Checklist for an International Joint Venture Energy JV Presentation, 2014 ACC Meeting New Orleans I. STRUCTURE

Size: px

Start display at page:

Download "Checklist for an International Joint Venture Energy JV Presentation, 2014 ACC Meeting New Orleans I. STRUCTURE"

Homer Garey Knight
6 years ago
Views:

1 I. STRUCTURE 1. Why use a Joint Venture? Do you need an equity JV, or can the business objectives be more easily fulfilled through alternatives? Do any of the following conditions exist to help justify an equity JV? o Are you entering a new market? Are you seeking to partner with a local firm in a new geographic market or highly regulated jurisdiction (China, Russia, African and South American countries)? Are there local ownership requirements, or is navigating the local regulatory environment challenging for a foreign investor? Is your partner local and bring relationships with suppliers and customers, or an understanding of local customs? Will an equity JV gain you access to a regulated marked (mining, oil and gas)? o Access to complimentary resources: capital, technology, expertise? Does the joint venture partner provide: a. capital in a tight financing market b. industry contacts and experience or c. access to technology, equipment, other resources? Often, the joint venture parties will bring different assets to the table (e.g., one has capital and the other has industry experience or local contacts). o Can you uniquely share costs or mitigating risk? Testing entry into a new market/industry with greater uncertainty? Is it cheaper and faster than entering a new market organically or by acquisition (could be hybrid between a greenfield and acquisition by expanding one partner s existing operations)? Economies of scale e.g., solar panels, LCD screens, EV batteries? Reduce integration costs and integration challenges? Page 1 of 14

2 o Are there tax advantages? Cam the JV may be structured to take advantage of pass-through tax treatment? Did you consider the tax burdens, including those associated with transferring assets to the JV? Tax specialists should be involved in the early stages of structuring the JV. Key tax considerations include: a. Taxes on income and profit of the JV entity and the JV partners b. VAT/sales tax/customs duties c. Taxes on real estate and personal property d. Employee taxes e. Double-taxation treaties f. Transfer pricing regulations g. Tax abatements and subsidies o Have you weighed the disadvantages? Do you have a unified vision and goals? Are you prepared to share control of your business? How will you handle management disputes; potential for deadlock and slow decision-making? Difficult to capitalize with debt financing Risk of creating a competitor out of your own JV partner Impermanent need plan to wind-up/terminate Conflicts of interest and competition restrictions Information sharing and ownership of IP Governance difficulties Inability to easily exit and liquidate investment Risk of dedicated ( trapped ) resources 2. Have you considered alternative solutions? o If your business objective is to enter a new market or expand reach in existing market, consider Outright purchase or sale Outright purchase or sale with limited profits participation (e.g., earnouts) Distribution agreement Marketing agreement Page 2 of 14

3 o If your business objective is: develop a new product, consider Outright purchase or sale Outright purchase or sale with limited profits participation (e.g., earnouts) Distribution agreement License agreement Marketing agreement o If your business objective is: expand market share without making a large, upfront capital investment, consider Distribution agreement License agreement Manufacturing agreement Marketing agreement Employee or asset secondment agreement with profits participation 3. What Form of Joint Venture? o Contractual The partners understanding of their relationship with respect to the business is set forth in an agreement, but typically no assets are transferred. This is often a shorter-term arrangement and it may terminate when a specific goal is achieved. Sometimes referred to as a consortium o Equity The parties form an entity in which each has an ownership stake and certain management, voting and distribution rights. An equity JV is generally used for a closer, higherinvestment relationships that are expected to last for longer time period. The equity JV may be more difficult to wind up as the parties will need to liquidate the entity s assets. o Local variations The form your joint venture takes may be dependent on the controlling law. Local law may dictate, to some extent, the parties rights and liabilities with respect to the JV. 4. How will the JV be funded or financed? o How will capital contributions be handled? Will there be future capital calls? Who gets to decide the amount of future calls? o If the majority partner is funding the JV, the minority partner will want to know the JV is receiving arms -length terms. Page 3 of 14

4 o Will the partners guarantee the obligations of the JV? o Will financing be available? JV may be able to obtain financing if it is sufficiently capitalized and capable of operating as a standalone business. Lenders will likely request joint and several guarantees from the JV partners. a. Consider whether partners with unequal ownership/unequal capital contributions to the JV should instead offer several guaranties in proportion with their share of the ownership/contribution. o Consider how local regulation may influence the decision to fund with debt or equity (e.g., are there debt-to-equity levels required of the JV entity?) 5. If you determine that the joint venture is the proper business solution, how should you structure it? o Factors, include: Objectives. What is the joint venture intended to achieve? Contributions. What resources will each venturer contribute? Rights. What rights will each venturer obtain? Modification. How can new members be added? Tax/Accounting. What are the tax/accounting implications? Antitrust. Would the venture unlawfully limit competition? Termination. What happens upon the termination of the venture? 6. What form of legal entity? o Partnership o Corporation (or foreign equivalent) o Limited Liability Company (or foreign equivalent) o The vast majority of US equity JVs are formed as LLCs. Advantageous tax treatment Limited liability Maximum flexibility in structuring governance and economics Corporate fiduciary duties can, to a great extent, be disclaimed or expanded Page 4 of 14

5 7. What s within the JV and what s outside the JV? o Rule for Contributions: Avoid conveyance wherever possible Employees: secondment agreements instead of outright transfer Equipment, Assets and Physical Plants: employ manufacturing, distributor, support or services agreements instead of an outright transfer IP: employ limited license agreements instead of transfer of IP o Intellectual property ownership rights? Do partners own the IP (with a license to the JV) or does the JV own the IP (with a limited license back to the partners)? Difficulties if IP jointly owned by JV parties Who owns (or has use rights to) IP or IP improvements created by the JV? Specify what use may be made by JV of each party s retained IP 8. What are the business relationships between the JV and JV Parties? o Management agreement o Supply agreement o Purchasing agreement o Distributorship or marketing agreement o License agreement o Lease agreement o Services agreement o Personnel agreement o To the extent that each partner s contributions can be effected through contractual support arrangements (e.g., licenses, employee secondment agreements, services agreements) this will reduce the complication of any exit or JV unwind. o Make sure that the right to cause the JV to enforce agreements between the JV and a partner is vested in the other (disinterested) partner. o Pricing of support and supply agreements will be a key issue. To the extent that a partner is providing goods or services at a below market rate, consider whether additional equity should be allocated to that partner. 9. Equity instruments to consider when structuring allocation of economic upside between partners: Page 5 of 14

6 o Common equity o Preferred equity o Options/Warrants o Convertible debt o Conclusion: In simple JVs, you will use one class of equity (common), allocated in accordance with contributions 10. Have you considered accounting, competition and antitrust issues? o Consult accounting advisers, as ownership of certain percentage interests or bundle of consent rights may require consolidation or other particular accounting treatment. o Competition s May the JV parties compete with the JV? If not, the business of the JV must be specifically defined Need to consider logical evolution of retained business lines before finalizing non-competition covenants o Antitrust s Will the JV parties set prices, allocate markets, agree not to compete, etc., without a legitimate procompetitive purpose? Will the JV confer market power on the participating companies that would not exist otherwise? If so, do the JV s procompetitive benefits outweigh the potential anticompetitive risks? If JV parties continue to compete with each other outside the JV, will factors such as the terms of the JV agreement, structure of the JV management, and access to competitive information restrain competition? Consult competition/antitrust advisers. II. GOVERNANCE 1. Do you understand local law requirements with respect to governance of your JV? o Determine what type of entity you will use. o Are there required minority protections? o How is foreign ownership treated? Will the foreign partner be the legal representative of the JV in the host country? o Determine what licenses and government approvals are needed. 2. Determine allocation of rights and duties among the JV partners: o Voting rights o Minority partner protections Page 6 of 14

7 o Board seats o Capital contributions o Returns o Tax preferences 3. How will management personnel be appointed? o Where will the JV get its employees? o Which party has more skill in overseeing day-to-day functions? 4. How will the JV take action? o Location and frequency of meetings o Notice of meetings o Quorum requirements o Board reporting requirements o Limits on officer and manager authority o Should there be a management committee? III. CHOOSING A PARTNER 1. Have you done your Due Diligence? o Host country political and legal environment o Enforceability/predictability of contract rights o Background checks o Set up news alerts o Consider retaining local counsel o Partner s local reputation o Partner s local connections o Partner s past and present business relationships o Partner s financial resources and expertise o Partner s cultural sensitivities o Local anti-competition and foreign ownership rules 2. Develop a strategy to avoid FCPA violations. Consider the degree of risk presented by your partner and the host country. o Employee training o Monitoring relationships with government officials 3. Add rights and obligations to the governing agreement that will protect you and the JV from your partner s misdeeds. o Audit and investigation rights o Indemnification o Termination rights Page 7 of 14

8 IV. NEGOTIATIONS 1. Consider your approach to the negotiation carefully before you begin. o Decide who should be involved in the negotiation. o Decide how much do you want to disclose to your partner. o Consider what negotiating strategies might appeal to your partner or be most effective in reaching an agreement. o Be mindful of cultural differences. o Enlist the help of someone fluent in your partner s language. 2. Have an exit strategy. o Consider what your dealbreaker items are in advance to avoid being swept up in the deal. o Make a list of must-haves. o Are all members of your team on the same page? V. ANCILLARY AGREEMENTS 1. What Ancillary Agreements should be part of the transaction? o Technology licenses and IP agreements? o Services agreements o Offtake or Supply agreements o Construction/EPC o Confidentiality Agreements 2. Consider the effect termination of JV should have on Ancillary Agreements. 3. Consider the application of local law to Ancillary Agreements. VI. INTELLECTUAL PROPERTY 1. Have you identified all relevant IP that may require contribution/ licensing or protection? o Patent, Trademark o Trade Secrets critical know how o Confidential business information customer lists o Improvements and Developments what is likely to result 2. How will IP rights be contributed to the JV and allocated among the JV partners and what will be the terms of related agreements? Page 8 of 14

9 o Assignment o License What type, exclusive or non-exclusive? Territorial restrictions? Scope of sale/use restrictions? Rights to further sublicense? Checked applicable law of enforcement? 3. Have you valued the IP to be contributed or licensed and conducted appropriate Due Diligence? o Are IP contributions intended to become part of capital? o Is that appropriate to the extent intended? o Are ownership and rights related to IP confirmed e.g., if does venturer have right to further sublicense to JV IP of others. 4. How will improvements and newly developed IP be handled? o What will be the responsibility/process for identification and protection of improvements and new IP? o Who will own improvements and newly developed IP? o Who will one the new IP on exit or termination? VII. COMPETITION LAW 1. Considered filing requirements? o Determine applicable law(s) o Identify relevant jurisdictions o Filing and Schedule 2. Covenants not to compete agreed? o Non-compete with JV o Non-competes among co-venturers o Close review of geographic and scope restrictions under applicable law(s) o What impact on non-competes of exit or termination? VIII. EMPLOYMENT 1. How will the JV be staffed and what will be the applicable law(s)? o What existing employees will be transferred or seconded? o How will they be transferred or seconded? Page 9 of 14

10 o What employees must be recruited? o What law will apply to employment and transfers? o What requirements for notice or consultation may apply? o Address Works Council, Labor, Collective Bargaining issues o Non-solicitation agreement or provisions 2. Identify and address transfer issues. o Identify and obtain consents for transfer as needed. o Develop relevant employee communication, agreements employment contracts, confidentiality agreements, etc. o Administration of severance and transfer costs of existing employees. o Consult with immigration and tax experts. 3. Compensation and benefits o Establish compensation and benefits structure. o Determine elements required for new or transfer employees: Compensation, Incentives, Healthcare, and Retirement/Pension o Review regulatory requirements for same, including funding o Consider whether transitional services are needed and who would provide. IX. TERMINATION/EXIT 1. Duration o Does the JV continue indefinitely, or will it end when some goal is achieved? 2. How can one party exit the JV? o Default/Breach of Promise or Duty Have you addressed typical events of default? Failure to make required capital contributions Breach by a JV member of some other covenant, e.g., a non-compete Failure of manager (appointed by partner or for whom removal requires unanimous consent) to manage properly Action by manager not authorized by members Managers allowing the JV to break binding promises to vendors, customers or third parties without member approval o Do you have actions on default (following cure period); what makes sense for the life of the JV? Dilution of the defaulting party s economic interests in Page 10 of 14

11 the JV, e.g., by a shift of ownership, distribution and profit sharing, or by allowing the non-defaulting party to buy the defaulting party s interest at a discount If the default is a failure to make required capital contributions, other JV members can be given the opportunity, but not the obligation, to contribute and receive some premium in return (profit share, ownership, etc.) Dilution or elimination of the defaulting party s voting power Replacement of a defaulting manager Continuing to hold the defaulting party liable even if there is a quicker partial remedy like dilution or removal Liquidation or dissolution of the JV at the election of the non-defaulting party (parties) o Do you include default triggers and consequences? Cure periods should vary with the severity of the consequences of the default Ø Page 11 of 14 Major defaults, which require a shorter cure period o Transfers Consent of the other party is a common requirement for transfers; affiliate transfers might be permitted without consent. Do you want or will the other party have right of first refusal (ROFR)? Or a right of first offer (ROFO)? Ø The ROFR will require the transferring party to market its equity share before offering it to the non-transferring partner and may limit the market for its equity. Ø The ROFO puts the burden on the nontransferring partner to determine what price to offer. Will there be drag/tag-along rights? Which parties will have them? Ø Ø May want to give the non-transferring partner an ability to opt out of being in business with a new JV partner. Could result in sale of the entire JV if there is an obligation to sell at the same terms to an incoming buyer obtaining more than a certain share of the JV. o Planning for member transition Have you considered transition issues, e.g., if the exiting party is providing services to the JV?

12 Provide for a smooth transition for all circumstances. Ø a non-fault member event, e.g., irreconcilable business differences, death, bankruptcy of a JV member Ø Mandatory or optional purchase of the defaulting or exiting member s interest and terms Ø Buy-sell arrangements, where one JV party sets a price and the other party may either buy the interest for that price or sell their interest for that price (proportional to ownership), e.g., Russian Roulette or Texas Shootout o Provide for a member default under the operating agreement or an Ancillary Agreement, such as a services agreement or employment agreement Cure opportunity before forced exit Mandatory or optional redemption of defaulting venture at a discount Forfeiture Extended payment for any redemption Continued liability to non-defaulting members 3. Provide for voluntary exit. o Buy-sell arrangements (including ROFR or ROFO) o Put right, allowing a venturer to redeem its interest at an agreed or appraised price, with payout over time Consider local law requirements with respect to withdrawal from your JV vehicle---there may be limitations what you can agree to. 4. Do you address sale or dissolution? o If one party cannot buy out the other, the parties might prefer a sale or dissolution of the business. o Selling the JV as a going concern will tend to maximize shareholder value. o Selling also carries the risk that the JV could ultimately be acquired by a competitor. o Consider local law regarding terminating dissolving liquidating the business. 5. Upon exit or sale/termination, do you ensure the IP, employees, and business relationships are left intact? Page 12 of 14

13 X. DISPUTES AND CHOICE OF LAW 1. Do you provide for resolution without litigation? o JV agreement can provide procedures to resolve disputes without litigation. Discussion amongst executive officers Tie-breaking vote (independent director, chairman, independent third party) o If the parties are deadlocked, does the JV agreement require winding up or sale of the business, or allow a party to exercise a put/call right? (Not every deadlock merits the sale solution.) Some deadlocks are appropriate for decision by a neutral third party expert. Others may trigger an exit or venture sale. Deadlocks are not defaults they arise from honest disagreements about business matters so they should not result in remedies against a party. o Is time of the essence? If a decision or action is needed to avoid harm to the venture, the mechanism for deadlock avoidance must allow for speedy resolution. On occasion it may be acceptable for the deadlock to continue. 2. What are key terms for Arbitration? o Arbitration can resolve disputes about legal rights and obligations, but not about business judgment issues. o Parties will likely prefer arbitration for a foreign JV Arbitration awards will be easier to enforce than foreign court judgments Arbitration outcomes are easier to keep private Arbitrators may have particular technical expertise o Which arbitration rules do you choose? Consider whether distinctions between the rules applied by the major arbitral bodies (ICC, London Court of International Arbitration, bodies governed by the U.S. Federal Arbitration Act) might be important in resolving your dispute. What remedies are available? Can you join a third party to the arbitration? How are arbitrators selected? What procedural differences might produce and advantage or disadvantage on one side? Page 13 of 14

14 3. What is your choice of law? o English or US law is more common than local law, though there may be a carve-out for matters governed exclusively by local law (e.g., matters relating to the organizational documents of the JV entity). If English or US law is not acceptable, seek a controlling alternative that you understand (e.g., one formulated based on English law). You need advice from local counsel if your choice of law is not one in which you are versed. 4. What is your default venue? o Non-local party may want venue to be outside the place where the JV is organized. o New York and London are common neutral venues; also Singapore when doing business in Asia. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law. This communication does not create an attorney-client relationship between Sutherland and the recipient. Page 14 of 14

GLOBAL TRANSACTIONS. Joint ventures & partnerships

GLOBAL TRANSACTIONS. Joint ventures & partnerships GLOBAL TRANSACTIONS Joint ventures & partnerships *This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter. www.dlapiper.com