Structuring an International Joint

Venture in the European Union

by lipkar | studymode.com

Table of contents

1.Introduction ..………………………………………………………………….…... 3
2.General overview of international joint ventures ……………………………... 4
2.1Main classification of joint ventures ……………………………………. 5
2.2Structure of joint venture entity ………………………………………..… 5
3.Advantages and disadvantages of international joint ventures …………….. 6
3.1Advantages of IJV ……………………………………………………….... 7
3.2Disadvantages of IJV ……………………………………………………... 8
4.Planning an international joint venture ………………………………………... 8
4.1Preliminary investigation …………………………………………………. 8
4.2Planning the operation …………………………………………………… 9
4.3Finalizing the operation …………………………………………………... 9
5.Antitrust issue ……………………………………………………………………... 12
6.Joint ventures in Poland …………………………………………………………. 13
6.1Examples of international joint ventures in Poland ……………………. 15
7.Conclusion ………………………………………………………………………… 17
8.Bibliography ……………………………………………………………………….. 18

1.INTRODUCTION

Globalization has radically changed the way many European companies do

business. Because of advances in communications, transportation, and technology,
virtually every business of any size can now internationally distribute goods, services,
or intellectual property. Although dealing with international markets could be difficult,
companies must be ready to overcome differences in legal and regulatory regimes,
cultural norms, language problems, and currency issues especially in Member States
where the Euro has not been introduced. Only the largest companies have the
resources and experience to surmount these obstacles on their own. Many other
businesses simply do not have the capacity to deal with all the variables in foreign
jurisdictions without a partner organization. For this reason, many companies create
an international joint venture (IJV).

In this project I will briefly examine the structure, the advantages and disadvantages
of international joint ventures; the key contract provisions for creating them; and the
antitrust issue concerning this type of activity. I will also provide some Polish
regulations about joint ventures as well as the examples of the most important joint
ventures that have occurred in Poland. Joint ventures between domestic companies
(that are in developing countries such as Poland) and foreign companies have
become a popular means for management of both organizations to satisfy their
objectives. Additionally, Poland is considered to have one of the healthiest
economies of the post- communist countries, with GDP growing by 6,1% in 2006.
The Polish economy is currently undergoing economic development, and there are
many challenges ahead. 2.General overview of international joint ventures

International joint venture is a joint undertaking among two or more business entities
from different jurisdictions. It means that the concept of joint venture can vary from
country to country depending on the domestic law of the country where the joint
venture exists. Within the European Union, joint venture agreement can be identified
by some common features. It is important to mention that the joint venture aim is to
reach a common result for the benefit of all the parties involved, and this kind of
agreement lasts for a reasonable period of time. The definition generally refers to the
purpose of the entity and not a type of entity. Therefore, as I will present, a joint
venture may be a corporation, limited liability company, partnership, or other legal
structure. We will see that in Poland the legal form could be different. Joint ventures
are common in the oil and gas industry and can often be the co-operations between
the local and foreign companies. It is said that 75% of joint ventures are international.
A joint venture is often seen as a very viable business, as the companies can
complement their skill sets while it offers the foreign company a geographic
presence. It is also known that joint ventures show a greater instability in under-
developed countries. Also, those joint ventures involving government partners have a
higher incidence rate of failure. Furthermore, joint ventures are shown to fail
miserably under highly volatile demand and rapid changes in product technology.
Joint ventures can be managed by partners by themselves or by a joint venture
broker, who is the one that puts together the two or more parties that participate in a
joint venture. A joint venture broker then makes a percentage of the profit that is
made from the deal between two or more parties.

2.1 Main classification of joint ventures

Joint ventures can be classified in two main groups:
•Corporate joint venture, with the purpose to start a new business by means of the
respective contributions;
•Non-corporate joint venture (contractual JV), confined to a single operation where
one of the parties is the general contractor and the other acts as subcontractor. On
the basis of this classification we can also distinguish:
•operational joint venture – structured as a corporate venture;
•instrumental joint venture – structured as a contractual venture. To choose one of
these structures, we should take in consideration following factors: complexity of
cooperation, period of time to achieve the targets, independence of JV’s activity, and
flexibility of parties.

2.2 Structure of the joint venture entity

Choice of the structure is a very important issue for joint ventures. It should be
decided carefully if the joint venture should be contractual or corporate and what
legal form it should have: partnership, limited liability company, joint stock company,
consortium, etc. The main steps should be also considered in structuring the joint
venture entity:
I) Initial contributions of the partners (type of assets, quantity);
II) Future contributions of the partners (decisions, penalties);
III) Choice of Board of Directors (number of members, veto power, deadlocks);
IV) Restriction on share transfer;
V) Rights of first refusal and pre-emptive rights;
VI) Employee stock benefit plan (if stipulated).
The contributions of joint venture partners often differ. The local joint venture partner
will usually supply physical space, channels of distribution, sources of supply, on-the-
ground knowledge and information. The other partner typically provides cash, key
marketing personnel, certain operating personnel, and intellectual property rights. A
company forming an international joint venture will often partner with one of its
customers, vendors, distributors, or even one of the competitors. In the latter, two or
more competitors create a new entity that carries out some activities instead of the
partners. An example of this kind of joint venture could be a research joint venture:
when two or more partners cease doing independent research and development to
do it together, within a new entity jointly set up. There are also many other possible
activities that could make the object of joint venture, such as:
- manufacturing of foreign parent’s products,
- marketing and distribution of foreign parent’s products,
- sales support for independent representatives or distributors, - engineering support,
service and repair.
These businesses agree to exchange resources, share risks, and divide profits from
a joint enterprise, which is usually physically located in one of the parents’
jurisdictions.

3.Advantages and disadvantages of international joint ventures

There are both advantages and disadvantages of international joint ventures which
can be important in the process of decision making.

3.1 Advantages of IJV

Comparing to direct entry into a foreign market international joint ventures offer
significant advantages:
a)Faster access to foreign markets
The local partner may have already established itself in the marketplace and have
access to government contacts, lines of credit, regulatory approvals, scarce supplies
and utilities, qualified employees, and cultural knowledge.
b)Lower cost
IJV is usually much less costly than a direct, new entry into the foreign market or
buying an existing company in the local jurisdiction. The principal costs of this effort
have already been incurred by the local partner.
c)Distribution ease
IJV provide rapid access to distribution channels, marketing and sales contacts,
expertise, market efficiency, and cultural understanding in the host country.
d)Local knowledge
Access to the knowledge and know-how of the local marketplace that enhance the
venture’s probability of success. Example- The international joint venture between
the Polish firm Pezetel and Rockwell jointly pursued the US market for low-flying
aircrafts. Rockwell had access to marketplace information, and when he abandoned
the project, Pezetel ended in failure.
e)Reputation of the resident partner

3.2 Disadvantages of IJV

Of course, international joint ventures have their share of disadvantages:
a)Dilution of future profits and equity;
b)Opportunity cost for entry into a foreign market place;
c)Financing problems, particularly debt financing because IJV are usually finite in
their duration and lack permanence;
d)Competition when the partner turns into a competitor.

4.Planning an international joint venture – formal agreement

The managers often express mixed feelings about the formal joint venture
agreement, with some of them viewing it as a critical element in defining the longer-
term relationship. A vast majority of managers believe that the agreement is an
essential building block in structuring the joint venture. For this reason, it is very
important to structure the international joint venture in three main steps.

4.1 Preliminary investigation

It is substantial to select appropriate local advisors who will provide the future joint
venture the knowledge to establish a new entity. They will provide the audit informing
us not only about costs but also about savings and analyze the term of agreement to
be signed. We should analyze the local legal context especially in developing
countries, where specific laws on joint venture can be issued. In spite of the
harmonization process of EU laws, the legal system may differ from country to
country. We should not use the standard forms in structuring international joint
venture. 4.2 Planning of the operation
Stages of proceedings should be as follow:
•checking the market conditions,
•drawing a business plan,
•identifying risk capital and debt capital,
•choosing the most suitable legal and contractual technicalities, •evaluating the fiscal
impact of the different solutions.

4.3 Finalizing the operation – formal agreement

Finalizing the operation should mostly include three steps:
I)Preliminary checking, which contains: due diligence, business evaluation, business
planning;
II)Preliminary agreements, such as: letter of intent, confidentiality agreements;
III)Final contracts: master agreement, ancillary contracts.

An international joint venture should begin with at least a sheet of terms, if not a letter
of intent. It is vital that some document can be the foundation for assuring that the
parties agree on all of the primary business and legal issues before a definitive
agreement is drafted. Such agreements force the parties to understand their goals
and objectives and allow the parties to determine early on whether the relationship is
likely to succeed. It is evident that no agreement can work without the good will and
dedication of both partners. Of course it is up to those undertaking the joint venture to
decide how detailed the preliminary agreement will be. The letter of intent binds the
parties of the future international joint venture to negotiate the conclusion of the
agreement in good faith. It identifies the general conditions of the agreement,
allocates costs for the negotiations, disciplines the liabilities arising from the violation
of the duty to negotiate in good faith, and provides penalties. It also identifies the
negotiators (those individuals allowed to have access to the confidential
documentation), terms to be negotiated, and other regulations that are important from
the point of view of two parties. If the undertakings are interested in acquisition and
consultations of the confidential documents, they usually decide to sign the
confidentiality agreement so they can maintain confidentiality with all the information
acquired. In the case where no agreement is reached, the parties are obliged to
redeliver or destroy the copies. The definitive agreement contains many of the terms
from the preliminary agreement (such as continued confidentiality and capital
contributions), but with greater detail. In general, it will also contain additional
negotiated provisions covering various operational activities through to termination of
the joint venture. The definite agreement can include documents such as: •a letter of
intent,

•a confidentiality agreement,
•an exclusivity agreement,
•a primary joint venture agreement,
•any other agreements required for operations of the joint venture, such as
intellectual property sharing agreement, loan instruments, management agreements,
leases, services agreements, or guarantees. However, there are many essential
matters that the master agreement should cover:
•Management. Independent managers will be more likely to ensure that disputes are
resolved and avoid termination of the IJV because they have stakes in the success of
the venture;
•Governance. Structure of the board of the joint venture entity should be composed
of an odd number of directors. The partners should also allocate board-level
decision-making authority on certain issues and agree on arbitration provisions;
•Contributions of partners. It should set out in as much detail as possible the
respective contributions of the parties, both tangible and intangible. Depending on tax
consideration, it may be appropriate to specify values for contributions;
•Allocation of risk and rewards. Dividend distributions, capital calls, and allocation of
losses should be covered;
•Dispute resolution. The definitive agreement should specify how the disputes will be
resolved. Most partners prefer not to resolve them through litigation;
•Regulatory issues. It should address all regulatory issues affecting the joint venture
(export and import control, competition law, etc.);
•Governing law. Usually IJV’s activity is governed by the laws of the jurisdiction in
which the joint venture will be principally located;
•Termination provisions. When and how the contract and joint venture terminate;
•Governing language. Agreements are often written in two languages but one of the
language version should prevail;
•Intellectual property. It should be clearly delineated all rights to IP (ownership),
technology, software, and the like.

5.Antitrust issue

Given the nature of joint ventures, they are a hybrid entity that can lie somehow in
between cartels and mergers. Consider for instance a sales joint venture between
two competitors, whose only purpose is to set prices or quantities in the final market
without any activity (cooperative joint ventures). This is nothing other than a cartel
and should accordingly fall under Article 81 of the Treaty in the European Union. At
the other extreme, consider two competitors that give all their research, production
and sales assets to a newly created firm whose ownership they share (concentrative
joint venture). Such joint venture is akin to a merger and should be treated
accordingly by the law. In both cases a jointly owned entity might have anti-
competitive effects because the joint venture would have larger market power than if
the partners operated independently. If the two partners have only small market
shares, the joint venture should be cleared. In reference to this distinction there are
two laws that are mainly applicable:
1)EU REG. 139/2004
Regarding the concentrative joint ventures (full-function) where the entity
independent from the parties carries out all the typical functions of other operators in
the same field,
2)Art. 81 EC Treaty
Refers to coordination between parties of joint venture, so cooperative joint ventures.
In addition, there are three novelties in EU Reg. 139/2004:
•The joint venture agreement should be notified to the Commission prior to its
implementation;
•If the joint venture exceeds EU dimension limits but affects competition within a
Member State only (distinct market), it should be examined only by the Member State
authority;
•If the dimension limits are not reached but the concentration should be reviewed
under national competition laws of at least three Member States, it is possible to
apply to the Commission authority (to avoid multiple filings).

However, the joint ventures can also have positive effects on competition. These are:
-Increase of production,
-Support of technological development,
-Implementation of product distribution.

6.Joint ventures in Poland

Eastern Europe, since its unprecedented economic, political and social

transformation to a free market economy in 1989, has displayed many opportunities
for western firms. Even if the political, social, cultural and legal systems are still not
as advanced or designed as those found in western countries, and it is still described
as a “turbulent” market, though Poland provides many incentives that lead to
successful investments. Poland definitely stands out from other new Member States.
The country has a strong currency, and its economy is also very strong. The Polish
economy is one of the fastest developing in Europe, GDP grew by 7,4%, in the first
quarter and by 6,7%, in the second quarter of 2007. Such impressive results have
mostly led to the high level of growth of investments. Poland is recommended by
other countries as the biggest and most internationally active market in the region.
Legislation regarding joint ventures in Poland, especially with one of provisions,
differs from other Member States; in Polish conditions, the joint venture can be
established not only by foreign partners with a local one, but with 100% share of
foreign capital (example: Coca-Cola). Other provisions remain similar. Joint ventures
in Poland can be mostly established as a limited liability company (Sp. z o.o.) or a
joint stock company (S.A.). The undertakings usually operate in following sectors:
manufacturing, industry or services. The first joint venture in Poland was established
in 1976 when the Council of Ministers adopted a resolution which had permitted
foreign natural and legal persons to conduct the business in particular sectors (Dz.U
1976, nr19, poz. 123). The foreign entities used to be called “polonaise enterprises”
and they were the first in opening the Polish market to foreign investments. In the
early nineties, the companies with foreign capital started a very dynamic
development, and their number increased from 1.645 in 1990 to 17.577 in 1994.
Also, joint ventures became popular and many big corporations started their
businesses in Poland. This form of activity is a tool to improve effectiveness and
international cooperation. The most important goals for Poland to obtain are as
following: •Inflow of foreign capital to finance the local economic activity, •Transfer of
new technologies and new methods of management; •Improvement of employment
on the Polish market,

Inflow of foreign capital also provides new raw materials and products and helps to
increase the GDP. Establishment of joint ventures to obtain these goals is much
more secure than taking loans from the Polish government. As a result, the risk for
capital management is up to foreign and local partners of joint venture. Because of
international joint ventures in Poland, the distance between technology in this country
and in the world had been reduced. In addition, the qualifications of Polish managers
were improved and the monopolist position of some State companies was weakened.
There are mostly medium size companies creating joint ventures. In 2001 there were
46.258 joint ventures registered. In 2007 the number of joint ventures was doubled.
In 2006, the value of Foreign Direct Investments (FDI) in Poland exceeded 15 billion
EUR, which is the best result among the new EU member states. It is clear that
investors are well aware of the enormous potential of Poland’s economy.

6.1 Examples of joint ventures in Poland:

1)FIAT, the Italian motor vehicle group, and the Polish Government have set up three
joint ventures to succeed FSM TYCHY, the Polish state-owned group which owns the
car plant that produces the small-cylinder Cinquecento. FIAT owns 90% of the capital
of the three joint ventures: Fiat Auto Poland, Magneti Marelli Poland and Teksit
Poland. The joint venture became the new entity FIAT AUTO POLAND. One of the
agreements followed a USD 2 billion contract and Poland is now one of the biggest
producer of new Cinquecento. FIAT is one of the biggest investors and exporters in
Poland. The turnover of the group in Poland, together with joint venture, amounts a
PLN 20,6 mld in 2007 (without financial groups of Fiat);
2)Coca Cola Co. and Procter and Gamble decided to create a joint venture in Poland
with 50% of shares for each party. Both companies want to increase the sale. Joint
Ventures have 15 seats in Poland and assumes more than 6.000 people;
3)Daewoo – FSO and Henkel Polska created the Henkel Teroson Automotive Polska
in Ciechanow;
4)Vivendi Universal and Sony Music Entertainment will create a music web site which
is called Duet and is a competitor of Napster in downloading the music from Internet;
5)The Irish-based development firm Howard Eurocape created a joint venture in
Poland called Eurocape PIA Limited. The company was created to maximize
development and investment opportunities throughout Poland. Additionally, Irish
buyers see Poland as a market with long-term potential as an investment location;
6)easyFairs and Fairs in Krakow launched a joint venture in Poland with a new name
easyFairs Polska, which will launch easyFairs® Packaging Innovations Warsaw on
28-29 April 2009; 7)Europolis and Poland Central (sp. z o.o.) signed a joint venture
for the biggest logistics park in Central and Eastern Europe Region. The value of the
investment amounts 172 million Euro. The investment created employment for up to
6.000 people.

There are many other examples of international joint ventures in Poland. Most of
them are still the supermarket chains which have recently become very popular
shopping centres. Most of them benefit from the tax relief for joint ventures in Poland.
There are also many loopholes in the law of joint ventures which make the activity
more profitable for foreign investors.

7. Conclusion

As mentioned in the beginning, an international joint venture is a joint undertaking

among two or more business entities from different jurisdictions. Sometimes the two
undertakings do not need to come from two different countries, as we have many
examples of international joint ventures in Poland, where none of partners were
Polish. International joint ventures are becoming more and more popular and give the
partners new ways to make profitable investments.

Bibliography

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