Joint Ventures, Prospects and Challenges in Ethiopi a

1. Joint Ventures, Prospects and Challenges in Ethiopia Ethiopia’s experiences and practices in promoting joint ventures, the challenges and the way forward. By Yohannes Woldegebriel Director, Arbitration Institute Addis Ababa Chamber of Commerce and Sectoral Associations

2. “If you can't beat 'em, join 'em. Two heads are better than one. United we stand.”

3. JV Defined • Legal Definition Black’s Law “A business undertaking by two or more persons engaged in a single or defined project”. • It could also be defined alternatively as “An agreement to conduct business for a single defined project or for a specific purpose to earn profit or share losses.”

4. ...JV Defined JV explained under investopedia • JVs represent a great way to pool capital and expertise and reduce the exposure of risk to all involved. • JV present some unique challenges as well. For instance, if party A comes up with an idea that allows the JV to flourish, what cut of the profits does party A get? Does the party simply receive a cut based on the original investment pool or is there recognition of the party's contribution above and beyond the initial stake?

5. JV Contrasted with other Joint efforts • Joint ownership, tenancy in common- lack feature of adventure • Alliance-much less rigid arrangement • Syndicate- association of individuals to conduct business often financial character. • Franchise – right granted by trademark/name owner without sharing profit/loss. • Consortium-association of persons intending to participate in common activity and achieve common goal. • Sub-contracting –an independent contractor employed to carry out certain work on his own way.

6. JV Contrasted with Partnership • Lack of Legal Personality • Secrecy nature • Limited purpose/duration • Joint management by partners-joint management of the joint venture • Personal nature of the relationship- not transferable. • Fiduciary Relationship-parties are required to maintain the strictest loyalty. • Informality –it could be formed in writing, orally or otherwise. • Non-continuity with death, incapacity, bankruptcy.

7. Types of Joint Venture • Contractual joint venture- arising from agreements of the parties. • Partnership joint venture- partners are jointly and severally liable to the fullest extent possible. • Corporate joint venture- a separate legal entity in which participants are shareholders.

8. JV from ownership stand point • Public-private joint venture • Private-private joint venture • Full junction joint venture -created by the merger of existing businesses • Non full function joint venture- sort of cooperative joint venture

9. JV From Jurisdiction stand point • International Joint Venture • Domestic Joint Venture

10. Advantages of JV • Flexibility in formation. • Management is shared among participants. • One or other partners can procure loan to the JV due to credit worthiness and enable the JV to get needed financial resource. • Profit and losses are shared. • JV do not pay corporate income tax.

11. …Advantages of JV • Capital. • Technology and knowhow. • plant, machinery and equipment. • Foreign engineers and technical personnel foreign technical expertis. • Management technique. • Sourcing of raw materials as an input to the JV. • Marketing of the JV products particularly exported products.

12. Disadvantages of JV • Liability is unlimited. • There is joint and several liability. • Lacks continuity. • Interest not transferable.

13. JV Under Ethiopian Law JV under 1960 Commercial Code • Contractual JV under the Commercial code involve elements of agreement ad hence it appears that there is an emphasis on contractual terms of JV parties. • Business Organization While the contractual element of JV is quite emphatic, the also provide that JV is also a business organization and not mere contractual relationship. Accordingly it is provided under the code that JV is one among the six types of business organizations under Ethiopia’s commercial code. However the following features if JV militate against JV’s classification under business organizations. • Secrecy- JV need not be known to third parties • Informality- need not be in writing, register or publicized. • No legal personality of its own. • No name of its own.

14. …JV Under 1960 commercial code Other Features • Applicability of principles of partnership • Joint Venture “is subject to the general principles of law relating to partnerships” and 272(4) of the Ethiopian commercial code(ECC). • The extent of liability of Joint Venture partners as between themselves can be limited by their memorandum of association (Article 276(2), but the liability of the manager to third parties is full and unlimited (276(1) (ECC) • partners who take part in the management of the business shall be jointly and severally liable as between themselves and with the manager (Article 276(4) (ECC).

15. JV Under Ethiopian Law • Corporate ‘Joint Venture’ As much as JV is a contractual arrangement under the Ethiopian Commercial Code, it should be noted that the code does not rule out the formation of corporate JV by choosing the following legal forms- partnership, private limited company, or share company. • The following are, however, the natural legal ramifications; • if two or more joint venture partners form a registered ordinary or general partnership, then the liability of the partners will be joint and several • If the joint venture partners form a limited partnership, then some of the partners (i.e. the general partners) will assume full, personal, and joint and several liability whereas the limited partners will be liable only to the extent of their contributions. • the joint venture partners form either a private limited company or share company, then their liability will be limited to the extent of their contributions.

16. JV Under The Dergue Regime International joint ventures were more common during the period of the Cold war where western firms, were interested to do business with communist countries behind the “iron curtain” and other closed countries. Such joint ventures were mostly between western firms and state enterprises. Two Major JV Legislations • Joint venture Establishment Proclamation No. 235 of 1983. • Joint Venture Council of State Special Decree No. 11, 1989.

17. … JV Under The Dergue Regime Parties to JV • Ethiopian State, state enterprise or financial agency capital on one hand • a)and foreign state, state enteprise, financial agency or private capital on the other. • B) between Ethiopian State, state enterprise or financial agency capital and Ethiopian cooperative or private capital on one hand and foreign state, state enterprise, finacial agency or private capital, jointly or severally on the other. Art.

18. … JV Under The Dergue Regime Other major features of JV • JV commence operation upon registration by authorised public office. • JV is entitled to be granted license or permit. • JV may in its own name, enter into contract, acquire ownership rights, undertake obligations, sue and be sued, use and dispose of its property. • Shareholders of the JV were liable for the JV liabilities only to the extent of their sharholdings and commitments in the JV.

19. JV under the New Investment lawProclamation no 769/2012 • Areas of investment that may be carried out jointly with government • - 1. Manufacturing of weapons 2. Ammunitions and 3. Explosives that may be used for producing weapons. • Telecom Services. • Capital requirement • Minimum capital required for a foreign investor investing jointly with foreign with domestic investor shall be $150,000 • The Minimum Capital required of a foreign investor investing in architectural or engineering works or related technical consultancy services, technical testing and analysis or in publishing work shall be USD 50,000 if the investment is made jointly with domestic investor.

20. JV under the New Investment law Proclamation no 769/2012 • Industrial Zone • Industrial zone development shall be undertaken by the federal government or where deemed necessary, by joint investment of government and private sector • JV Contrasted with “Kinijit” The emphasis in the proclamation is only about the joint investment in its literal sense, and this sense can be further evidenced by the Amharic version of the corresponding article, which uses the word “ቅንጅት” rather than the term “እሽሙርማኅበር” as used in the Commercial Code Amharic version.

21. JV Under Public Procurement Law • JV under public procurement and Property Administration Proclamation • This proclamation envisage some sort of public private joint venture (public private partnership investment through the private sector participation by a contractual arrangement between public body and a private sector enterprise as the concessionaire In which the concessionaire: • a) undertakes to perform or undertake any construction project or service or lease concession; • b) assumes substantial financial, technical and operational risks in connection with the performance of a public function or use of government property; and • c) receives consideration for performing a public function or utilizing government property, by way of fees from any public funds, user levies collected by the concessionaire from users or customers for a service provided by it, or a combination of such consideration.

22. JV Under Public Procurement Law The Minister of Finance and Economic Development may issue directive prescribing the rules governing the formation of Public Private Partnership and the modes of implementation of such partnership.

23. The way Forward for JV • A unified and integrated body of rules governing ‘joint ventures’ and responding to the current needs of JV is highly demanding • different rules and practices undertaken in various areas must be avoided. • the idea of ‘secrecy’ as one legal element for the joint venture arrangement should be retained but another type of JV that can be disclosed should be allowed. • limited liability joint venture for limited or specified projects with a legal personality should also be introduced in our legal framework with flexible legal requirements for its formations different from the requirements of other forms of business organization, and also with all the necessary solid corporate governance structures and protective clauses for minority shareholders to ensure their right for joint management. • tax laws should be revisited to accommodate tax liability issues to be raised in case of ‘joint venture’ companies, particularly flexible tax structure should be put in place to enable corporate joint venturers to pay their own profit taxes independently to avoid double taxation. • The ne laws of should also allow flexibility in formation.