Joint venture is a legal entity in the nature of a partnership engaged in the joint understanding of a particular transaction for mutual profit. It is basically an association of persons or companies jointly undertaking some commercial enterprise. Generally, all contribute assets and share risk. Several steps are required to establish a joint venture agreement. The first step is to identify an appropriate joint venture partner after negotiation the parties may precede to signing of Joint Venture Agreement (JVA).
Although the partners to a joint venture will obviously have some interests in common, they will just as obviously have some that are not. A saying “some bed, different dreams” nicely captures the situation in which joint venture partners may find themselves. One can predict in a general way how differences and tensions can arise and develop over the life of a joint venture. Since JVA determines the rights and obligation of parties, it is important to view that what clauses of JVA are to be viewed in order to safeguard the rights of the parties and to minimise the emerging tensions. For example, JVA formation requires contributions from the parties; therefore, one has to look into the risk posed by currency fluctuations, money repatriation and to conform to regulatory requirements. In many countries, particularly in the developing countries, there are restrictions on repatriation of money and many stops are required including several approvals from that central bank. Hedging of currency may also be required where there are too many fluctuations, contributions of payments relating to royalties and technology transfer may cause tension between the partners.
The issue relating to technology and royalties require special attention. JVA has to specify contributions and conditions of licence, grant back and its termination. There exists a risk of ambiguity and the same may lead to dispute and litigation. For example, the local partner wants the most advanced technologies. Whereas the foreign partner may be interested to use outmoded technology since in his view it is appropriate for the country where joint investment is being made. At the same time foreign partner may wish to place restrictions on the use of its technology to safeguard its intellectual property rights. The local partner may resist these restrictions. The local partner may resist the continuing payments of royalties to its foreign partner once the technology has been learned, and if there is improvement who owns the improvement, it becomes another question of difference as the foreign partner may see these changes as part of his technology and the local partner tends to see them as JVA property.
Distributions and cash management is another important area for attention. The issues in this regard may be the requirements of minimum cash and the structuring of finance for the purpose of tax distributions. This is also important from procurement perspective as each partner may have preference from the firms from which goods are to be purchased. JVA foreign partner may prefer to purchase from his related or friendly companies or from its subsidiaries. The other partner may resist such efforts.
Another issue relates to the presence of family member of a partner including friends in the management of JV. Foreign partner may not like that. At times foreign partner may stand disturbed when trained employees are transferred to local partner’s other operations. Similarly, the local partner may resist rotating of employees by the foreign partner.
The local partner under the directions of the local government may like to export goods produced. This may trouble the foreign partner who may himself be supplying these goods to the same markets. The role may also be reversed when foreign partner wants to market its finished goods in the local market through other firms. Also expansion decision may cause tensions where additional funds are required.
Then comes the decisions regarding dividends and future investment. In typical cases, local partner may want a higher percentage of profits whereas foreign partner may be prepared to reinvest. The local partner may be under pressure from the local government to show earnings and return more quickly. These conflicting interests lead to tensions.
There are also the issues of cultural change. Different countries have different ways of doing things. These differences may be magnified in relationship of partners. Foreign partners may make many assumptions about the behaviour of the local partners whereas local partner sees the behaviour of foreign partner arrogant, such attitude obviously create frictions and tensions.
A number of issues tend to be of particular importance in negotiating joint ventures. These include the control over the JV, may be a partner wants to have management control or vice versa, division of responsibility and the reduction of Board of Management. As already discussed issues relating to technology transfer may also have importance for partners. Valuation of assets other than cash such as intellectual property can be the point of differences. The other important issue includes dispute resolution and mechanism for exit.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)
Zafar Azeem, "Tensions in joint venture Relationships," Business recorder. 2014-06-05.Keywords: Economics , Economic issues , Economic systems , Business enterprise , Business relation , Investment , JVA