While cross-border relationships with foreign customers, agents, distributors, manufacturers and other business partners involve substantial levels of interaction and exchange between the parties, perhaps the most challenging transnational collaboration is the “international joint venture”. The phrase “international joint venture” is not a precise term that describes a specific type of transaction. Rather, it is a more general term of art that encompasses a wide variety of transactions whereby the participants in a joint venture pool their resources to cooperate in the achievement of a common objective. In the transnational context, this frequently involves one company entering a foreign market through a joint venture arrangement with a foreign firm, but many joint ventures are more flexible, and often more complex, than that. The joint venture relationship is shaped by an ever-evolving calculus of law, the confidence each party has in the other and the cultural and business systems of the countries involved.
Businesspeople often use the term “joint venture” to describe a wide range of collaborative relationships and, in fact, business partners often base their relationship on specific contractual obligations, such as a fairly short and loosely worded agreement to “work together” in a specific area perhaps accompanied by a common form of commercial contract such as a license or distribution agreement. What we’re talking here, however, is joint ventures that use a separate business entity (e.g., a corporation, partnership or limited liability company (“LLC”)) to conduct the specified business activities. Use of a separate entity allows the parties to limit the liability associated with the relationship and may even be required for alliances with local partners in various foreign countries formed to engage in specific activities in a mutually defined customer or geographic market.
The participants in an international joint venture are generally business units of the respective parties, perhaps a division or a wholly-owned subsidiary. A U.S. company entering into an international joint venture may elect to have its ownership interest in the joint venture acquired by its international division or a continental or national affiliate. Both parties would have the right to designate members to serve on the board of directors (or other managing board or committee) of the joint venture entity and would make other contributions of cash, assets and other resources. However, if the entity is organized under the laws of the local party’s country the U.S. company must take precautions to understand the default rules applicable to such entities and the degree of flexibility the owners of such an entity have to deviate from those rules by agreement or through provisions in the charter documents.
Parties to an international joint venture are motivated by a variety of factors and the goals and objectives identified by the party certain influence the form of the joint venture and the activities that will be conducted in the name of, and using the resources contributed to, the joint venture. Among other things, joint ventures may be used to share risks, achieve and maintain economies of scale, efficiently and successfully gain access to new markets, tap into financial resources that may not be available internally or through other outside sources, overcome barriers to acquisition or as a prelude to an acquisition once the parties have gathered experience about whether they are good fit for full integration by working together in a joint venture.
The advantages and disadvantages of a joint venture structure are similar to those applicable to any type of strategic alliance. In addition, however, parties may select an equity joint venture, rather than using a network of contractual agreements, in situations where both parties want to be directly involved in the management of various key functions. Moreover, a joint venture can be used to achieve a commonality of interests, and reduce the risks of opportunistic behavior by the parties, when valuing intangible assets that require further development. The use of an independent entity is also believed to accelerate the transfer of knowledge required for a successful collaboration. Finally, a joint venture is a common strategy for establishing business activities in a new foreign country in reliance on the resources of a local party.
You can learn more about forming, managing, operating and termination international joint ventures in new Chapter 284 of Business Transactions Solutions. Even better, if you have the time please join the series of programs on International Joint Ventures that will be available this month on West Legal Ed Center. We’ve already completed the first one, which you can listen to at your leisure, and the next one is coming up next Thursday, March 17th. Click here for more information.
Titles by Alan Gutterman
Understanding Legal Needs of Technology Companies: Leading Lawyers on Performing a Legal Audit, Managing Financial Risk, and Prioritizing Legal Needs (Inside the Minds)
Legal Compliance Checkups: Business Clients
Business Entities (California Transactions Forms)
Business Transactions (California Transactions Forms)
Buying a Business: What You Need to Know (Quick Prep)
Business Transactions Solution (WestlawNext™ PRO)
Business Counselor’s Law & Compliance Practice Manual, 2014 ed.
Corporate Counsel’s Guide to Strategic Alliances, 2014 ed.
Corporate Counsel’s Guide to Strategic Alliances with Forms on CD, 2014 ed.
Corporate Counsel’s Guide to Technology Management and Transactions, 2014 ed.
Corporate Counsel’s Guide to Technology Management and Transactions with Forms on CD, 2014 ed.
Hildebrandt Handbook of Law Firm Management, 2015 ed.
Going Global: A Guide to Building an International Business, 2015 ed.
Going Global: A Guide to Building an International Business with Forms on CD, 2015 ed.
Business Counselor’s Guide to Organizational Management, 2012 ed.
The post International Joint Ventures: A Challenging, Yet Rewarding, Strategy for Going Global appeared first on Legal Solutions Blog.