The Independent Counsel

International Sales

How to Negotiate an International Joint Venture Agreement

(Part two of three parts)


In the last issue, I discussed why a company should consider an international joint venture, who were the most likely prospective partners and some of the pros and cons of teaming up with these prospective partners.

This time, I consider the Joint Venture Agreement ("JVA") itself and some of the contentious issues and problem areas that can arise in negotiating it.

The JVA and Collateral Agreements

The JVA is the basic document by which the parties establish the joint venture company, determine its capital structure and board membership, and set forth which corporate decisions will be decided at the management, board and shareholder levels.

Usually referenced within the JVA and attached to it as annexes are any patent, know how and trademark licenses that the partners have agreed to grant the joint venture company (JVC), as well as a copy of any proposed corporate articles of organization and by-laws for the new entity.

Contentious Issues and Problem Areas

There are many issues to be settled in the JVA over which mistrust can arise and negotiations can founder. Among them are:

1. What will be each party's percentage ownership of the JVC, and the nature of his contribution? If not all in cash, how is the contribution to be valued?

2. What JVC decisions will require approval by both parties - e.g. borrowing, development, manufacture and sale of new products, territorial expansion, dividends, hiring and firing of key executives?

3. What licenses will each party grant the JVC to its technology and trademarks? In what territories may they be used, and for what royalties?

Chances are strong that each party will believe that its contributions in kind and its licenses are of greater value than those of its prospective partner.

Letter of Intent

Preparation of the JVA and all the collateral agreements and documents is a time consuming process that very likely will run many hours on the lawyers' legal meter. Accordingly, the parties are usually well advised first to develop a Letter of Intent or Heads of Agreement setting forth in summary form their proposed resolution of the principal issues. It is more important that the Letter of Intent air all significant issues than that it be binding or even get signed.

The ability of the parties to reach even tentative agreement in a letter of intent will signal a strong basis for agreement, and the drafting of the detailed agreements can then begin. If a tentative understanding can't be achieved, then, at least, you will not have spent money preparing, reviewing and revising draft agreements that you never use.

Can You Achieve In-House Consensus?

As we have seen, there are numerous issues to discuss and negotiate with your prospective partner but, first have you achieved agreement among your management, financial, research and marketing/sales people that a joint venture is the best route for you to go and that you have the best partner for that route?

Are they prepared to give the necessary support to the venture, perhaps involving repeated trips to distant sites that lose more of their allure with each visit? Have you sat down with your attorneys to find any liability, patent, tax, or other pitfalls in your proposed structure for the venture?

Finally, do you have a consensus as to what you hope to achieve with this joint venture? Is it to build a strong manufacturing, marketing and/or sales presence, a research base for new products, or a low cost, break-even manufacturing source for sales back to the partners? It is this vision that you will have to explain and sell to your prospective partner as you enter negotiations. Therefore, it is imperative that your management and legal team fully understand and support the essential elements of your plan, are in agreement on your negotiation strategy and know the base line below which you should not concede on issues.

Conclusion: Negotiation of a joint venture agreement is complex with many opportunities for disagreements and misunderstandings between the parties. These are all the more likely and their resolution will be all the more difficult if you do not enter the negotiations with a team that fully understands your goals and is committed to achieving them.

Next time: "What if it doesn't work out?", a consideration of the problems of undoing the joint venture and the extent to which these can be dealt with in the JVA

Part III | Part I

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1995; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.