This week's report includes several useful checklists relating to forming an international joint venture. Topics covered include matters to consider when forming a joint venture, matters to consider when drafting a shareholders' or partnership agreement for a joint venture and the steps that need to be completed in order to form a joint venture.
Once a new joint venture corporation, partnership or limited liability company has been formed, organized and capitalized it's time to get down to the day-to-day operation of the new business and the attached Primer on Joint Venture Operational Activities provides an overview of what's in store.
Negotiating and operating a joint venture is a time-consuming and risky undertaking that requires a good deal of advance thought. It is generally recommended that the parties take the time to sit down and hammer out the basic terms in a memorandum of understanding to identify potential issues and problems and lay out the timeline for proceeding. A checklist of topics typically covered as part of any comprehensive "MOU" is a helpful business tool.
Formation of a new joint venture as a separate entity calls for consideration of many of the same issues that must be faced when starting any new business. One of the most important is the governance structure, a topic covered in detail in the attached Primer.
When forming a new joint venture as a separate entity the parties will spend a good deal of time negotiating and drafting a shareholders' agreement (or an operating agreement if the JV will be formed as a limited liability company). In order to assist in that process and make sure that all of the major issues are considered it's recommended that the attached checklist be used as a reference.
The May 2015 Business Counselor Update includes updated and expanded coverage of one of the most well-known and important forms of strategic alliances: joint ventures. The library in Business Transactions Solutions now includes four chapters on the subject beginning with Structuring and Negotiating Joint Ventures (Ch. 248) and then continuing with chapters focusing on the life cycle of a joint venture: Formation of Joint Ventures (Ch. 249), Managing and Operating Joint Ventures (Ch. 250) and Termination of Joint Ventures (Ch. 251). Each chapter has an extensive library of forms and checklists and detailed commentary and practical aspects of setting up a joint venture and managing it successfully. Key topics includes categories and purposes of joint ventures, letters of intents, formation and operation agreements, ancillary agreements between the joint venture and the parties for various types of support to the joint venture, documentation for assignment of a joint venture interest, and dissolution agreements. To see the materials log on to Westlaw Next and search for Business Transactions Solutions.
So-called “equity joint ventures” are collaborations between two or more business partners that involve the formation of a separate legal entity, such as a corporation or LLC, within which the joint activities will occur. An equity joint venture should be contrasted with “contractual” joint ventures, which have become a popular topic among lawyers and managers. The distinction between an equity joint venture and a contractual joint venture can be illustrated by comparing the manner in which a United States manufacturer might enter a new foreign market. If the equity joint venture strategy is used, the manufacturer might form a new corporation jointly owned with a foreign partner. The United States party would contribute a license which would allow the joint venture to manufacture the products. The local party might contribute manufacturing facilities and any needed capital and personnel and agree to act as the local distributor for the joint venture. In that case, the parties will share the profits of the joint venture. Alternatively, instead of forming a new corporation, the United States party might use one or more “contractual” relationships, such as license and distribution agreements with the local party, to achieve the desired result of sales in the new foreign market without using a separate joint venture entity.
The formation and use of an equity joint venture, referred to hereafter simply as a “joint venture,” must take into account all of the same issues which are generally encountered with any new business enterprise. For example, each of the joint venture partners will contribute various resources and skills to the new enterprise, including products; financing; personnel; facilities; raw materials; and marketing, managerial and operational expertise. These contributions may take the form of direct investment in the joint venture or may be provided under the terms of one or more ancillary agreements between the joint venture entity and the partners. The partners must also agree on a number of issues regarding the management and operation of the enterprise.
Assuming that the corporate form is elected for the joint venture, the basic structural components would be as follows: articles of incorporation and bylaws; a shareholders’ agreement that would cover essential issues such as formation procedures, capital contributions, governance and termination of the joint venture; and ancillary agreements covering any services to be provided to the entity by the parties, as well as any agreements with respect to the purchase of products developed or manufactured by the joint venture or the use of the assets of the joint venture by the parties in activities that may, or may not, be related to the specific purpose of the joint venture. Among the various agreements are an administrative services agreement; a supply agreement; an equipment purchase agreement; one or more licenses with respect to technology or manufacturing rights; one or more distribution agreements; and an agreement with respect to the lease, acquisition or construction of facilities.
The procedures to be followed regarding the formation of the entity are typically specified by relevant laws in the jurisdiction in which the entity is to be organized. For example, formation of a new general partnership in the United States to conduct the joint venture activities will be governed by the applicable state partnership statutes, formation of a new LLC to conduct the joint venture activities will be governed by the applicable state LLC statutes, and formation of a new corporation for the joint venture requires compliance with applicable corporations law statutes. For larger transactions, the parties may enter into a master formation of joint venture transaction agreement which sets out in detail the steps that will be taken to form and organize the new entity and accept the contributions that each of the parties has committed to the joint venture. This approach may be appropriate when the parties are both public companies contributing a substantial amount of their assets to the joint venture since such a transaction may require regulatory and shareholders' approvals that will take a substantial amount of time.
To learn more about the structural components of equity joint ventures, see Chapter 103 of my Westlaw Next online publication Business Transactions Solution.
The chapter on Joint Ventures in my Westlaw Next product Business Transactions Solution (§§ 103:1 et seq.) provides detailed coverage of the formation, management and termination of joint ventures. For attorneys that need to move quickly in counseling their clients about joint ventures, we have created a practice toolkit that includes a library of checklists beginning with a transaction checklist that can be used in negotiating and drafting the documentation for use in a corporate joint venture arrangement. See Specialty Form at § 103:22. Additional checklists may be useful for certain aspects of forming and organizing a joint venture including a checklist that covers various legal issues as well as key provisions in the joint venture documentation. See Specialty Form at § 103:22.10. It is also useful to have a checklist of the key matters to consider when drafting a shareholders’ or partnership agreement to be sure that nothing is missed during the process of negotiating and finalizing that important document. See Specialty Form at § 103:22.20. Counsel may also want to prepare a checklist for closing procedures. See Specialty Form at § 103:22.30. In addition, when considering what type of legal entity to choose for a joint venture a checklist that covers each of the key factors, and differences among the potential entity choices (i.e., partnerships, corporations and limited liability companies), can be a useful tool to refer to when talking to clients. See Specialty Form at § 103:22.40. Checklists are also helpful in drafting management and operational provisions (see Specialty Form at § 103:22.50) and for planning on how to terminate the joint venture (see Specialty Form at § 103:22.60).
Joint ventures are an important transactional tool for companies looking to develop strategic alliances. If, after the exchange of information and preliminary due diligence information, the parties are still interested in pursuing the joint venture, the next step usually is the negotiation of a letter of intent or memorandum of understanding. Although there is no legal or other requirement for such a letter or memorandum, and the parties may wish to make it clear in the document itself that the agreement is not intended to be binding, it serves to memorialize the fundamental understandings and intentions of the parties. It also can be used to obtain any necessary legal or regulatory authority necessary for further negotiation of the joint venture, and it clearly is the first step toward a definitive set of joint venture agreements and documents. Finally, a letter of intent or memorandum of understanding is generally taken as an assurance that both parties are serious and, in fact, the document will often include a covenant from both parties that they will not attempt to locate an alternative joint venture partner for some period of time while they attempt to complete their own negotiations.
While there is no standard form to be followed in drafting the letter of intent or memorandum of understanding, it should be detailed enough to provide a skeleton of the proposed joint venture. The letter of intent should also describe in some detail certain obligations that are unique to the activities of the proposed joint venture. For example, a letter of intent for a joint venture between a large party and a smaller party to support development of the smaller party’s innovative technologies might include terms relating to funding of the development work by the large party and the ability of the large party to terminate the joint venture and acquire ownership of the technology by issuing shares of its stock to the smaller party. This type of arrangement provides the smaller party with the capital required to continue developing its technologies; however, as opposed to seeking a return on its investment through sales of products based on the technologies it will look to appreciation in the value of the shares it will be receiving from the larger party. For its part, the larger party will typically demand control of the board of directors of the joint venture and a larger ownership percentage of the joint venture and will insist that the smaller party provide a detailed business plan that will be used to measure progress toward the desired technological development.
For detailed discussion of joint ventures, and examples of the forms of documents referred to above, see Business Transactions Solution on Westlaw Next.
In my latest contribution to Business Law Currents I provided readers with a “Top Dozen” list of the issues that attorneys should discussed with their clients before taking on the onerous and challenging task of negotiating and documenting the terms of a new joint venture. Certainly a list of 12 issues will not capture all the details that must be considered in documenting a joint venture; however, the exercise will almost certainly focus the principals on the areas that are key influences on the success of the collaboration.