The Legal Aspects of a Joint Venture

What follows is a situation where we will negotiate a strategic alliance. For the sake of simplicity let’s
create a hypothetical equity joint venture (JV) between two partners of different nationalities and with
roughly equal bargaining positions. The vehicle we shall use for this collaboration is a new business
equity in which both partners take equity positions. We shall assume that the two partners have already
agreed to go ahead with the alliance and have widely considered the strategic and financial implications
of doing so. Their agreement currently exists in outline form only, possibly as a Memorandum of
Understanding (MOU) or based on an oral understanding and a handshake. The partners have agreed to
put into place a contract to cover the details of the alliance, and this contract is to be negotiated and
drafted with the assistance of lawyers.

In establishing the JV, key clauses that set out the scope of the agreement and the partners’ obligations to
each other are to be negotiated. Major establishment issues to be considered include initial discussions,
setting up the JV, the parties and framework of contract, performance clauses, restrictions on the partners,
and liability. Here we will explore the negotiation process itself by considering the identity and role of
negotiators and the interaction between managers and their lawyers. The intention here is to raise
international managers’ awareness of some of the salient issues and concerns that arise during the course
of alliance negotiations.

Although lawyers play an important role in negotiating and drafting alliance agreements, no clear
dividing line exists between so-called legal and business issues, and the commercial managers will often
need to be involved in making decisions on the legalities mentioned here. For this reason, commercial
managers may wish to consider some of their alternatives in advance so they know where they stand on
the issues to be covered in the agreement and decide which proposals (partner restrictions, transfer of
shares, etc.) they wish to put forward for negotiation. Negotiations normally involve at least two
participants per partner—one commercial representative and one lawyer. Some companies prefer to have
more representatives from different business areas, and often the lawyer will have at least one junior
colleague involved. The more complex the JV, the more negotiators are likely to be involved. If more
than two partners are entering into the alliance, negotiations become more complex, with representatives
and lawyers of each partner needing to agree over the terms of the contract. If the JV is between
companies from three different countries, for example Chile, the United States, and France, you can
imagine how complex the negotiation process is from the legal, political, and cultural standpoint.

The Challenge: What are the legal implications of the international JV?