The International Joint Venture Planning its End Game
The Final of Three Parts
BY WILLIAM C. MUNROE
Faithful readers may recall that previously I covered the reasons to create a foreign joint venture, the form that it should take, and the type of partner to choose (Part One, Issue No. 3). Later, we reviewed some contentious issues involved in setting up the joint venture with a foreign partner (Part Two, Issue No. 4). Here, I discuss the importance, when negotiating the joint venture, of keeping its eventual termination in mind.
Why plan for a joint venture's demise, one may ask? Because managements change, companies and divisions are sold, parties fail to fulfill their obligations, original projections prove faulty, product lives end, and changing economic and political conditions impair competitiveness. In short, the termination of a joint venture at some point is almost inevitable.
Ways to End a Joint Venture
There are essentially three ways to end a joint venture by agreement:
- One party may buy the other out;
- One or both parties may sell to a third party; or
- The parties may agree to dissolve the venture.
A means to ensure that the parties will agree upon an exit strategy is to prescribe the procedure in the original joint venture agreement. Care should be taken in negotiating such a clause, however, in order to avoid sowing mistrust between the parties at the beginning.
Local, Legal Exit Barriers
Because of the scrutiny often given by local governments to foreign joint ventures, local laws may block a desired purchase, sale or dissolution even if all parties agree fully upon its terms.
- Restrictions on Foreign Investment May Prevent Buyout. A frequent reason for entering into a foreign joint venture with a local partner is that the partner's government does not permit majority foreign ownership. The corollary is that, when it comes to the break up, local law may preclude your company from buying out its partner and taking control of the venture itself. Your company may find its existing partner to be the only viable local purchaser of its share. Knowing this, the partner's purchase offer will not be generous.
- Local Restrictions May Block Sale to Third Party. A company that sells off an entire product line to a third party may wish to include the related assets of its joint venture in such a sale, and it is important that your attorney include within the joint venture agreement the unilateral right for your company to do so. However, be forewarned that local law may require government approval of any transfers of foreign joint venture interests, and such approval may prove to be difficult or impossible to obtain.
- Bar to Removals of Assets May Block Dissolution. If the venture does not achieve your company's goals for it, you may wish to close the venture and remove its assets. However, even if your company's local partner agrees with this plan, or if your joint venture agreement includes the unilateral right to terminate and dissolve, local law may require that the manufacturing equipment or product lines that your company has provided to the joint venture remain in country, and it may prove difficult, or impossible, to get government approval to take them out. In any event, much of your proprietary technology will now be stored in the heads of the local managers and technicians whom you have trained. Thus, you may have to leave a substantial portion of your investment in place when you leave.
The break up of a joint venture can be painful and carry unplanned consequences. However, your company can minimize the burden of a break up by taking into account the inevitability of modification or termination in a carefully drafted joint venture agreement.
Your company's choices of partner, the rules of operation for the venture, and the cash, personnel, equipment and technology to put at risk in a foreign environment all require the making of difficult and risky decisions. Yet, international joint ventures persist because teaming with an overseas partner oftentimes proves to be the best, or perhaps the only way to enter new markets profitably, and thereby achieve desired business goals.
Comment: Before deciding to set a foreign joint venture, check the local laws and regulatory climate of a potential host country as they might affect its eventual dissolution. Then take those laws into account when deciding on to the extent of your company's commitment to its venture, and in any agreement that you make with your foreign partner.
© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1996; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.