JOINT VENTURE NEGOTIATIONS – Practical & Legal Issues

Larry Placide & Clive Pegus

JOINT VENTURE NEGOTIATIONS – Practical & Legal Issues

23 July 2014

Courtyard Marriott, POS

Objectives of Presentation

Focus on joint venturing as strategy to develop and expand business operations and to access overseas markets



Structure of Presentation

Essentials of Joint Venture Different Forms of Joint Venture Rationale for Joint Venture Finding a Joint Venture Partner Legal Issues in Negotiating a Joint Venture Risk Factors Other Legal Arrangements for Pursuing Business

Abroad


What is Joint Venture?

Joint venture is a business structure or arrangement that brings two or more separate businesses or entities together to share capital (expertise, technology and other resources/assets), risks and profits in a joint business

Why Joint Venture?

Synergies created by joining forces bring greater impact, capacity and efficiency than the sum of the separate businesses



Rationale for Joint Ventures

Access to Capital, including Specialised Staff, Technology and Finance

Access to Markets (e.g. Professional Services) and Distribution Channels

Business Expansion & Diversification

Greater Capacity


Rationale for Joint Ventures

Development of New Products

Increased Technical Expertise

Sharing of Risks and Costs

Strategic Move against Competition


Essentials of Joint Venture

Shared business objectives as defined in strategic or business plan

Shared ownership and contribution to authorized capital

Shared governance and control over management

Shared profits or losses


Forms of Joint Venture(full integration)

Closely resembles merger Parties produce similar goods or provide similar

services Parties seek to integrate functions in one area of

business or all of their functions Useful for small businesses where objective is to

enhance capacity to meet demands of the market

Forms of Joint Ventures(Research & Development)

Parties pool skills, knowledge or equipment to develop better products, services or production methods

May be for limited purpose and duration such as a study or survey or to apply for tender and if successful undertake the work


Forms of Joint Venture(Production & Marketing)

Parties either produce goods or services together or market them together or both

Economies are gained from combined effort.


Forms of Joint Venture(Purchasing)

Agreement to purchase goods (or services) together. Higher quantities, more deliverables, lower costs

More economies possible through joint storage or sharing of administrative staff


Indirect Joint Ventures

Networking – E.g. Telecoms, banking, travel– Use of installed factilities, Linx, reservations

systems Management Contracts

– E.g. Hotel Management where owners partner with brands


Indirect Joint Ventures

Licencing– Grant licences or franchises– Strong control of franchisor

Contract Manufacturing– E.g. Textiles and clothing



Finding Strategic Partner

Develop business strategy & plan

Clarify objectives & contribution of partner

Clarify duration

Assess risk


Finding Strategic Partner

Seek assistance of Investment Promotion Agency or Investment Adviser in identifying suitable partners

Understand culture & management style of prospective partners

MOU with prospective partner

Process

Clarification of strategic objectives Research & development of strategic framework Search for suitable partner Disclosures/Exchange of information Due diligence of prospective partner Negotiations of joint venture agreement Registration of business Secure licenses Operationalization of business


Structure

Can either be a limited liability company, partnership or unincorporated body

Companies may retain individual businesses or merge operations for specific objective

Collaboration of two individual experts or firms


Basic Legal Documentation

MOU or Letter of Intent Confidentiality & Non-disclosure Agreement Joint Venture Agreement or Shareholder’s

Agreement Incorporation documents By-laws License Agreement for use of technology Trade licences



Assessing Partner

Recent financial & business performance Business strategic framework Management team Market reputation Shared interest Trustworthiness Credit-worthiness Matters in court or arbitration or anticipated disputes Labour relations history

Due DiligenceCorporate Documents

Check basic corporate documents (Articles of incorporation, by-laws, minutes of directors & shareholders meeting, annual returns, trade licenses, trademarks registration, patent registration, copies of distribution agreements, list of subsidiaries, equity & debt financing agreements, stock options, shareholder information, leases, and other material contracts, insurance, labour agreements


Due DiligenceLitigation & Audits

Audit reports & letters to management re. internal accounting controls

Description of any recent change in accounting method

Active litigation, including letters asserting claims & complaints

Court judgments, orders of Government agencies & settlements


Due diligence(Environment)

Schedule of hazardous materials stored, manufactured or located at facility

Information on any incidents involving release of potentially hazardous materials

All OSHA reports All permits or approvals obtained from any

governmental body responsible for environmental & health regulation


Due Diligence General

Is partner financially secure Does partner have credit problems Is partner already in JVs How is partner performing re. production,

marketing & personnel What customers and suppliers say about

partner’s trustworthiness and reputation



Legal Issues

Structure of JV (partnership, limited liability company or unincorporated entity)

Treatment of sensitive & confidential information to be shared during negotiation

Identifying information to be shared Develop MOU & NDA prior to negotiations Valuation of assets (including intellectual property &

goodwill) to be transferred to JV Ownership structure


Legal Issues con’d

Governance Management & decision-making Reporting & information sharing Capital development Dispute resolution Governing law Understanding law of forum Exit strategy

Structure of JV

Limited liability company, unlike partnership, restricts liability of partners in event of JV fails and is wound up


Governance & Management

Key strategic and management decisions should require consent of all partners

Examples: borrowing, capital development, manufacture and sale of new products, sale of assets, territorial expansion, dividends, engagement and dismissal of key executives


Reporting & Information Sharing

Ensure that all relevant management decisions and critical information are reported to you in an expeditious manner

Ensure appropriate confidential procedures and systems for sensitive information


Dispute Resolution

Critical to include provision in Agreement on dispute resolution, especially in deadlock and on winding up

Method of dispute resolution (judicial adjudication/ADR)

Forum (check whether Convention on the Recognition & Enforcement of Foreign Arbitral Awards applicable in forum & jurisdiction of partner)

Governing law


Governing Law

Parties are generally free to choose proper law of contract, provided the choice is bona fide

Proper law may not have any relationship to parties Where no express choice of law, Courts may decide

on basis of implied or presumed intention of parties or the law with the closest or most real connection

Law of place of performance may regulate mode of performance

NB. US extraterritorial jurisdiction of certain decrees


Exit Strategy

Consider what will happen when JV comes to end How shared intellectual property will be unbundled How confidential information will be protected How will future income arising from joint venture

activities be treated How will continuing liabilities be treated. What happens to continuing business & outstanding

contracts Procedures for valuation & distribution of assets



Risk FactorsTypes

Misuse or appropriation of information shared Loss of control of technology Loss of assets especially where exported to foreign

jurisdiction in support of JV Double taxation Applicable foreign exchange & currency risks Conflict of laws in multijurisdictional JVs & transactions Misunderstanding due to cultural differences Objectives not clearly defined Differences in leadership style Parties unable to fulfil commitments


Other Arrangements

Licensing arrangement Management Contract Collaboration Agreement


THANK YOU

JOINT VENTURE NEGOTIATIONS – Practical & Legal Issues

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