Twenty years ago a joint venture most often occurred in domestic construction projects by which two or more companies would join forces for a particular piece of construction, sharing the responsibilities and revenues, with the joint venture ending when the job was completed.
Modern day use of the Joint Venture has enlarged its scope so that it is a typical means of engaging in business in a foreign country. A company in the United States which wishes to enlarge its operations abroad or obtain (or share) some intellectual property in a market unfamiliar to it will seek a “partner” in the other jurisdiction to engage in what is often a long term business venture in that locale.
The advantages of having local expertise and personnel without having to directly enter a foreign market is quite appealing to many American companies and the sharing of resources and intellectual property can be an added inducement. What used to be required by certain foreign governments (such as China) has become quite often the preferred methodology of entry into a market by the United States company.
But there are problems and issues that must be confronted before a joint venture is undertaken and this article shall outline some of the most pressing questions that a company must confront and suggest some solutions that can maximize the benefits and minimize the risks of utilization of such joint venture.
THE BASIC STRUCTURE:
Typically, a Joint Venture (“JV”) exists so that two parties can combine resources, contacts, skills and assets to better exploit a particular market. The variations are endless. An American company with intellectual property may wish to enter a foreign market and has neither resources, contacts or the skill set necessary so approaches an Indian or Indonesian company to create some sort of relationship to market the product in that country. Or two companies with equal skill sets but without sufficient economic capital combine their capital to engage in entry into a market or to build a production site.
The typical structures are the creation of a partnership or limited liability entity in the foreign locale which is owned by both entities. The alternative method is to create a long term contract between the two entities spelling out duties and division of proceeds and protection of intellectual property. Sometimes a careful party will wish both…a limited liability entity with a shareholder’s agreement is not uncommon.
Tax consideration, both in the United States and abroad (where such oddities as Value Added Tax (“VAT”) can have a tremendous effect on structural planning) must be integrated in and a good international CPA is as vital in structural planning as attorneys, both in the United States and in the foreign locale.
The party considering a joint venture must be careful not to let tax or local jurisdictional issues alter the power or monetary arrangements to its disadvantage. The balance between tax planning, operational planning, local legal restrictions, and cost benefit analysis becomes the primary concern of the wise executive.
THE TYPICAL ISSUES TO CONFRONT.
The recurring theme is sharing resources.
The recurring problems and questions confronted quite often are:
Power. Who makes what decisions and what happens if there is a dispute?
Money: Who puts in what and how are the proceeds divided?
Responsibilities. Who is to do what and with what priority over other business?
Oversight. Who reports to who and what criteria are to be utilized to gauge success? Accounting methods and oversight by whom?
Protection of Interests. How is intellectual property, customer lists, contacts, and the business itself to be protected from one or both joint venturers or third parties?
Extraordinary events: What happens if one company or owner withdraws or becomes disabled? What happens if the laws change or a new competitor comes in that changes the playing field?
Local Issues. Many jurisdictions restrict ownership and power of a foreign national thus the usual fair division of power is made impossible, often putting one of the JV members at risk. Restrictions on removal of currency can make this an even more difficult question. Taxes come into the picture both in terms of characterization of expenses and treaties between the United States and the particular nation.
Business Ethics: Not a minor issue. Not only because what one nation considers appropriate may be considered a major violation of good business practices in another, but because United States law can often prohibit activities that another nation treats as standard business practices. See our article on the Federal Corrupt Practices Act.
Competition by the Parties. Quite often the parties remain competitors in other fields. How is that fact to be integrated into the particular venture, both during it and afterwards? How are business advantages to be restricted to the joint venture so that one’s competitor does not use the venture to drive one from the market at a later time?
Withdrawal from the Venture. Under what terms does one party withdraw or become forced to withdraw from the Venture? What happens to the assets and trade secrets?
A quick review of the above basic issues indicates that creation of a joint venture is not a simple process even if the parties know and trust each other. Knowledge of the law in at least two jurisdictions; knowledge of tax law; realistic and appropriate expectations; and effective means to obtain data about performance are all vital for the negotiation to conclude and the business to prosper.
And as seen in our article on International Business Transactions for the United States Business, even the negotiations themselves are subject to different requirements and many a joint venture foundered on perceived insults and slights. There are also predatory entities, particularly in certain parts of Asia, that utilize joint ventures to obtain trade secrets and will cheerfully compete against the very joint venture they are connected with. In some of those nations, there is no effective court system, and such protections as a third nation locale for dispute resolution and utilization of technology to protect technology may be vital.
There are also oddities involved in some locales that only experience or good advice can prepare the business person to confront. One ship building company failed in Thailand because they had not budgeted six months for the local workmen to build appropriate shrines to local deities for the ships. Another entity failed to understand that the extended family of their joint venturers would be the hidden vendors for critical materials and that while all in Indonesia knew the extent of that family’s holdings, our American client had not.
But this writer’s favorite story was of the American client who had spent a great deal of money outfitting a state of the art warehouse in South Africa only to have an armored car driven by organized bands of thugs smash through the steel front door and steal literally every stick of furniture on the premises. None of the businesses on that street were surprised and the local warehouseman merely shrugged. A typical event in that locale and solved by hiding one’s assets, not “advertising them” by putting them in a modern looking building.
The wise business person will develop a team to assist him or her in not only developing a business plan, but in achieving enough knowledge as to the local taxes, laws, customs and means of enforcement of contracts so that the odds of success are maximized. Local counsel and accountants, a knowledgeable Unites States attorney and CPA, and communications with people already resident in the locale is essential. Most attorneys and CPAs who do this kind of work can form the requisite team.
WHY DO IT?
A surprising number of people, even business people, do not fully realize that they are already engaged in international business. Look around your office or this computer screen. The odds are good that two thirds of your tools, supplies, assets and intellectual property are based on an international business connection.
There is tremendous money to be made and talent to be achieved by expanding one’s expertise into international business and the joint venture is often the easiest and safest way to do it. To resist that opportunity is akin to a business person in the early twentieth century refusing to expand its business to include the next town down the road. The competitors who do see and exploit the opportunity will simply succeed and you will not.
It is also exciting and invigorating. One experienced high tech executive advised the writer that it was more interesting to him to create a company in Argentina than to make even more money in New Jersey. He loved the adventurous aspect of it, the challenge of learning new cultures, new requirements and succeeding in another forum.
Like riding a bike, if one merely lists the requirements the task appears daunting. But once one has some experience, it goes remarkably smoothly. Understanding the basic requirements and creating the right team of professionals and experts should allow the average business to engage in joint ventures that widen the available markets exponentially.