Update: shareholders' agreement terms for a Mainland China joint venture

Two recurring problems surface every quarter in our cross-border corporate practice. A joint venture between a Hong Kong or international party and a Mainland Chinese counterpart reaches deadlock. Or the venture is dissolved. At that point, the shareholders' agreement either works or it does not – and the difference is almost always traceable to two clauses written at the outset: the governing-law clause and the dispute-resolution clause.

A shareholders' agreement for a Mainland China joint venture must address the split between the law governing the agreement itself and the law governing the foreign-invested enterprise operating inside the Mainland. Under the governing regime for foreign-invested enterprises in the People's Republic of China, Mainland mandatory rules apply to the foreign-invested enterprise (the operating entity registered in the Mainland) regardless of the law chosen for the shareholders' agreement. Hong Kong law is regularly chosen to govern the offshore document; but parties should verify the current position on enforceability before each transaction closes.

This briefing flags the issues most frequently missed when drafting these terms and identifies the immediate action for groups with active or planned Mainland joint-venture exposure.

What the recurring trigger is

The enforcement risk is not hypothetical. A shareholders' agreement governed by Hong Kong law and providing for HKIAC arbitration in Hong Kong remains enforceable at the offshore level. The challenge arises one step down: the operating entity inside the Mainland is a Chinese-law entity. Its articles of association, capital structure and governance are subject to Mainland mandatory rules regardless of what the offshore shareholders' agreement says.

Several structural mismatches appear repeatedly in our desk's experience of reviewing these documents:

• Deadlock mechanisms that trigger a buy-sell or put option at the offshore level but cannot be directly executed against the Mainland operating entity without a separate set of Mainland-registered steps.
• Information rights and reserved-matter approvals drafted for an English-law company structure that do not map to the governance mechanics of a Mainland youxian zeren gongsi (limited liability company) or gufen youxian gongsi (joint-stock company).
• Drag-along and tag-along provisions that are effective between the offshore shareholders but require a separate equity transfer filing and regulatory approval inside the Mainland before the transfer is recognised by the relevant Mainland authority.
• Exit provisions that assume a clean sale when, in practice, the transfer of equity in a Mainland entity requires the approval of co-shareholders under the applicable Mainland corporate-law rules – regardless of what the offshore shareholders' agreement provides.

The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), in force since 29 January 2024, has widened the corridor for enforcing Hong Kong court judgments on the Mainland and vice versa. This matters when a dispute over the shareholders' agreement produces a Hong Kong judgment. But it does not dissolve the structural mismatch between offshore contractual rights and the Mainland operating entity's governance.

Who is affected and what to do now

Any international or Hong Kong group that holds equity in a Mainland operating entity through an offshore or Hong Kong holding vehicle should check three things before the next board cycle or capital event.

First: does the shareholders' agreement include a well-drafted HKIAC arbitration clause or an exclusive Hong Kong jurisdiction clause? A poorly drafted clause – one that refers to "arbitration in Hong Kong" without specifying the rules and the seat – creates genuine uncertainty about whether the Arbitration Ordinance (Cap. 609) or the Mainland arbitration regime applies in a contested scenario.

Second: does the agreement address the day-two operating reality? Reserved matters, information rights, and exit mechanics should be mirrored, as far as Mainland law permits, in the articles of association of the Mainland operating entity. A right that exists only at the offshore level may be unenforceable where the assets actually sit.

Third: is there a governing-law clause that reflects genuine legal advice on the split between the offshore document and the Mainland entity? Choosing Hong Kong law for the shareholders' agreement is commercially rational and widely used on this corridor. The point is whether that choice was made with an understanding of what Mainland mandatory rules override.

For groups that already have Mainland joint ventures in place, a short document review against these three points is the most cost-effective risk management available. For groups at the term-sheet or negotiation stage, now is the time to structure the agreement correctly.

For a structured assessment of your shareholders' agreement terms across the Hong Kong and Mainland corridor, write to us at info@lockhartyip.com.

Further context on our cross-border corporate counsel work is available at our corporate counsel practice page. Related cross-border structuring considerations for international joint-venture parties are addressed in our Singapore-seat matter note and in our Cyprus joint-venture shareholders' agreement analysis.

Frequently asked questions

Which jurisdiction's law applies to shareholders' agreement terms for a Mainland China joint venture?

Parties commonly choose Hong Kong law to govern the shareholders' agreement itself, and that choice is commercially well-tested on the Hong Kong–Mainland corridor. However, Mainland mandatory rules apply to the foreign-invested enterprise registered inside the Mainland regardless of the offshore governing-law clause. The two bodies of law operate in parallel; neither choice eliminates the effect of the other.

How long does shareholders' agreement terms for a Mainland China joint venture usually take?

Negotiating and finalising a shareholders' agreement for a Mainland joint venture varies with the complexity of the deal, the number of parties and the degree of commercial alignment. Where parties are aligned on governance and exit, a well-drafted document can be concluded in a matter of weeks. Contested reserved-matter lists and exit mechanics can extend the timetable materially. Parties should verify the current regulatory-approval timelines for the Mainland operating entity separately.

What are the main risks in shareholders' agreement terms for a Mainland China joint venture?

The three highest-frequency risks in our experience are: a dispute-resolution clause that is ambiguous between Hong Kong and Mainland arbitration; exit mechanics that work at the offshore level but cannot be executed against the Mainland entity without a separate approval step; and governance rights that are not mirrored in the Mainland entity's articles of association. Each of these can convert a commercially agreed position into a deadlock at the moment it matters most.

About Lockhart & Yip

Lockhart & Yip is an independent international and cross-border counsel based in Hong Kong. We advise international groups, founders, and their advisers on joint-venture structuring, shareholders' agreement terms and corporate governance across the Hong Kong and Mainland corridor, working alongside locally licensed firms on matters of Hong Kong law. Our desk is built around corporate counsel, holding structures, and cross-border enforcement across Greater China and the principal offshore centres. Our team advises on these documents as a neutral-forum, internationally qualified practice – not as a local Hong Kong law firm. To discuss your position, write to info@lockhartyip.com.

Lockhart & Yip advises on international and foreign law. We do not practise the law of Hong Kong; matters of Hong Kong law are handled together with locally licensed firms. This publication is general information, not legal advice. For advice on your situation, contact info@lockhartyip.com.

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.