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INTERNATIONAL JOINT
VENTURES: THE BASIC CRITERIA FOR SUCCESS
INTRODUCTION:
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:
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Power.
Who makes what decisions and what happens if there is a dispute?
-
Money:
Who puts in what and how are the proceeds divided?
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Responsibilities.
Who is to do what and with what priority over other business?
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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.
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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?
THE NEGOTIATION.
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. |
