International Joint Ventures – Achieving the Right Fit and Avoiding Disputes
There are many good reasons that your business would consider an international joint venture, but as with any commercial endeavour, entering into a joint venture comes with a variety of challenges.
These can include finding a partner that is the right fit, successfully blending different organisational cultures, the potential for a lack of cooperation as decision-makers go in different directions when circumstances change, and failure to align on strategic objectives. It is a stark statistic that over 50% of joint ventures end within three years, while less than 20% last six years or beyond.
If a company can successfully overcome these hurdles, it can benefit from the many advantages of participating in a joint venture, such as access to innovation and technology, new talent pools, and expansion into new countries, particularly high growth emerging markets.
Identifying the right international partner
It is crucial that joint venture partners align their objectives from the outset, including in relation to strategic interests, generating profit versus longer term growth, agreement on target markets, and potential exit scenarios.
Prior to joining forces with an international partner, you would be well advised to conduct the appropriate due diligence. This may extend to engaging in prior dealings (if commercially viable) in order to establish communication, trust, integrity, and to test the waters. Understanding the regulatory environment in the jurisdiction you plan to operate in can avoid unwelcome surprises. It would also be wise to conduct 'background checks' on the potential joint venture partner to determine whether they are known for being litigious. You can also check the Corruption Perceptions Index* of the relevant country: the lower the score of the country the local partner is based in, the riskier it may be to partner with them.
*The Corruption Perceptions Index is published annually by Transparency International since 1995, and measures how corrupt a country's public sector is perceived to be, according to experts and businesspeople.
Effective environmental, social and governance (ESG) frameworks and decision-making
In the current climate, with businesses and investors across the globe focused increasingly on ESG and value creation, it is important to establish effective governance frameworks to ensure that the appropriate ESG policies and procedures are in place (particularly if you will be a silent partner) in relation to risk and compliance, employees, and supply chains.
A decision-making structure should be decided upon and implemented, for example, a tiered approach with an executive management board, a board of directors, and shareholder reserved matters to protect minority interests. Priority should be given to achieving alignment and consensus amongst the decision-makers rather than the speed at which decisions are made. Joint venture partners also need to consider and agree on the management style. Dominant management from a majority shareholder versus shared management responsibility at executive level can have a significant impact on both the operational success of the joint venture and the working relationship between the parties.
The partners need to determine who the operational 'middle' managers would be, and which shareholder is best placed to provide the required personnel or whether the joint venture will attract and hire its own staff. Further, it is advised in a post-pandemic world to clearly set out the joint venture's expectations on its employees regarding flexible working arrangements.
Although the parties may be reluctant to discuss an exit strategy amidst the enthusiasm arising from entering into the joint venture, it is advisable to ensure that exit options have been considered in case relations turn sour further down the road, or for when the joint venture has fulfilled its purpose and is no longer required. To resolve issues along the way, it is sensible to have a well thought through dispute resolution process with appropriate escalation to senior stakeholders in the event of deadlock. In addition, the parties should discuss and agree appropriate terms relating to governing law and jurisdiction, and sensible buy-out and valuation rights and mechanism.
As part of its due diligence, a partner should also understand the impact of local culture on dispute resolution in the relevant country and the robustness of the local judicial system compared to the time and cost impact of international arbitration. Termination of the joint venture can affect matters such as tax, supplier and customer contracts, ownership of assets (e.g. intellectual property) and operational requirements (e.g. sites and employees).
Businesses should be aware that although international joint ventures have their benefits, it is vital that proper planning and diligence is carried out to enhance the chances of success. In addition, time spent considering the possibility of a difference in opinion between the parties at some point, will be a sound investment in the commercial relationship and ultimately mitigate the risk of disputes arising.