FIEs are joint ventures and WFOE. A WFOE is a limited liability company wholly owned by foreign investors. This business structure offers foreign investors maximum control over company management and business operation. However, without a local partner on board, a WFOE is often prohibited from investing in those industry sectors which are restricted to the FIEs in which the Chinese investor has the majority equity holding.
Compared with a WFOE, a JV is established in circumstances where foreign investors need to rely on the Chinese partners for business support, resources and products distribution network. The parties to the joint ventures share profits and losses and assume business risks in accordance with their equity holdings in the EJV or in accordance with the provisions stipulated in the CJV contract.
Merger and acquisition (M&A)
Alternative to setting up an FIE which can be time consuming, foreign investors may choose to enter into M&A transactions with a local target company and acquire either the whole or part of the latter's equity interest. Market entry through M&A transactions provides foreign investors with immediate access to the target company's business resources. In many cases, the target companies are chosen as strategic partners of foreign investors in their business operations in China.
On the other hand, with equity acquisition, there is potential risk for foreign investors to be exposed to the target's liabilities not discovered prior to the transaction. Accordingly, thorough legal, financial and business due diligence needs to be carried out before entering into an M&A transaction.
Stephens Lawyers & Consultants works with and have assisted clients in entering into the Chinese market including advising in relation to the business structures and protection of intellectual property.
For further information contact:
Katarina Klaric Principal Stephens Lawyers & Consultants Level 3, 530 Lonsdale Street Melbourne VIC 3000 Phone: (03) 8636 9100 Fax: (03) 8636 9199 Email: katarina.klaric@stephens.com.au Website: www.stephens.com.au All Correspondence to: PO Box 13286 Melbourne Law Courts Melbourne VIC 3000 To send your comments and feedback, please email stephens@stephens.com.auDisclaimer : This article is not intended to be a substitute for obtaining legal advice.
© Stephens Lawyers & Consultants, April 2007 - June 2009
Updated June 2009.