JOINT VENTURE NEGOTIATIONS – Practical & Legal Issues

1. JOINT VENTURE NEGOTIATIONS – Practical & Legal Issues 23 July 2014 Courtyard Marriott, POS

2. Objectives of Presentation Focus on joint venturing as strategy to develop and expand business operations and to access overseas markets

3. 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

4. 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

5. Why Joint Venture? Synergies created by joining forces bring greater impact, capacity and efficiency than the sum of the separate businesses

6. 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

7. Rationale for Joint Ventures • Development of New Products • Increased Technical Expertise • Sharing of Risks and Costs • Strategic Move against Competition

8. 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

9. 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

10. 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

11. 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.

12. 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

13. 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

14. Indirect Joint Ventures • Licencing • Grant licences or franchises • Strong control of franchisor • Contract Manufacturing • E.g. Textiles and clothing

15. Finding Strategic Partner • Develop business strategy & plan • Clarify objectives & contribution of partner • Clarify duration • Assess risk

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. Legal Issues con’d • Governance • Management & decision-making • Reporting & information sharing • Capital development • Dispute resolution • Governing law • Understanding law of forum • Exit strategy

27. Structure of JV • Limited liability company, unlike partnership, restricts liability of partners in event of JV fails and is wound up

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. Other Arrangements • Licensing arrangement • Management Contract • Collaboration Agreement

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