Posted: April 29th, 2015

Q1: Joint venture is a commercial arrangement of two or more economically independent entities, for mutual gain.

Q1: Joint venture is a commercial arrangement of two or more economically independent entities, for mutual gain.

•    The legal form of JV depends on the nature and size of enterprise, anticipated length of the venture, the identity, and location of the venturers and the commercial and financial objectives of the participants.
•    Legal structure for JV (equity based, Contractual based)
o    jointly owned corporation or group of corporations.
o    a limited liability company (i.e. a corporate vehicle).
o    a partnership or limited partnership (i.e. an unincorporated vehicle).
o    a contractual co-operation agreement (non-equity).
•    Majority of ongoing business ventures tend to use a corporate vehicle whose share capital is divided between the joint venturers.
•    In corporate vehicle, the participants have the benefit of a limited liability and the flexibility to raise finance, also the change in the share ownership will not have a big effect on the company.
•    Consortium or Co-operation agreement: participants agree to associate as independent contractors rather than shareholders in a company or partners in a legal partnership. (Indemnity should be included in the agreement under which party will indemnify the other for any losses that causes through the actions of the co-participants.
•    Deadlock: any problems in the voting of directors between the companies of JV, or opposing views of directors.
•    Deadlock can be found in Chairman’s casting vote, outsider, and reference to shareholders.
•    To solve deadlock for contractual based JV, “Russian Roulette” or “Texas Shootout”.
o    Russian Roulette: if (company A) offer to buy shares of (company B) at an undervalued price, and the (company B) rejected the offer, then the company B must buy the shares of (company A) at the same undervalued price offered and (company A) is obliged to sell its shares to (company B).
o    Texas Shootout: each party send a sealed bid to buy out the other party The sealed bids are opened together, and the highest sealed bid “wins”, and that bidder must then buy (and the “loser” must sell) the other half share in the business.
o    Although the two options terminate the relationship between the parties, they do ensure the business of the venture continues.
o    Voluntary liquidation of the JV, to speed up any ongoing negotiations within the time framework for deadlocks, and it acts as an exit from the JV.
•    If a minority shareholder holds 25% of the voting capital under the law of Northern Island he will have the power to block some resolutions such as resolution to reduce share capital. But he cannot block ordinary resolutions decided by a majority vote.
•    Transfer of Employment Undertakings (TUPE) (Protection of employment): automatically the employment transfer to the JV.
•    If the joint venture is to set up a new business, TUPE is unlikely to apply and so the joint venture must obtain the relevant employees’ consent to the transfer. In order to ascertain the risk involved in setting up any joint venture it is important that employment advice is sought.
•    Overseas jurisdiction: one or more of the participants or any part of the JV business is based outside of Northern Ireland.
•    Alliances between companies in increasing by 25% a year but the failure rate for alliances is very high could reach round 60% to 70%.
•    There are many business arrangements for the alliances to follow, but these arrangements are not enough to achieve successful alliances between companies.
•    Alliances need a high degree of interdependence as well as the ability to navigate and to recognize the differences between the partners’ strengths and operating styles.
•    There are five principles to alliance management, which means placing less emphasis on some part of the idea and more emphasis on the other part.
•    Principle 1: “focus less on defining the business plan and more on how you’ll work together”. The relationship between partners is the key of success for alliances more than just to focus on the business plan, goals, and contract. Individuals on both sides must work as if the same company employed them, know how counterparts operate, what their decisions, what their resources are, and how they share information. All these require a clear understanding of each partner’s organizational structure, policies and procedures, and culture and norms.
•    Principle 2: “develop metrics pegged not only to alliance goals but also to alliance progress”. Not to focus only on outcomes and results as a financial value but to focus on performance, progress, and commitments.
•    Principle 3: “instead of trying to eliminate differences, leverage them to create value”. Differences between alliances could be bad for both partners in terms of performance or process, so the partners should come up with leveraging those differences in a way that could be benefit for both sides and willing to acknowledge their weaknesses and limitation, and how to strengthen these weaknesses from the alliances leveraged differences.
•    Principle 4: “Go beyond formal governance structures to encourage collaborative behavior”. Partners should engage in more business collaborations rather than just conducting formal governance structures. Alliance behavioral and how to collaborate and contribute to prevent any mistakes by working together not by blaming each other. An alliance needs to share relevant information in order to adopt a concept that will enable an alliance to productively diagnose problems that will result to achieving future milestones. 90% of companies who adopted the concept of collaborative mind-set and behaviors were able to achieve success in their business.
•    Principle 5: “spend as much time on managing internal stakeholders as on managing the relationship with your partner”. Inconsistent behavior could happen from the partner organization that could lead to insufficient internal alignment and damage control. So companies need to spend more time with alliance to not lose control. It is not an easy task to align the company’s business processes carried out by various business functions with the overall alliance contribution to the business. Business partners need to develop strong corporate governance that is based on trust, in terms of information shared, commitments, and consistent behavior.
•    Alliance management is facing crisis as companies think that investment in alliances could increase growth, the idea is incomplete because they need to incorporate the practices described in the article.
•    To protect your interest in JV:
o    Incorporate a right of veto.
o    Ask for the establishment of “reserved matters”. This means that when it comes to certain matters then the board will not be allowed to deal with them, instead the joint shareholders agreement becomes a requirement.
o    Permanent representative in the board includes all board committee.
o    Equity ratio protection.
o    Any quorum required your representative, but this is unlikely to be accepted as it creates deadlock when you refuse to attend.
o    Access to all information.
o    Do not enter JV without creating exit plan, for your investments.