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International Business Law

International Business Law. Prof. Andrea Moja Academic year 2011/2012 LIUC University – Castellanza. 3. Joint Venture Agreements (SUMMARY).

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International Business Law

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  1. InternationalBusinessLaw Prof. Andrea Moja Academic year 2011/2012 LIUC University – Castellanza

  2. 3. Joint Venture Agreements (SUMMARY) • “Joint Venture”: a business situation where 2 or more parties join their capacities in order to achieve a certain common objective with a benefit for every party • Joint ventures have become an important strategic option for many businesses • “Joint Venture” is an umbrella term which describes the commercial arrangement between two or more economically independent entities • In the joint venture the emphasis is put on thecooperationamong the parties

  3. Joint Ventures are often called “alliances” • This alliance is made to achieve results that the parties could not or did not want to achieve alone • such an alliance may take place between: • “friends” • market competitors: often to reduce costs on research or development • The parties always hope to save money and time by unifying their capacities to achieve a common target and profit both

  4. Negative aspectsof the Joint Venture • the loss of autonomy of the parties • the other party has to be chosen carefully (as the decisions concerning the Joint Venture must always be made in consent with the other party) • a party might feel tied to the JV, as it can hardly contract with other parties or work autonomously on the same market that is covered by the JV

  5. Characteristicelementsof JV • Thereisa common target, that the partieswanttoachievebycooperation in ordertomake acommon benefit • the partiesunifyresources and capacities • Costs, risks and profitsare attributedto the partiesalmost in adequateshares • Thereisgenerallyanobligationofnon-competitionamong the parties and between the parties and the JV company • Theremustbebalancebetweenrisks and limitationofautonomy on one side and the profits on the other side

  6. NEGOTIATION PHASE • as the Joint Venture is a complex business, that involves high investment costs and generally a long period of time, there will be the need for substantial resources and other capacities • the parties shall deal with: • market conditions • fiscal conditions • legal rules • banking systems

  7. Choosing a partner • The JV partner must have the right capacities and resources • He must accept cooperation for a longer time and a certain loss of autonomy • Cooperation is the basis • Every party has to make sure to avoid dominance from the other party • The parties have to verify the economic, technical and commercial feasibility of the JV • They provide the basis for the legal structure of the JV

  8. Three basic legal structures can be used for joint venture • a partnership or limited partnership: a relation between persons carrying on a business in common with a view to a profit- i.e. an unincorporated vehicle • a purely contractual co-operation agreement • a limited liability company - i.e corporate vehicle

  9. People are getting used to distinguish 2 main different ways to set up a Joint Venture • bycontract: Contractual Joint Venture (the cooperation is ruled by a series of contracts) • byestablishing acompany: Equity Joint Venture (a new company, of which both parties are shareholders) Each form is more suitable for a certain business target

  10. 3.1 The contractual joint venture • The relation is easier to dissolve (generallywhen the target is achieved) • The relationship is more flexible and it does not create a third legal person (does not have high impact on the organisation of the parties involved) • There is mostly a single, individual target • Fiscal effects: all taxes are attributed to the parties of the contract • The duration of the cooperation is shorter

  11. 3.2 Equity joint venture • Fiscal effects: taxesareattributedto the new company • Thereis a common target, mostly a general, wide objective(not a single one) • The cooperationisplannedfora long periodoftime • Itneeds high investmentcostsand has a huge impact on the organisationof the parties • The partiesdo notintendto dissolve the relation • A JVC hasitsownrepresentatives, whichmakesiteasierfor the partiesto coordinate control and otheractivities

  12. This agreement: • lays out the objectives for which the JVC shall be constituted • provides rules for the constitution itself and the relation betweenthe contracting partiesand the JVC • rules who is responsible for the administration and representation of the new JVC • states the duration of the JVC and some solutions for possible disputes

  13. Dissolutionof the joint venture • IN CASE IT SURVISES: one party leaves the JVC, if it is profitable and the other party wants to continue work. This is often made by granting put or call options to the remaining or leaving part • THE DISSOLUTION often results in its liquidation in cases of hardship or deadlock, as also ruled out by law in many jurisdictions. • Deadlock: a standstill resulting from the opposition of two unrelenting forces or factions • the JV agreement has to determine the price of the shares. In case of non-performance of one party the price might have a penalizing character

  14. 3.3 Analysis of certain foreign regulations on joint ventures: China, Eastern Europe, South America CHINA • Praxis come to distinguish two forms of Joint Ventures: • Equity Joint Venture: the parties are shareholders of a limited liability company • Cooperative Joint Venture: the parties are free to choose between establishing a company (not Equity Joint Venture but any other Chinese company with limited liability) or not creating any new legal person and determine the cooperation by contracts

  15. Procedure of constituting an equity joint venture 1. Finding business partner 2. Preliminary negotiation – letter of intent 3. Feasibility study 4. Joint Venture agreement 5. Approval by MOFCOM (Ministry of Commerce) 6. Registration by SAIC (State Administration for Industry and Commerce) in order to gain business licence 7. Successive operations

  16. SOUTH AMERICA and RUSSIA • It is preferable having the share capital split between the shareholders in the following way: 49% - 51% • It should be better to rule the shareholders’ relationship by means of deadlock clauses in order to sort out deadlock events whenever they should occur • Intellectual properties -two possible solutions: • the intellectual property rights will be transferred into the JV (at NEWCO level) • The intellectual property rights will be ceased by means of a licence agreement from the shareholder, owner of the intellectual property, to the subsidiary of the NEWCO (under NEWCO level)

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