A joint venture is sometimes described as two people sleeping in the same bed dreaming different dreams.

This is often the case in Asia. So parties need to be prepared for eventual problems.

The most important provisions in any joint venture agreement are the dispute resolution provisions and the governing law and jurisdiction provisions. These are the provisions with which most care should be taken. As they are normally towards the back of the agreement, parties often rush though them to complete the transaction.

In most joint ventures, the executed joint venture agreements are filed away and only dusted off in the event of disputes arising between the parties. So it is important that care is taken when drafting these so-called back end provisions.

Local legal advice is necessary to ensure that the dispute resolution provisions and the governing law provision work in the particular jurisdiction where the joint venture will be established. As an example, in some jurisdictions it is preferable to use the local law as the governing law but use arbitration in an offshore jurisdiction as foreign arbitral awards are more readily enforced than taking action through that country's civil courts. In some jurisdictions, civil court procedures can be used by a party to prolong proceedings and frustrate the other party. It can become expensive to fly in experts to give evidence only to have proceedings adjourned for several months before the expert has been able to make their appearance.

There are many things which may go wrong with a joint venture and it is near impossible to predict every eventuality. The joint venture partner may run short of funds and be unable to provide further agreed funding. I have seen examples where the joint venture was established in a factory within one party's property. When the parties fell out, that party then refused to allow the other access to the factory. It is advisable to establish the joint venture on neutral ground such as a government promoted industrial estate to minimise access issues.

Control of the joint venture is a critical issue. Often, foreign ownership restrictions will limit the foreign party to a minority position. There may be exceptions to this through government promoted investment schemes or through the use of commonly accepted shareholding structures and management arrangements. Foreign parties should never accept at face value claims by the local party that local law prevents majority foreign ownership as there may be options available to achieve majority ownership.

Care needs to be taken with any related party transactions involving the local party. A foreign party sometimes finds the joint venture unprofitable because of a number of related party transactions between the joint venture and the local party. That party is, in effect, taking more than their share of the joint venture's profits via inflated and sometime fraudulent transactions with parties related to them.

Reputation risk is another factor in joint ventures. Where success of the venture relies heavily on one party, any adverse change in their reputation can be disastrous for the joint venture. In one case which relied heavily on the reputation and business standing of one of the partners, the venture imploded overnight when that party's reputation was destroyed through their own actions which became headline news.

Finally, it is best to avoid what I refer to as 'absent partner syndrome' where a foreign party buys into a business effectively establishing it as a joint venture and goes home expecting the local partner to treat it is a joint venture. In one case, the local party continued to treat the business as his own and spent the profits on a fleet of Mercedes-Benz vehicles for himself and his family. Such was the hands-off approach by the foreign party, the true extent of the financial calamity was only revealed when the foreign party flew in to confront their partner after waiting in vain for the flow of joint venture dividends.

PELEN

February 2018

The content of this publication is intended to provide a general overview on matters which may be of interest. It is not intended to be comprehensive. It does not constitute advice in relation to particular circumstances nor does it constitute the provision of legal services, legal advice or financial product advice.