Joint Ventures in Hong Kong

Joint ventures are not recognised as a distinct legal concept under Hong Kong law.

The key types of joint ventures used in Hong Kong are:

• corporate joint ventures – where a separate legal entity is established, in which each joint venture partner is a shareholder;
• partnerships – where a partnership is established by the joint venture partners, with the terms of the partnership set out in a partnership agreement;
• contractual joint ventures – where the joint venture partners enter into a commercial agreement (generally a cooperation or collaboration agreement) setting out the details of the joint venture relationship.

In practice, most joint ventures are set up as corporate joint ventures, involving the creation of a designated vehicle in which each joint venture partner is a shareholder. The joint venture vehicle is typically a private company limited by shares. It can either be a newly incorporated entity, or the existing subsidiary of one of the parties to the joint venture.

There are no foreign investment restrictions in Hong Kong. There are no restrictions on foreign partners acquiring shares and holding the office of director of Hong Kong companies. There are also no foreign exchange controls.

However, if the joint venture operates in the television or broadcasting industry, the foreign partner’s ownership cannot exceed 49%.

In addition, if the joint venture operates or holds assets in mainland China, local foreign investment regulations will apply. Depending on the sector, the investment may be permitted, restricted (with the requirement that the Chinese partner must hold a controlling interest) or prohibited.

The following considerations may influence the structuring of a joint venture in Hong Kong.

• Choice of vehicle - A joint venture may be structured either as a contractual joint venture, as a partnership or as a corporate joint venture. Most joint ventures are set up as corporate joint ventures, typically using a private company limited by shares. If a new joint venture entity is incorporated, the incorporation process can be as fast as one day. Alternatively, the joint venture partners may choose to use an existing entity. This would require to arrange share transfer(s) to the joint venture partners, and the negotiation of representations, warranties and indemnities may delay the process.
• Initial funding – The joint venture company may be funded exclusively by the joint venture partners (by cash contributions or by contributions in kind such as the transfer of intellectual property rights) and by external funding (bank debt with or without charges). If assets are contributed to the joint venture entity by one or more of the partner(s), the transfer should be documented in a separate agreement and appropriate filings and notifications must be made (for instance, filing of trademark assignment notice with the Hong Kong Intellectual Property Department).
• Joint venture agreement – It is good practice to enter into a formal joint venture agreement setting out the rights and obligations of the partners in relation to the joint venture entity. The joint venture agreement typically addresses questions such as share capital and funding, governance (board composition, voting rights and arrangements), conduct of the business, future capital contribution requirements, rights to dividend, restrictive covenants, share transfer provisions and exit provisions.

There is no general prior antitrust or competition approval or notification requirement in Hong Kong. However, the formation of a joint venture may fall under Hong Kong’s competition law framework, which is primarily governed by the Hong Kong Competition Ordinance (Cap. 619).

• First Conduct Rule – The First Conduct Rule prohibits agreements and concerted practices and decisions that have the object or effect to prevent, restrict or distort competition in Hong Kong. The First Conduct Rule applies to the operation of the joint venture entity and to the relationship between the joint venture partners. For instance, a joint venture agreement could contravene the First Conduct Rule if it has the object or effect of harming competition.
• Second Conduct Rule – The Second Conduct Rule prohibits undertakings that have a substantial degree of market power from abusing that power by engaging in conduct that has the object or effect to prevent, restrict or distort competition in Hong Kong. As with the First Conduct Rule, the operation of the joint venture and the relationship between the joint venture partners are subject to this rule.
• Merger Rule – Merger control rules currently only apply to mergers involving holders of a carrier licence to establish or maintain telecommunications networks. The Merger Rule prohibits mergers that have, or are likely to have, the effect of substantially lessening competition in Hong Kong. The formation of a joint venture in the telecommunications sector that performs, on a lasting basis, all the functions of an autonomous economic entity, amounts to a merger. The creation of the joint venture will be subject to the Merger Rule, and exempt from the First Conduct Rule and Second Conduct Rule. If the formation of the joint venture contravenes the Merger Rule because it has, or is likely to have, the effect of substantially lessening competition in Hong Kong, the joint venture partners may apply for clearance from the Hong Kong Competition Commission. If the economic efficiencies that arise or may arise from the formation of the joint venture outweigh its adverse effects, or if other exclusions apply, the Competition Commission may exclude the application of the Merger Rule.

In Hong Kong, the restrictions or requirements governing the contribution of assets to a joint venture depend on the type of assets involved. Below is a non-exhaustive list of restrictions and requirements.

• Pricing documentation – It is good practice to document the valuation of the assets being contributed to the joint venture. From a tax perspective, to ensure compliance with transfer pricing rules, the asset valuation must adhere to the arm’s length principle. Even if the parties fall below statutory transfer pricing documentation thresholds, documenting the valuation of asset contributions provides the parties robust evidence in case of review by the tax authorities.
• Transfer documentation – The transfer is typically documented by the entry into of a formal contribution or transfer agreement. It is market practice for the contributing party to give appropriate warranties in relation to the assets being transferred to the joint venture.
• Share issuance with payment in kind – Contributions of assets to a corporate joint venture in exchange for shares constitute a contribution in kind. The share allotment must be notified to the Hong Kong Companies Registry within one month after the date of the allotment, and particulars of the assets contributed to the joint venture entity must be disclosed to the Companies Registry.
• Intellectual property contributions – Contributions of intellectual property rights may trigger notification requirements to the Hong Kong Intellectual Property Department, for instance in case of assignment of trademark.
• Corporate authorisations – Where relevant, appropriate corporate authorisations should be obtained for the contributing party to transfer the assets to the joint venture entity.

When initiating discussions with a potential partner to set up a joint venture in Hong Kong, it is good practice to enter into one or more of the following preliminary documents:

• binding confidentiality agreement ensuring that all confidential information shared by the parties in relation to their respective businesses is kept confidential;
• non-binding term sheet setting out the key terms and conditions of the future joint venture agreement, roadmap and timeline for negotiations, allocation of costs, governing law and dispute resolution mechanisms;
• binding exclusivity agreement ensuring that the parties do not negotiate with third parties during an agreed negotiation timeline.

If the joint venture is structured as a corporate joint venture, careful consideration should be given to drafting and negotiating the joint venture agreement. It is key to adopt effective deadlock arrangements to prevent disputes from escalating, such as buy‑out mechanics, mediation or arbitration and Russian roulette clauses. Once the parties agree on the joint venture agreement, they should consider amending the joint venture company’s articles of association to ensure consistency with the agreement's provisions and to adopt appropriate precedence clauses.

A Hong Kong private company limited by shares is managed by its board of directors. In addition, it must appoint a company secretary, who also qualifies as a company officer.

• Board of directors – The company must appoint one or more director(s). Collectively, the board of directors is responsible for managing the company. There are no nationality or residence restrictions for directors. As far as at least one director is an individual, the other director(s) can be corporate director(s). The rules governing the appointment of directors are set out in the company’s articles of association. The articles usually provide that shareholders have the power to appoint directors, but that the board of directors may appoint directors to fill vacancies until the next general meeting or to appoint additional directors.
• Company secretary – The company must appoint a company secretary. The company secretary generally maintains the company’s records and registers, assists with the organisation of board meetings and shareholders’ general meetings, and ensures statutory filings with the Companies Registry. The company secretary may be either an individual who ordinarily resides in Hong Kong, or a body corporate that has its registered office or a place of business in Hong Kong. In practice, most companies appoint a professional corporate secretarial service provider. Corporate secretaries must hold a Trust or Corporate Services Provider licence. If a company has only one director, the sole director cannot also act as company secretary. As for directors, the rules governing the appointment of the company secretary are set out in the company’s articles of association. The articles usually provide that the board of directors has the power to appoint the company secretary.

Even if the corporate joint venture vehicle is a Hong Kong private company limited by shares, the parties to the joint venture are free to choose the law governing their contractual arrangements, including the joint venture agreement.

In practice, where the joint venture vehicle is a Hong Kong private company limited by shares, choosing Hong Kong as governing law for the joint venture agreement and ancillary agreements ensures consistency with Hong Kong statutory company law provisions.