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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
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Larry Placide & Clive Pegus
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
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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
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Larry Placide & Clive Pegus
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
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Rationale for Joint Ventures
Development of New Products
Increased Technical Expertise
Sharing of Risks and Costs
Strategic Move against Competition
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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
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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
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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.
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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
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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
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Indirect Joint Ventures
Licencing– Grant licences or franchises– Strong control of franchisor
Contract Manufacturing– E.g. Textiles and clothing
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Larry Placide & Clive Pegus
Finding Strategic Partner
Develop business strategy & plan
Clarify objectives & contribution of partner
Clarify duration
Assess risk
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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
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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
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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
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Larry Placide & Clive Pegus
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
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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
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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
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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
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Larry Placide & Clive Pegus
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
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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
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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
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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
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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
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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
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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
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Larry Placide & Clive Pegus
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
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Other Arrangements
Licensing arrangement Management Contract Collaboration Agreement
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THANK YOU