Executing a Global Growth Agenda: Cross-Border Joint Ventures
Joint ventures ("JVs"), whether in the form of equal investments, or other forms of equity or other strategic minority investments, are often a preferred business development strategy for U.S. businesses looking for growth in international markets. Reasons to enter into such JVs are manifold, including that JVs provide: (a) easier access to capital, (b) easier access to new geographic markets, especially those that are either otherwise closed to international investors, or where local regulatory schemes make it difficult to go it alone, (c) easier access to technology and expertise, (d) synergies by way of sharing costs of large scale investments, and (e) risk management and risk sharing in uncertain markets. However, despite such inherent advantages in using JVs as a business development strategy, joint venturers quite often do not fully align their goals for the JV and the timeframe within which joint venturers expect to achieve such goals. As a result, tensions may arise between the joint venturers even as the JV is taking off the ground, which sows the seeds of a failure down the road. Therefore, management change should give due consideration to certain specific "soft issues" listed below. Honest discussions in respect of these exploratory themes significantly impact the documentation of the governance, funding, and exit and liquidity rights in the JV agreement, each of which in turn has a lasting impact on the formation and, ultimately, the success of the JV.
Initial Considerations
1. Strategy: The relative importance of the JV to each joint venturer may be vastly different because of their different strategic interests. This in turn affects the degree of integration of the joint venturers in the JV. Accordingly, alignment of interests is a critical element to a successful JV, and such alignment can be better achieved by appropriately valuing the assets and any services to be provided to the JV by the joint venturers, specifying clearly the goals for the early years of the JV, and ultimately, documenting such goals in the JV agreement.
2. Organizational Behavior: Cultural differences among the joint venturers, and conflicting incentives that may drive each of the joint venturers, require that certain key employees of each joint venturer spend a certain minimum amount of time in connection with the activities of the JV. Typically, a smaller subset of employees is seconded full time to the JV for a specified duration so as to focus on building the JV from the ground up and ensuring its success.
3. Governance: Typically, because joint venturers share the decision making at the JV level and because each joint venturer may have different decision making processes (e.g., difference in reporting systems, processes, and metrics that are followed by the joint-venturers), governance of the JV can be complicated. In order to provide for more efficient governance and decision making, a JV should consider forgoing a linear flow of decision making in the JV and instead devising carefully crafted roles and responsibilities for each joint venturer.
4. Economics: Joint venturers may desire to (a) have geographic and other restrictions on the operations of the JV, (b) engage in certain business opportunities outside the JV when such business opportunities could also be explored by the JV, (c) provide ongoing services, staffing and other resources to the JV, and may charge market rates for such items. All of these issues affect the economics of the JV, and may lead to a misalignment of interests among the joint venturers.
In addition, in respect of international JVs, especially in emerging markets, certain issues must be given due consideration with deference to nuances arising from these JVs operating in the international context:
Additional Nuances
1. Diligence of Joint Venturers: Joint venturers should be carefully diligenced. A joint venturer should carefully diligence the nature of business in which the JV will be operating, and the reputation of the other proposed joint venturers. Such diligence includes undertaking standard corporate and organizational due diligence, as well as undertaking background checks on the principals and other controlling persons by employing the services of investigative firms that specialize in this area. Although it is always prudent for a business to know the counterparty, this background diligence is even more important in the context of JVs because of the increased focus of U.S. and other international governmental agencies on anti-bribery and other anti-corruption issues, including Foreign Corrupt Practices Act compliance.
2. Operational Control and Oversight: Maintaining operational control of the JV, and diligent oversight over the activities of the JV, is critical for JVs operating in international markets. The JV should otherwise maintain strict compliance procedures, including maintaining controls over the bank accounts of the JV, and appropriate books and records with an eye toward Foreign Corrupt Practices Act and other anti-bribery acts compliance so as to minimize the risk, reputational and otherwise, to the JV and to the joint venturer. This requires managing relationships and interactions between senior executives of the joint venturers, and otherwise having non-linear reporting channels in place.
3. Safeguarding Intellectual Property: Safeguarding proprietary technology is a critical item for all JVs, but especially for those operating in emerging markets because the enforcement of intellectual property rights in these markets is different, and often less protective, from that in the United States. Typically, JVs limit access of JV personnel to such technology on a "need to know" basis. In addition, most often JVs limit the intellectual property brought to the JVs as ready-to-use technology and equipment rather than basic prior art so as to avoid such intellectual property being pilfered by rogue personnel.
4. Arbitration in Neutral Venues: Joint-venturers typically seek to avoid getting stuck in local litigation quagmires. As a result, depending upon the identity of the joint venturers, the JV agreements will often provide for mediation and arbitration in neutral venues such as London, Singapore, Paris, etc. Further, a good practice is to carve out from such provisions any local laws that may otherwise seek to bring the joint venturer within the purview of the local legal regimes.
5. Maintaining Ownership: If one of the joint venturers considers the JV to be of strategic importance, it may be critical for such a joint venturer to have the ability to take control of the JV in due course. However, certain countries permit only minority ownership of domestic entities by foreign persons. In such situations, it may be appropriate to negotiate for options or other "creeping acquisition" rights (i.e., ability to acquire such higher percentage of ownership as may be permitted in future under applicable local laws at a certain pre-determined price) that would allow the joint venturer to, as closely as possible, achieve the business deal it sought through the JV while complying with local laws.
Conclusion
Businesses looking to advance a long-term growth agenda can possibly achieve such growth by carefully curating a set of strategic investments in the international markets. A JV strategy can be highly potent and give a business time to get acquainted with the new markets without spending to acquire 100% of the business in an unfamiliar market. However, successful execution of such a strategy typically requires careful advance preparation, thoughtful implementation that takes into account strategic considerations, and simple but well-designed deal structures that leave room for sophisticated implementation but do not prove to be impediments in negotiating with regulators.