Sunday, June 14, 2015

International Joint Ventures (U.S. Law)

What's a JV?

A joint venture (JV) is a temporary cooperation of two+  unaffiliated companies for any business purpose. An international joint venture with U.S. business partner may be used to distribute goods to the U.S.  The U.S. joint venturer can share its network of U.S. contacts, sales force and marketing skills, assist with necessary U.S. permits and licenses. The foreign joint venturer can provide the products, appropriate IP licenses and capital. A joint venture is typically formed for a defined purpose or specified project.  Therefore, a JV is typically limited in scope and duration. The expected responsibilities, contributions and liability of each joint venturer shall be specified in organizational documents.

How to set up a JV

A joint venture can be set up by: 1) registering it as a legal entity; or 2) signing a Joint Venture Agreement. Legal entity JV is generally speaking more “solid” in that it normally provides more liability protections than a contractual JV. That is because contractual joint venture could be considered to be a general partnership under U.S. law, which potentially exposes the joint venturers to serious risks such as tax exposure in the US, and unlimited liability for the debts, obligations and mistakes of the other partner.

1 )      To form a joint venture as a legal entity, a corporation, LLC or a partnership is formed where one stockholder/participant is a foreign entity and the other stockholder is a U.S. entity. A choice of legal entity type will be dictated, in large part, by the parties’ tax considerations. Legal entity’s organizational documents (bylaws, shareholder agreement) will stipulate the parties’ % ownership, profit sharing, voting and management rights, as well as duties within the joint venture.

2)      In a contractual joint venture, the collaboration is based on an agreement between the joint venture partners. A joint venture to develop new products, for example, might be structured as a collaborative research and development agreement.

Advantages of JVs:

-          Can be formed quickly and inexpensively.
-          Low cost access to a foreign market via an established local partner.
-          Alleviated political risk in unstable countries; not having to deal with corrupt officials, nationalization, etc.
-          Provide quick access to foreign joint venturer’s business network, credibility, channels of distribution, local knowledge and other resources.


-          The biggest problem I see with international JVs is that each partner is potentially liable for the mistakes of the other partner(s). This problem exists (especially in contractual JVs) when the joint venture’s contracts and/or organizational documents do not adequately address parties’ responsibilities, apportionment of risks and liabilities.
-          Diluted profits, particularly when a partner claims significant expenses.
-          Cultural differences, misunderstandings and inefficiencies.
-        Transfer pricing rules apply, even though JV parties are not related.
-     Difficult to capitalize. JVs (especially contractual ones) are not treated as something permanent because they are not. This risk can be addresses by setting up a JV as an entity such as an LLC or a corporation.
-     Potential for loss of IP, trademark hijacking by one of the partners, conflicts over IP developed during the course of JV.
-          Your own JV partner can become your competitor after learning your ways. This risk can be alleviated by inserting non-competition, non-solicitation and confidentiality provisions in the joint venture agreement.
-          50/50 joint ventures are subject to potential deadlock if partners have equal voting rights and they can’t agree on some issue(s). This risk should be addressed by deadlock resolution provisions. Even agreeing to flip a coin and move on can be more beneficial for everybody than deadlocking.
-          No/bad exit strategy.  

Issues to address:

Minimum amount of time contributed by each member?
Will some members have the authority to act freely within their assigned fields or responsibility, without the need to seek approval of other members?
What happens if one of the members is not pulling their weight?
Are members allowed to participate in outside business activities that might be be in competition with the JV's business? 
Capital contributions. Will the members be required to contribute additional capital to the JV after their initial capital contribution? How will sweat equity, IP and in-kind contribution be valued?