International Business and Investment in China, It Is Wrong to Read the Face of the Chinese-Foreign Joint Venture Law That the Board of Directors Is the Highest Authority

Authors

Fengping Gao

Abstract

Within the spectrum of international business and investment, China inbound Foreign Direct Investment hit an all-time high record 135 billion U.S. dollars in 2017. Meanwhile, a large number of international businesses, including American companies, pulled out from China and transferred their business to South Asian countries for a variety of considerations including but not limited to the cheaper labor and the lax environmental regulations, and/or to the United States in response to the recent corporate tax cut and/or other policy objectives initiated under the Trump Administration such as to bring the manufacturing jobs back to America. The departure of foreign investors could trigger the controversy among the original parties to the Chinese-Foreign Equity Joint Ventures (hereinafter the FJV).

In a recent advised international business case, the original board chairperson disagreed with the resolution reached by the shareholders to dismiss him, alleging that he was conferred with the highest authority of the law to represent the company. Without the cooperation of the incumbent board of directors, the successor of the chairperson failed to register with the authorities in compliance with the law. The failure of the registration was invoked as another justification under the procedural law for the original chairperson to entrench his board position. Further, the board chairperson and the legal representative, sued the shareholders on behalf of the company in a foreign court. The controversy remained detrimental to the venture for up to five years.

The extensive litigation is not an isolated dispute with respect to the internal struggle of the FJV. The relevant issues in another case, Sino-environment Technology, were also brought all the way up to the Supreme People's Court of China. The highest court published its decision on the official gazette as a "typical case," which means the contested legal issues more often to be brought up to the courts again and significant of the social impact in China.

The FJVs are specifically covered by the poorly drafted FJV laws and regulations, which provide authority for the board of directors. Such a provision contradicts the fundamental principle of company law prescribing the board of the shareholders to be the organ of authority at the company. Also, the registration with authorities could easily be employed as the internal block to defeat the intent of the shareholders, thus leading the internal struggle into an impasse if such a procedural undertaking is regarded as the condition to effectuate the replacement of the board directors. To solve such a controversy and untangle the ambiguity of legislation, it should be required to read the FJV laws and regulations side-by-side. Regarding the non-cooperation issue of the board of directors, the legal principle should be applicable to the dismissed board that "one cannot benefit from one's own wrongdoing or misconduct."

The purpose of this paper is to provide both academic analyses on the issues for international legal professionals and practical advice to the house counsels of the FJV. Part I provides background information with respect to the establishment of the FJVs and the unique formation of its board of directors. Part II separately discusses the two issues often raised by the original dismissed board of directors as defenses, namely, whether the board of directors is the highest authority of the venture, and whether the successor registration must be performed in order to effectuate the replacement. Part III evaluates the first claim with the agency theory, the basis of the separation of ownership and management, and the method by reading the text in conjunction with the context of the law. As to the procedural registration issue, the paper resorts to the authority of the highest court case which directly deals with the problem. The paper concludes the alleged defenses are void. Finally, Part IV appends the legal advice in this regard.

Recommended Citation

Gao, Fengping (2018) "International Business and Investment in China, It Is Wrong to Read the Face of the Chinese-Foreign Joint Venture Law That the Board of Directors Is the Highest Authority," Journal of International Business and Law: Vol. 18: Iss. 1, Article 6.
Available at: https://scholarlycommons.law.hofstra.edu/jibl/vol18/iss1/6