Joint ventures (JVs) are a popular business format with multi-nationals looking to enter new geographies, and for good reason. A good JV, according to conventional wisdom, will bring together the strengths of two partners and eliminate their weaknesses. While this is true in the best cases, most businesses see that the road to a successful partnership is fraught with pitfalls once the journey has begun. Adding a cross-border element to a partnership often only compounds the difficulties being faced by both partners.

AMA has a long history of helping overseas clients find suitable JV partners in India. Our knowledge of JVs is born of this experience – from both the JVs that worked out and those that didn’t. It often becomes important for local and overseas clients to get a neutral opinion on the proposed partner, as they sift through negotiable and non-negotiable differences.

The plan

The plan for cross-border joint ventures often involves two partners, one bringing in the technology and know-how and the other bringing in customer relationships or manufacturing capabilities. This usually brings up several questions:

• What will be the stake ownership of each of the partners?
• How is the Board of Directors constituted?
• What special powers are to be written into the founding charter (memorandum and articles of association)? E.g. Does either party require a veto power, right of first refusal on shares, non-competition clause, etc.?
• Who nominates Board members and appoints the CEO, CFO, COO, etc.?
• Will both partners be equally involved on the ground, i.e. in setting up a facility, hiring employees, day-to- day decisions? (Often overseas clients are unable to participate in all these activities)
• How is the transfer / licensing of technology charged? How is brand usage charged?
• Can the local partner’s manufacturing facilities be leased to the JV in part? How is this arrangement to be charged?
• How does the overseas partner repatriate profits – can these be structured in ways other than dividends to ensure tax optimisation?

While these are good questions to ask at the beginning, and good to codify into a shareholders
agreement, the actual operations of the JV within the first few years throw up new and more
subjective questions, which are tougher to solve:

• How does the JV deal with a lack of cultural fit between the JV partners?
• Does the overseas partner trust the local partner completely in running the day-to- day operations?
• Does the local partner view the overseas partner’s interest as “interference” in running the business?
• Are the key management personnel being remunerated at levels that are fair to both partners? Do they have an existing connection with either partner which impacts their remuneration?
• Are both partners “pulling their weight” – i.e. has the contribution to the JV (whether of management or technology or customers) lived up to the promise?
• If the JV supplies goods to either or both partners, are these being priced fairly?
• If the JV continues to make losses after the targeted break-even date, how much longer do the partners want to keep funding it? (This is often a sticky point as partners have completely different expectations)
• If a partner wants to exit the JV, how easy or difficult is it for him to do so?
• In case of a dispute between the partners, how is it to be resolved and who mediates?
• If the partners are unable to agree on a price for a sale of equity among themselves, how do they arrive at a fair price?

There can be immense scope for discussions to turn acrimonious, especially in cases where the JV has not performed to plan. In a sense then, the personalities of the JV partners become the most important factor in play – do they approach failure as a team or does failure simply open the floor for blame games? Can they support the JV financially and in other ways for longer than they expected or will they want to exit when targets are not reached? Can a settlement be reached amicably or could it end up in expensive and time-consuming litigation?

As we have seen in our experience of dealing with and mediating for cross-border JVs, it is difficult to answer these questions going in. The solution is often a combination of an equal partnership, a clear shareholders agreement and reliable mediators. With all these solved, the last – and possibly most important – is the personality factor.