What is in this article?:
A joint venture may make sense for lots of reasons, but how it is established is critical to its success. Partnership is a big step. Look before you leap!
- Defining governance, control
- Defining partners’ obligations
- Documenting the exit strategies
There are many good reasons for a forger (or any manufacturing company) to enter into a “joint venture”: Joining with another industry player or competitor can expedite a producer’s entry into a new geographic region or product market, provide a way to share the cost and risk of a new venture, or allow companies with different capabilities to combine their specialties in a manner that benefits each of them. In a foreign country, it can provide a partner knowledgeable about local business and markets, or a mechanism for investment that otherwise would be prohibited by local regulations.
However, statistics show that many JVs fail, and often it is because they aren’t fully and carefully considered at the outset. While lawyers should actively participate in the planning and documenting stage — and three critical, legal aspects of a JV’s formation are examined below — it is a big mistake to turn the process over to lawyers exclusively. Before you sign any JV agreement your organization’s operations people must spend a lot of time, alone and together with the potential JV partner, talking through “what if” scenarios and making sure that the JV partners’ expectations, culture, and goals are aligned.
Properly planning and documenting a joint venture is critical to ensuring that all relevant issues are addressed and that the parties’ agreements are accurately expressed.
Defining Governance and Control — Once a JV is proposed, the first legal consideration must be to define how it is to be governed. There is no legally required structure for a JV; the form depends upon the scope and duration of the joint venture, and tax, accounting, intellectual property, and antitrust considerations. Often, a new limited liability company (LLC) or corporation is formed through which the JV operates. Sometimes, no legal entity is formed and a JV is established the form of a complicated contract.
No matter the form of the JV, it must be managed and controlled by a board or other governing body. How will the members of the governing body be appointed? Will it reflect the partners’ ownership shares or some other allocation? In a 50/50 joint venture, it’s typical for half the board members to be appointed by each partner. If one party contributes greater resources, it will want control of the governing body.
Sometimes the law of the jurisdiction where the JV is located will prohibit foreign majority ownership. For example, Chinese regulations prohibit foreign control of investments that are deemed to be in the national interest or that compete with state sanctioned monopolies or favored domestic industries.
Will the JV be managed by a president or other officer? The JV agreements must spell out clearly which decisions will be made by the officers and which decisions must be made by the governing body. If the governing body is controlled equally (50/50) by the parties, then all decisions of the governing body must be agreed upon by the parties. But, if a majority of the governing body is appointed by one party, the other (minority) party should request the protection of “super majority” provisions applicable to specified decisions.
For example, how significant must a contract be before it must be approved by the governing body? And then, how significant must a contract be before it must be approved by both majority and minority JV partners? What about taking on debt? Issuing stock? Buying property? Buying out a member? Buying significant equipment? Approving a business plan? Adding a new JV partner? The JV documents should clearly address the mechanism for making these and a myriad of other decisions.