There is no doubt that JVs can be invaluable in allowing companies to access new customers, expand revenues and pursue new product development, all while offsetting costs and risks… if they are structured and managed well. There are a number of points to consider before you sit down to negotiate with your potential JV partner. These items reflect the intersection of business and legal points which will guide both the negotiating process and the trajectory of the JV:
Scope: What will be the scope of the proposed JV’s business and territory? Are there any carve-outs or exclusions that will be retained by the individual JV partners?
Goals and objectives: Are the JV partners aligned on the business objectives and strategic goals of the JV? Is there at least a preliminary consensus on the initial budget and business plan (including the timing for launch) for the JV?
Form: Will the JV take the form of a new entity or be simply contractual in nature? If a new entity, what form will it take (and what options exist under law)? Ownership and capitalization. If the JV will take the form of a new entity, what will be the relative ownership between or among the JV partners, and how will the economic benefits, costs, obligations and liabilities be allocated? What is the anticipated initial capitalization and what will the JV’s policy be as to capital calls and the incurrence of debt?
Management: How will the board or other governing body be composed?
What approval or “veto” rights will the JV partners have at the board or shareholder level, including any supermajority or unanimous approval rights?
Jurisdiction: Where will the JV be formed and what will be the governing law of the JV/partner agreements? What legal, tax and regulatory issues are associated with the JV’s proposed jurisdiction(s) of formation and operation?
Relationships: Will additional services, obligations and undertakings be required by one or more JV partners beyond capital contributions?
Liquidity rights and obligations: What liquidity rights and restrictions will the JV partners have in respect of their interests in the JV?
Disputes: What will be the mechanism for resolving disputes?
Termination: What termination rights will the JV partners have? What are the consequences of termination? What post-termination restrictions on doing business will be imposed on the former JV partners?
Useful deal tips
All JVs pose challenges, and many of the points identified above are relevant both to a purely domestic or international JV. However, there are unique challenges associated with doing a JV across international borders.
The most obvious consequence of an international deal is the applicability of multiple legal regimes, including those of each JV partner, the JV itself and the jurisdiction(s) where the JV is operating. While this by itself will add complexity, time and cost, it is particularly problematic when the legal requirements are in conflict. In addition, international transactions will implicate additional legal requirements (such as the FCPA and U.S. export laws).
Also, U.S. companies will frequently find their business ethics and practices (and compliance requirements) to be radically different from those of their foreign counterparties. This will add challenges in performing due diligence, drafting and negotiating the JV agreements, establishing the JV’s policies and conducting the JV’s operations.
Teaming with another company in a JV or other form of strategic alliance continues to be a popular and effective means to expand internationally. Pursuing such rewards has associated risks and costs. Nevertheless, with a little foresight and planning, parties seeking to launch an international JV can significantly improve their chances of success.