Chinese buyers focus on JV enforceability

This article originally appeared in IFLR, a sister publication of China Law & Practice


As Chinese companies become increasingly interested in European assets, their attention has turned to how to enforce contracts in target countries.

Lawyers at IFLR's M&A Forum on March 10 explained how joint venture (JV) partners in common law jurisdictions can protect themselves.

US and European companies still harbour fears over Chinese JV partners co-opting intellectual property and other assets. But that concern has now started to move the other way.

For Chinese JV parties, legal jurisdiction may be an answer – not only for across Europe, but for all common law countries.

They are looking for new ways to protect themselves. "It's important to establish a JV in a jurisdiction where the protection a party is seeking to obtain contractually will be upheld by the court," said Umberto Nicodano, partner at Bonelli Erede Pappalardo, speaking at the IFLR Asia M&A Forum.

Discussing the enforceability differences of provisions in a JV's bylaws versus its shareholders' agreement, he emphasised that one is more effective than the other.

"The bylaws are not purely an organisational document but are often the key instrument that will govern the functioning of the JV entity," said Nicodano.

Generally throughout Europe, the clauses that really matter must be included in a JV's bylaws to ensure that specific performance and injunctive relief are available. "If a party relies only on the shareholders' agreement and the same is breached, that party is entitled to damages but is unlikely to obtain an injunction in court," he said.

For example, in Italy, shareholders' agreements have a maximum permissible duration of five years.

Any clause that forces renewal has been struck down by courts and arbitration panels. It means that a party may run the risk of having no protection upon expiration of the five-year term. Only damage claims will be available.

"On balance, the protection assured by the insertion of relevant clauses in the bylaws outweighs the drawbacks of making the parties' arrangements public," Nicodano added.

That applies across Asia's popular common law jurisdictions, said a panellist, naming Hong Kong, Singapore, Malaysia, BVI and the Cayman Islands.

"There are many examples of people who sue on shareholders' agreements and are trumped by the other side because of the bylaws and articles of association," the speaker said.

A downside to including important provisions in the company's bylaws is that they're made public, so deal parties must think strategically.

Stefano Micheli, partner at Bonelli Erede Pappalardo, noted that it also depends on whether you're a minority or majority shareholder.

The majority shareholder might well be content with including everything that matters in the shareholders' agreement only, he said.

On the other hand, if a minority shareholder wants its rights more effectively protected, then it must weigh carefully the disclosure that inevitably comes with the bylaws versus the ability to have a more enforceable type of protection.


By Ashley Lee, International Financial Law Review