International JVs

Particular Risks

A joint venture may be established by parties from different jurisdictions. This may involve a company with a proprietary brand or product entering a market abroad with a local joint venture “partner” who is already established in the latter state. An international joint venture may involve two or more parties, perhaps from one or more states, undertaking a project in a third state.

International joint ventures raise an additional level of complexity as they involve the laws and business norms of two (or more jurisdictions) and their interaction.  Considerations of local law, tax, regulation, culture and politics arise.  The risks may be significant. The rule of law may be weak. The currency may be soft. The investment may not be easy to realise.

It may be that there are better alternatives to a joint venture. There may be risks that the local partner is not reliable and that it would be better to establish a local subsidiary or branch. There may be broader political, economic and legal risks such that it would be preferable to enter a distribution or commercial agency agreement or contract with a local party as an advisor.

Rule of Law and Expropriation

The rule of law may not be as strong in some jurisdictions as it is in more developed jurisdictions. Less developed states are more likely to apply legal restrictions on the ownership of shares and the repatriation of profits.

There may be unpredictability in terms of future changes of law, the risk of expropriation and the enforcement of property rights including intellectual property and security. The judicial system may not be reliable. There may be exchange controls on converting local currency.

The domestic party may be contributing technology to the joint venture party. The terms of the technology transfer should be clearly provided for. Intellectual property law in the jurisdiction may not be developed. Consideration should be given to how the integrity of the intellectual property rights may be maintained.

Many international trade agreements between states contain special provisions in respect of investment. Often investors are given direct rights of access to remedies in order to enforce their proprietary investment rights against the government. This differs from almost all other provisions of such agreements which are binding as between states only.

Local Corporate Law

Questions may arise as to whether a local corporate should be employed as the joint venture vehicle or whether a corporation formed under the laws of another jurisdiction is more desirable, if possible under local laws.

The corporate laws/company law of the jurisdiction concerned must be considered. The laws of most jurisdictions provide for corporate structures which are broadly similar to those which apply to domestic companies.

The ability of the local company’s legislation to provide for the requisite management and decision-making structures and procedure should be confirmed. There may be a governmental requirement in the foreign jurisdiction that the local party maintains a certain interest.

The financial accounting framework of the local jurisdiction should be considered. The appointment of local auditors may be required or be desirable. The joint venture agreement may require the joint venture company’s accounts to be prepared in accordance with a more familiar international financial reporting framework than that which applies in the local jurisdiction.

The joint venture agreement / shareholders agreement required may be adapted so as to be in a form which is customary in the state. It may need to be in the language concerned. It may need to be governed by local law and be subject to local courts. In many civil law jurisdictions, documents must be authenticated by way of notarisation before a quasi-public official, a notary.

Local Regulatory Matters

Consents or licenses may be required for the foreign ownership of shares. Consents or licenses may be required for undertaking the particular business in that the jurisdiction which might not be required for the same business in other jurisdictions.

Local lawyers are likely be engaged in relation to issues such as the choice of legal structure (company, partnership or equivalents), local tax, licensing and regulation, controls on foreign participation, real property rights, exchange control, capital investment requirements, environmental laws, technology transfer rules, local employment laws, intellectual property laws, liability issues, dispute resolution and the enforceability of rights generally.

Status of Parties and Local Partner

The identity of the parties with obligations on both sides and of the joint venture entity should be considered. In some cases, a parent holding companies may guarantee transactions where the relevant participating entity party has no financial substance. In other cases, bank guarantees and indemnities may be required to support finance or the availability of government grants and repayment obligations.

The status of the local party and the joint venture company will need careful examination. A confirmation may be required from a lawyer in the jurisdiction that the local party’s obligations under the agreement are binding on it.

Ideally, due diligence should be undertaken in relation to legal, tax and financial issues, which relate to the local partner. The domestic joint venturer may require confirmation from the foreign party in the jurisdiction of establishment  that there has been disclosure of all material facts likely to affect the decision to partake in the joint venture

If a corporate vehicle has been recently established, representations and warranties may be given by the local partner who has established it in respect of basic matters including

  • incorporation;
  • its good standing
  • the existence of required licenses and authorities;
  • its ability to participate in the joint venture arrangement;
  • the absence of third-party rights, claims and litigation.

Capital and Investment

The capital requirements and input of each of the parties should be the defined. The local party may be contributing real property, local rights, existing licenses, goodwill, and ongoing operational control of the business in the foreign jurisdiction.

The capital structure will define the basic proprietary and participatory rights of the parties. This should be structured in accordance with their commercial agreement. Considerations of finance, long-term and short-term must be dealt with.

The extraction of dividends and a capital return is a critical matter. There may be restrictions under local law on the repatriation of profits. There may be currency controls for the purpose of maintaining the value of the local currency.

The presence or absence of a double tax treaty will be significant. If there is none, consideration must be given to whether unilateral relief might be available in the home jurisdiction.

An exit strategy should be developed. The necessary mechanisms for disposal, winding up and realisation should be provided for. This may arise at the termination of the investment whether successful or unsuccessful, where a prolonged deadlock arises, or there is a failure to meet performance standards. The relevant commercial terms should be enforceable under local law.

Governing Law

Parties may choose the national law of the state most closely associated with the venture. They may choose the national law of one of the investing parties. They may choose a neutral jurisdiction, whose laws whose rules for contractual interpretation and enforcement are well-developed (commonly England and Wales or New York State).

Where a state is a party to the agreement, or there is a fear that laws may change, the parties may agree that the local law applies, but that it is to be frozen as on the date of the agreement. This seeks to avoid later changes in the law which adversely affect the interests of the investing party.

In some exceptional cases, the parties may provide that the agreement is to be governed by general principles of law. They may allow the arbitrator to act “ex aequo et bono” (in equity and good conscience). These clauses are undesirable and lack certainty.

The clauses might be used as the last resort where no other agreement is possible. The concept is better developed and understood in civil law jurisdictions from which it originated. It allows the tribunal not to apply strict legal rules where this would lead to an inequitable outcome.

Dispute Resolution

A dispute resolution mechanism is essential. The investing party may not be sufficiently familiar with or have sufficient confidence in the laws of the local jurisdiction. Commonly international joint venture agreements provide for the arbitration of disputes.

Where arbitration is chosen, the agreement should specify the rules which apply and the mechanisms for appointment of the arbitrator. The governing law should be specified. The investing party may prefer to choose its own governing law. The law of the place of arbitration generally governs the conduct of the proceedings, but not necessarily the substantive law that applies.

Consideration should be given to whether the state concerned is party to international conventions on recognition and enforcement of arbitration. Consideration should be given to the existence of bilateral or multilateral trade agreements with protection for investors.