International Joint Ventures Handbook 2008

International Joint VenturesHandbook

International JointVentures Handbook

Baker & McKenzie

This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.

©Baker & McKenzie 2008All rights reserved.

Save where otherwise indicated, law and practice are stated in this book as at August 2006.

DDIISSCCLLAAIIMMEERR:: The material in this book is designed to provide general information only. It is not offered asadvice on any particular matter, whether it be legal, procedural or other, and it should not be taken as such.The precedent documents included in this book have not been prepared with any particular transaction inmind. Baker & McKenzie, the editors and the contributing authors expressly disclaim all liability to anyperson in respect of the consequences of anything done or omitted to be done wholly or partly in relianceupon the whole or part of the contents of this book. No reader should act or refrain from acting on thebasis of any matter contained in this book without seeking specific professional advice on the particularfacts and circumstances at issue. References in this book to “Baker & McKenzie” include Baker & McKenzieInternational and its member law firms, including Baker & McKenzie, LLP.

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordancewith the common terminology used in professional service organizations, reference to a “partner” meansa person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” meansan office of any such law firm.

International Joint Ventures HandbookEditors’ Note

EDITORS’ NOTEBaker & McKenzie was founded in 1949. For more than 50 years, Baker & McKenzie hasprovided sophisticated advice and legal services to many of the world’s most dynamic andsuccessful organizations. With a network of 3,300 locally qualified, internationally experiencedlawyers in 38 countries, Baker & McKenzie has expertise in all of the disciplines that are typicallyrelevant to a joint venture transaction. Working in experienced inter-disciplinary teams to adviseon corporate, securities, tax, antitrust/competition, commercial, intellectual property, finance,employment, employee benefits, IT, environmental, real property, trade and other complianceand regulatory matters, Baker & McKenzie is in a unique position to assist companies in planningand implementing joint venture transactions and to deliver integrated solutions which take intoaccount all relevant business and legal factors.

This handbook is intended to help clients (lawyers and non-lawyers) understand the breadth anddepth of business and legal considerations associated with international joint venture transactionsand suggests some ways to navigate the joint venture journey. This handbook is organizedprimarily in checklist and questionnaire format with the goal of helping the reader gather andassess key information that impacts the various stages of joint venture planning. It is writtenprimarily from the perspective of the foreign or “non-local” party entering into a new jurisdiction.

This handbook is not a comprehensive treatise. It seeks only to provide a framework for thosecontemplating a joint venture relationship and it focuses on equity joint ventures where theparties participate through equity in a joint venture vehicle for the purpose of conducting businesstogether. Further, this handbook does not attempt to provide a detailed discussion of theplanning and execution of business acquisition and disposition transactions, even though manyof those elements will be present in the joint venture context, particularly when one or bothparties will be contributing an existing business to the venture. Baker & McKenzie publishesother handbooks, including the “Related Publications” listed below, that look at other transactionsin greater depth.

Related PublicationsCross-Border Transactions Handbook – a guide to major legal issues to consider whenembarking on a cross-border transaction.

Post-Acquisition Integration Handbook – a guide to major legal issues to consider whenintegrating an existing and newly acquired business operating in the same field, to save costs,develop synergies and generate value for shareholders.

Rapid Dispositions Handbook – an organized collection of practical know-how, specificallyrelevant to a situation where a company wishes to dispose of a business or undertake a disposalprogram.

International Joint Ventures HandbookEditors’ Note

Acquiring Companies and Businesses in Europe – a country-by-country introduction tothe main legal issues to consider when contemplating an acquisition in Europe.

Guide to Mergers and Acquisitions in Asia Pacific – a country-by-country introduction tothe main legal issues to consider when contemplating an acquisition in Asia Pacific.

A Legal Guide to Doing Business in the United States of America – an overview ofseveral areas of US law that are of interest for non-US companies who either plan to enter theUS market or already conduct business in the United States. Some editions are focused oninvesting companies from particular jurisdictions (including Austria, Germany and Switzerland).

For further details on any of the information contained in this handbook or to obtain copies ofany of the related publications listed above, please contact your Baker & McKenzie contactpartner. Further details on the firm, our people and our practice may be found atwww.bakernet.com.

This handbook is a product of the efforts of numerous lawyers throughout Baker & McKenzie,including the contributors listed below. The editors are extremely grateful to these knowledgeablelawyers for their hard work.

Contributors

Shane ByrnePartnerSenior EditorBaker & McKenzie, LLPTel: +1 415 984 [email protected]

Lewis PopoffKnowledge ManagerCorporate & Securities, North AmericaEditorBaker & McKenzie, LLPTel: +1 734 622 [email protected]

Andrew Boling, Chicago Helen Mantel,Chicago

Roxane Busey, Chicago Laura Rodey,Chicago

Regine Corrado, Chicago Kengo Nishigaki,Tokyo

David Ellis, Chicago Paul McCarthy,Chicago

Peter George, Chicago Emery Mitchell,San Francisco

David Halliday, London Tonia Pinkerton,London

Stuart Hopper, London Dieter Schmitz,Chicago

Edward Harrison, Chicago Carl Svernlov,Stockholm

TABLE OF CONTENTSSECTION 1 OVERVIEW ........................................................................................1

1. Basic Considerations....................................................................22. Understanding the Different Approaches ..................................3

Exhibit 1(a) - Transaction Continuum..........................................4Exhibit 1(b) - Comparison of Typical Contractual

Joint Venture, Equity Joint Venture and Establishment of Wholly-Owned Subsidiary ........................5

SECTION 2 DILIGENCE........................................................................................91. Local Risk Assessment ................................................................92. Compatibility Assessment ............................................................9

Exhibit 2(a) - Local Risk Assessment Checklist........................11Exhibit 2(b) - Compatibility Assessment Checklist ..................16

SECTION 3 STRUCTURE ..................................................................................211. Note on Tax Strategies ..............................................................212. Jurisdiction in Which to Organize the Vehicle ..........................22

Exhibit 3(a) - Example Entity Forms ..........................................233. Capital and Financial Interests..................................................294. Equity Participation ....................................................................345. Management Control ................................................................356. Director and Officer Liability ......................................................35

Exhibit 3(b) - Equity Participation Considerations....................37Exhibit 3(c) - Management Control Considerations ................38

SECTION 4 EXIT AND TERMINATION ..............................................................411. Transfer of Interests ..................................................................422. Sale or Dissolution ....................................................................443. Intellectual Property Considerations ........................................444. Non-Competition ........................................................................455. Other Transition Issues ..............................................................46

SECTION 5 OTHER KEY CONSIDERATIONS ....................................................471. Dispute Resolution ....................................................................472. Methods for Contributing Assets ..............................................483. Non-Competition Provisions ......................................................504. Competition/Antitrust Law ........................................................51

International Joint Ventures HandbookTable of Contents

5. Foreign Ownership Restrictions ................................................546. Employee Transfers and Benefits..............................................55

SECTION 6 DOCUMENTATION ..........................................................................591. Confidentiality Agreement ........................................................592. Term Sheet..................................................................................593. Joint Venture Agreement............................................................604. Company Formation Documents ..............................................605. Ancillary Agreements..................................................................60

Exhibit 6(a) - Sample Mutual Confidentiality Agreement ........62Exhibit 6(b) - Sample Term Sheet..............................................76Supplement A to Term Sheet - Commentary

and Alternative Provisions ..................................................82Supplement B to Term Sheet - Sample

Exit Rights Provisions ..........................................................95Exhibit 6(c) - Joint Venture Issues Checklist ............................97

Appendix A Overview of D&O Duties and Liabilities in Foreign Entities....111

Appendix B Overview of Applicable US Laws Impacting D&O Liability......123

International Joint Ventures HandbookTable of Contents

International Joint Ventures HandbookSection 1 – Overview

1Baker & McKenzie

SECTION 1 OVERVIEWA corporate alliance may take many forms, from a purely contractual relationshipto a jointly owned entity. It may involve transferring an existing business to thejoint control of the parties or indirectly acquiring an existing business from anotherparty, in which case organizing the venture will involve elements of a disposition oracquisition, or both. Alternatively, an alliance may only involve license agreements,joint marketing agreements, affiliate revenue sharing agreements or other types ofagreements in which the parties agree to pursue a set of common goals. Thishandbook focuses on “equity joint ventures” in which a foreign partner and a localpartner participate through equity in a joint venture vehicle for the purpose ofconducting business together in a particular jurisdiction (often an emerging market).

The following is a generalization of the typical corporate transactions and wherejoint ventures fit along this continuum:

There are, however, endless ways in which a joint venture can be structured thatdefy the simple categories shown above. For example, even though the partiesmay set up an equity joint venture, it may be the case that substantial (if not all)contributions are made via arm’s-length commercial agreements. Each opportunitythus will have its own characteristics which suggest a particular strategy, and rarelyis there a single “right” or “wrong” approach.

This handbook considers the different stages of the equity joint venture deal process,from evaluation of the initial opportunity and potential partner, through high levelstructure planning, evaluation of specific legal issues including exit and terminationrights, and drafting the necessary transaction documents.

Outsourcing Corporate Alliances Traditional M&A Greenfield

(Non-Equity) (Equity)

ContractServices

Contractual Joint Ventures

Non-ControllingAcquisition

<50%

Equity JointVenture

ControllingAcquisition

>50%

FullAcquisition

Establishmentof Wholly-

OwnedSubsidiary

/ \

licensing,supply,

distribution

resourcesharing


2 Baker & McKenzie

1. Basic ConsiderationsAmong the reasons commonly cited for entering into a joint venture are:

• Fast entry into local markets;

• Low market entry costs;

• Strong local player (e.g., established customer base, market presence,production capacity, complimentary technology, employee base,distribution chain, and political savvy);

• Economical long-term resource commitment with shared risks;

• Diminished political risk (e.g., government interference,nationalization, political volatility); and

• No suitable acquisition targets or greenfield projects (e.g., establishmentof wholly-owned subsidiary) due to cost, local cultural resistance,foreign ownership restrictions, and other factors.

Potential downsides and risks include:

• Cultural differences between parties from different jurisdictions canlead to significant misunderstandings and inefficiencies;

• Misalignment or divergence of strategies can result in losses and afailure to achieve overall business objectives;

• Operational problems, whether the result of strategic differences,production issues, management control issues or otherwise, can limitthe effectiveness of the venture;

• Lack of trust between the parties can limit cooperation;

• Decision-making and dispute resolution processes can be lengthy andcostly, depending upon what mechanisms are agreed in the jointventure documentation and what practices have evolved during the lifeof the joint venture in this respect;

• Service and contribution agreements, which are often seen as ancillaryto the relationship, can create a crushing dependency of the jointventure on a particular party even though an equity joint venture maybe established with the overarching goal of giving the joint venturesome measure of independence from the participants; and

• Buy-out upon termination can be expensive or difficult.

That said, a joint venture may be the appropriate investment arrangement in theparticular circumstances, and, like any investment arrangement, the potentialdownsides and risks can be managed through careful diligence, thoughtful planningand appropriate documentation.

2. Understanding the Different ApproachesAt the outset of any cooperative arrangement, the parties must determine theappropriate form to regulate their relationship in light of their respective goals andstrategies. For example, in addition to establishing an equity joint venture, theparties should consider whether any of the following types of arrangements wouldbe appropriate in light of their respective commercial objectives:

• a supply agreement for goods or services;

• a distribution or agency agreement;

• a license or franchise agreement;

• a research and development or cooperation agreement;

• a 100% acquisition; or

• establishment of a wholly-owned subsidiary without participation fromanother party.

The Transaction Continuum shown in Exhibit 1(a) depicts generally the levels ofcommitment, integration and control generally associated with these different typesof relationships, and how transaction complexities can vary.


3Baker & McKenzie


Exhibit 1(a) Transaction Continuum

The Comparison chart in Exhibit 1(b) compares in greater detail the basiccharacteristics of a contractual joint venture, equity joint venture and theestablishment of a wholly-owned subsidiary, as three broad categories ofinternational investment. We note that, for those participants who believe thatthe creation of contractual collaboration is sufficient and appropriate for theopportunity under consideration, local laws may impact on the relationship inany event, and imply obligations between the parties on the basis of agency orpartnership as a matter of law which the parties themselves have not expresslyaddressed. As such, it will be beneficial for any potential participant to considerthe possible effect of local laws even at the high level planning stage.

4 Baker & McKenzie

Outsourcing Corporate Alliances Traditional M&A Greenfield

(Non-Equity) (Equity)

ContractServices

Contractual Joint Ventures

Non-ControllingAcquisition

<50%

Equity JointVenture

ControllingAcquisition

>50%

FullAcquisition

Establishmentof Wholly-

OwnedSubsidiary

/ \

licensing,supply,

distribution

resourcesharing

Increasing Degree of Commitment

Increasing Degree of Integration

Increasing Degree of Control

Transaction Complexity

5Baker & McKenzie


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Baker & McKenzie

7Baker & McKenzie


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inve

stor

ow

ns 1

00%

of

subs

idia

ry a

nd, t

here

fore

, all

of it

sas

sets

SECTION 2 DILIGENCEOnce a party has decided to proceed with a joint venture in a foreign jurisdiction,it will be necessary to conduct diligence in connection with the transaction andthe potential partner. If the transaction involves the contribution of an existingbusiness to the venture, the diligence exercise likely will share many of the samecharacteristics as a diligence exercise carried out in a traditional business acquisitionor disposition transaction – e.g., financial, business and legal diligence with respectto the business being contributed. In the international joint venture context, thediligence exercise should also focus on risks that are unique to doing business inthe relevant local market as well as on assessing potential compatibility withprospective partners.

1. Local Risk AssessmentAn international joint venture implies an ongoing relationship in a market that maybe unfamiliar to at least one of the parties. Especially where the joint venture willconduct business in an emerging market, the diligence exercise should thus includean assessment of the particular risks that are unique to that local market, includingpolitical, business, legal, and cultural risks. The Local Risk Assessment Checklist inExhibit 2(a) is designed to assist the analysis of these types of risks.

2. Compatibility AssessmentA joint venture also implies a degree of cooperation between the parties.An important aspect of the joint venture diligence exercise should thus bean evaluation of factors that may indicate compatibility between the prospectiveparties to assess the prospects of a successful joint venture. The CompatibilityAssessment Checklist at Exhibit 2(b) is intended to identify specific operationaland non-operational areas for review in this regard. This checklist can also be usedto help monitor the relationship throughout the life cycle of the joint venture. Bearin mind, however, that:

• Many of these factors can only be assessed through frank discussionsbetween the parties;

Baker & McKenzie 9

International Joint Ventures HandbookSection 2 – Diligence

• The parties may not be forthcoming until they know the transaction islikely to proceed; and

• Cultural sensitivities may impact the level and nature of the diligenceexercise.

A compatibility assessment is thus often easier said than done. Nevertheless, it iscritical to include in the diligence process the persons who will ultimately be involvedin the management of the joint venture so they can begin to develop a workingrelationship and head off potential problems early in the joint venture’s life cycle.

The information and tools included in this section are not intended to be static, andthe levels of importance of the individual factors will undoubtedly vary dependingon the particulars of the party proposing to enter into the joint venture, and itsobjectives for the specific opportunity.

10 Baker & McKenzie


11Baker & McKenzie


Exhi

bit 2

(a)

Loca

l Ris

k As

sess

men

t Che

cklis

t

Polit

ical

and

Bus

ines

s R

isks

Ris

kIs

sue

Poss

ible

Sol

utio

ns

Stab

ility

of L

ocal

Gov

ernm

ent

•Is

the

loca

l gov

ernm

ent s

tabl

e (e

.g.,

mat

ure

dem

ocra

cy,

repr

esen

tativ

e po

litic

al p

artie

s, c

ivili

an c

ontro

ls, f

ree

pres

s,no

rece

nt h

isto

ry o

f dic

tato

rshi

p)?

•On

e w

ay to

ass

ess

stab

ility

is to

exa

min

e co

untr

y st

udie

spr

epar

ed b

y go

vern

men

t age

ncie

s, in

clud

ing

thos

e of

the

USDe

part

men

t of S

tate

(http

://w

ww.

stat

e.go

v/) a

nd th

e CI

A W

orld

Fact

Boo

k (h

ttps:

//w

ww.

cia.

gov/

), as

wel

l as

loca

l new

spap

ers.

•M

inim

ize c

apita

l inv

estm

ent (

rese

rve)

in th

e jo

int v

entu

re e

ntity

.•

Del

ay u

ntil

stab

ility

incr

ease

s.

Corr

uptio

n an

dAn

ti-Co

rrup

tion

Regu

latio

n•

Is c

orru

ptio

n co

mm

on?

•If

so, c

an th

e jo

int v

entu

re e

ffect

ivel

y op

erat

e its

bus

ines

sw

ithou

t par

ticip

atin

g in

cor

rupt

ion?

•On

e w

ay to

ass

ess

corr

uptio

n is

to c

onsu

lt Tr

ansp

aren

cyIn

tern

atio

nal’s

Cor

rupt

ion

Perc

eptio

n In

dex

(http

://w

ww.

trans

pare

ncy.o

rg/)

.•

Esta

blis

h an

d im

plem

ent a

mea

ning

ful c

ompl

ianc

e pr

ogra

mth

at c

onta

ins

stric

t int

erna

l pol

icie

s ag

ains

t cor

rupt

pra

ctic

es.

This

requ

ires

effe

ctiv

e co

mm

unic

atio

n to

the

join

t ven

ture

’sem

ploy

ees,

as

wel

l as

on-g

oing

mon

itorin

g.•

Incl

ude

appr

opria

te re

pres

enta

tions

and

cov

enan

ts in

the

join

t ven

ture

agr

eem

ent a

nd im

pose

pen

altie

s th

at a

lign

the

join

t ven

ture

par

ties

in th

e ou

tcom

e.•

Cond

uct p

rivat

e in

vest

igat

ion

of th

e po

tent

ial p

artn

er a

nd k

eyem

ploy

ees.

Curr

ency

Ris

k•

Is th

e lo

cal c

urre

ncy

conv

ertib

le?

•If

the

curr

ency

can

not b

e co

nver

ted

dire

ctly,

do

alte

rnat

ive

mea

ns o

f con

vers

ion

exis

t?•

Is th

e cu

rren

cy m

arke

t (or

cur

renc

y sy

stem

) sta

ble?

•D

o th

e ex

chan

ge c

ontro

l/cu

rren

cy la

ws

of th

e ju

risdi

ctio

nre

stric

t the

pay

men

t of d

ivid

ends

or m

ovem

ent o

f cap

ital?

Doe

s th

e jo

int v

entu

re e

ntity

form

rest

rict t

he p

aym

ent o

fdi

vide

nds?

Are

ther

e an

y w

ays

to o

verc

ome

the

rest

rictio

ns?

•H

edge

cur

renc

y ris

k w

ith d

eriv

ativ

es.

•Ob

tain

exe

mpt

ions

as

a co

nditi

on to

inve

stm

ent.

•Co

nduc

t joi

nt v

entu

re in

con

vert

ible

cur

renc

y.

12 Baker & McKenzie


Baker & McKenzie

Ris

kIs

sue

Poss

ible

Sol

utio

ns

Loca

l Bus

ines

s Ri

sks

•Is

the

loca

l eco

nom

y st

able

? Is

it p

ossi

ble

that

the

loca

lgo

vern

men

t will

face

fina

ncia

l cris

is?

•Co

uld

man

ufac

turin

g co

sts,

incl

udin

g la

bor c

osts

, inc

reas

edr

astic

ally

?•

Are

labo

r uni

ons

gene

rally

pow

erfu

l in

the

coun

try?

•Is

loca

l con

sum

er b

ehav

ior/

pref

eren

ce s

usce

ptib

le to

dra

stic

chan

ge?

•Ar

e th

ere

exis

ting

or p

oten

tial l

ocal

com

petit

ors

to w

hom

the

loca

l gov

ernm

ent c

an g

ive

spec

ial p

rivile

ges?

•Bu

y in

sura

nce

polic

ies

for c

ount

ry ri

sks.

•As

sess

loca

l bus

ines

s ris

ks in

det

ail a

nd u

se re

alis

tic o

rm

odes

t dis

coun

t rat

es.

•Ve

ntur

e w

ith p

oliti

cally

sav

vy lo

cal p

artn

er.

•W

ork

with

loca

l bus

ines

s, la

bor a

nd p

oliti

cal l

eade

rs to

obt

ain

inve

stm

ent a

nd o

ther

loca

l sup

port

.

Lega

l Ris

ks

Ris

kIs

sue

Poss

ible

Sol

utio

ns

Rule

of L

aw•

Doe

s th

e ta

rget

cou

ntry

hav

e w

ell-e

stab

lishe

d ru

les

of la

w in

gene

ral o

r do

offic

ials

hav

e si

gnifi

cant

dis

cret

ion

with

resp

ect

to in

terp

reta

tion

and

enfo

rcem

ent?

•Se

lect

gov

erni

ng la

w a

nd d

ispu

te re

solu

tion

foru

m o

f aju

risdi

ctio

n w

ith w

ell-d

evel

oped

and

flex

ible

lega

l sys

tem

.

Enfo

rcea

bilit

y of C

ontra

ctua

lSa

fegu

ards

in Jo

int V

entu

reDo

cum

ents

•Is

the

choi

ce o

f law

and

foru

m v

alid

and

enf

orce

able

?•

Are

pena

lty c

laus

es v

alid

and

enf

orce

able

?•

Is a

n in

junc

tion

orde

r to

enfo

rce

cont

ract

ual r

ight

s av

aila

ble?

Can

loca

l cou

rts

enfo

rce

spec

ific

perfo

rman

ce?

•Ar

e lo

cal c

ourt

s pr

ejud

iced

tow

ards

loca

l com

pani

es?

•Ar

e ju

dgm

ents

of l

ocal

cou

rts

pred

icta

ble?

•Ho

w lo

ng w

ill it

usu

ally

take

to o

btai

n an

d en

forc

e a

judg

men

t?•

Doe

s th

e lo

cal g

over

nmen

t hav

e st

rict e

nfor

cem

ent

proc

edur

es?

•Is

the

loca

l cou

ntry

par

ty to

inte

rnat

iona

l tre

atie

s fo

r the

enfo

rcem

ent o

f for

eign

mon

ey ju

dgm

ents

and

arb

itral

awa

rds?

•Pr

ovid

e fo

r arb

itrat

ion

in th

e jo

int v

entu

re a

gree

men

t.•

Sele

ct g

over

ning

law

and

foru

m o

f a ju

risdi

ctio

n w

ithw

ell-d

evel

oped

and

flex

ible

lega

l sys

tem

.

13Baker & McKenzie


Ris

kIs

sue

Poss

ible

Sol

utio

ns

Sele

ctio

n of

Ent

ity•

Iden

tify

avai

labl

e co

rpor

ate

form

s fo

r joi

nt v

entu

res

(e.g

.,co

rpor

atio

n, li

mite

d lia

bilit

y co

mpa

ny, p

artn

ersh

ip)

•W

hich

of t

hese

ent

ity ty

pes

is c

usto

mar

ily/n

orm

ally

use

d fo

rjo

int v

entu

res?

•

Whi

ch o

f the

se o

ffer g

reat

est f

lexi

bilit

y of

man

agem

ent?

•D

oes

loca

l law

requ

ire a

min

imum

cap

ital c

ontri

butio

n?Ar

eco

ntrib

utio

ns in

-kin

d al

low

ed?

Are

con

tribu

tions

sub

ject

to a

n in

depe

nden

t val

uatio

n?•

Can

the

corp

orat

e fo

rm p

ay d

ivid

ends

at a

ny ti

me

or a

re th

ere

any

timin

g re

stric

tions

? C

an d

istri

butio

ns b

e m

ade

out o

fca

pita

l or o

nly

out o

f pro

fits?

Are

ther

e m

anda

tory

rese

rves

?•

Are

inte

rest

s in

the

part

icul

ar k

ind

of e

ntity

ass

igna

ble?

Are

limita

tions

on

the

right

to a

ssig

n/tra

nsfe

r (su

ch a

sre

quiri

ng m

anag

emen

t con

sent

, rig

ht o

f firs

t ref

usal

, or r

ight

of fi

rst o

ffer)

lega

l and

bin

ding

?•

Doe

s a

mem

ber h

ave

any

right

to w

ithdr

aw a

nd h

ave

itsin

tere

st re

deem

ed b

y th

e co

mpa

ny?

Can

mem

bers

dis

solv

eth

e co

mpa

ny in

cas

e of

dea

dloc

k? Is

an

agre

emen

tco

ncer

ning

suc

h a

with

draw

al o

r dis

solu

tion

bind

ing

and

enfo

rcea

ble?

•D

oes

the

loca

l ent

ity p

rovi

de li

mite

d lia

bilit

y to

its

equi

tyow

ners

? W

hat i

s th

e ris

k of

“pi

erci

ng th

e co

rpor

ate

veil?

”•

Doe

s th

e lo

cal c

ount

ry o

r the

cou

ntry

whe

re th

e pa

rty/

entit

yis

loca

ted

reco

gniz

e th

e co

rpor

ate

form

as

a pa

ss-th

roug

hen

tity

for t

ax p

urpo

ses?

Are

ther

e an

y lim

itatio

ns o

n su

chre

cogn

ition

? W

ill c

ontri

butio

ns to

the

corp

orat

e fo

rm b

e ta

xed?

•Is

the

corp

orat

e fo

rm w

ell-r

ecog

nize

d in

the

loca

l bus

ines

sco

mm

unity

for t

he ty

pe o

f bus

ines

s be

ing

cont

empl

ated

?

•If

ther

e is

no

corp

orat

e fo

rm s

uita

ble

for a

join

t ven

ture

,co

ntra

ctua

l arr

ange

men

ts w

ithou

t est

ablis

hing

a c

orpo

rate

form

can

be

a so

lutio

n (e

.g.,

join

t mar

ketin

g, d

istri

butio

n or

supp

ly a

rran

gem

ent,

licen

sing

arr

ange

men

t).•

To re

duce

the

risk

of d

irect

liab

ility

of t

he e

quity

ow

ners

,co

nsid

er in

terp

osin

g ho

ldin

g co

mpa

nies

.•

See

hand

book

Sec

tion

3 (S

truct

ure)

for a

dis

cuss

ion

ofpo

tent

ial c

orpo

rate

form

s.

14 Baker & McKenzie


Ris

kIs

sue

Poss

ible

Sol

utio

ns

Inte

llect

ual P

rope

rty

•D

oes

the

loca

l gov

ernm

ent h

ave

wel

l-est

ablis

hed

inte

llect

ual

prop

erty

law

s an

d ar

e th

ey re

gula

rly e

nfor

ced?

•Ar

e cr

oss-

bord

er tr

ansf

ers

of in

telle

ctua

l pro

pert

y by

assi

gnm

ent o

r lic

ensi

ng s

ubje

ct to

gov

ernm

ent r

evie

w/c

ontro

l?•

Wha

t are

the

man

dato

ry ru

les

rega

rdin

g em

ploy

ee o

wne

rshi

pin

inve

ntio

ns (e

.g.,

in s

ome

coun

tries

, inv

ento

rs a

re e

ntitl

ed to

a ce

rtai

n le

vel o

f com

pens

atio

n fo

r suc

cess

fully

exp

loite

din

vent

ions

whi

ch m

ay in

crea

se in

telle

ctua

l pro

pert

yde

velo

pmen

t cos

ts)?

•D

oes

loca

l law

pro

hibi

t or l

imit

the

right

of a

con

tribu

tor t

ore

ceiv

e an

aut

omat

ic a

ssig

nmen

t or l

icen

se-b

ack

ofim

prov

emen

ts m

ade

by a

lice

nsee

(i.e

., th

e jo

int v

entu

re)?

•D

oes

loca

l law

requ

ire th

at in

telle

ctua

l pro

pert

y de

velo

ped

usin

g go

vern

men

tal f

unds

/spo

nsor

ship

rem

ain

unde

r the

owne

rshi

p of

a lo

cal e

ntity

? (T

his

coul

d im

pact

inte

llect

ual

prop

erty

ow

ners

hip

upon

term

inat

ion

or e

xit.)

•D

oes

loca

l law

requ

ire th

at a

trad

emar

k ca

n on

ly b

ere

gist

ered

by

an e

ntity

loca

ted

and/

or d

oing

bus

ines

s lo

cally

?

•Im

plem

ent a

bus

ines

s st

ruct

ure

whe

re p

ropr

ieta

ry in

form

atio

nw

ill n

ot b

e di

sclo

sed

to th

e lo

cal p

arty

.•

Esta

blis

h an

d im

plem

ent s

trict

inte

rnal

con

fiden

tialit

y po

licie

sfo

r the

join

t ven

ture

ent

ity.

•Fa

ctor

into

on-

goin

g co

ntrib

utio

ns a

nd d

istri

butio

ns a

nyre

quire

d co

mpe

nsat

ion

aris

ing

as a

resu

lt of

em

ploy

ee-o

wne

din

vent

ions

.•

Esta

blis

h th

e jo

int v

entu

re in

a ju

risdi

ctio

n w

ith fa

vora

ble

inte

llect

ual p

rope

rty

law

s.

Antit

rust

•D

oes

the

loca

l gov

ernm

ent h

ave

wel

l-dev

elop

ed a

ntitr

ust

regu

latio

ns a

nd a

re th

ey re

gula

rly e

nfor

ced?

•Re

ques

t a n

o-ac

tion

lette

r fro

m lo

cal a

ntitr

ust a

utho

ritie

s.•

Choo

se a

join

t ven

ture

stru

ctur

e th

at w

ill n

ot v

iola

teap

plic

able

ant

itrus

t reg

ulat

ions

.

Fore

ign

Inve

stm

ent L

aws

•D

o in

vest

men

ts b

y a

fore

ign

pers

on re

quire

prio

r app

rova

lof

any

gove

rnm

enta

l aut

horit

ies?

•D

oes

loca

l law

allo

w a

fore

ign

pers

on to

ow

n a

maj

ority

ofth

esh

ares

in a

com

pany

?

•Fo

reig

n pa

rty

redu

ces

inve

stm

ent t

o le

ss th

an m

ajor

ity,

and

obta

ins

cont

rol o

ver t

he jo

int v

entu

re th

roug

h sh

ares

with

spec

ial v

otin

g po

wer

or t

hrou

gh s

peci

al c

ontra

ctua

lar

rang

emen

ts.

Regu

latio

n (L

icen

sing

)•

Are

fore

ign

com

pani

es a

llow

ed to

hav

e a

licen

se to

do

busi

ness

with

out t

he p

artic

ipat

ion

of th

e lo

cal p

arty

? •

If th

e m

ajor

ity o

f sha

res

in th

e jo

int v

entu

re a

re o

wne

d by

afo

reig

n co

mpa

ny, i

s th

e jo

int v

entu

re a

llow

ed to

hav

e su

cha

licen

se?

•Fo

reig

n pa

rty

redu

ces

inve

stm

ent t

o le

ss th

an m

ajor

ity,

and

obta

ins

cont

rol o

ver t

he jo

int v

entu

re th

roug

h sh

ares

with

spec

ial v

otin

g po

wer

or t

hrou

gh s

peci

al c

ontra

ctua

lar

rang

emen

ts.

Acco

untin

g &

Com

plia

nce

•D

oes

loca

l cor

pora

te la

w s

peci

fy a

ccou

ntin

g ru

les

for t

hepa

rtic

ular

ent

ity ty

pes

or a

re th

e pa

rtie

s fre

e to

cho

ose?

Isth

ere

any

limita

tion

on th

e ab

ility

of t

he n

on-lo

cal p

arty

tore

quire

the

use

of it

s ow

n ac

coun

ting

stan

dard

s?•

Are

any

spec

ific

com

plia

nce

requ

irem

ents

of t

he n

on-lo

cal

part

y ac

cept

able

loca

lly?

•Is

the

finan

cial

repo

rtin

g of

the

join

t ven

ture

sub

ject

to th

ere

quire

men

t tha

t one

or b

oth

part

ies

mai

ntai

n ad

equa

tein

tern

al c

ontro

ls?

•Re

quire

the

join

t ven

ture

ent

ity to

ado

pt a

ccou

ntin

gst

anda

rds

that

are

as

clos

e as

pos

sibl

e to

the

non-

loca

lpa

rty’

s (e

.g.,

sam

e fis

cal y

ear).

•Re

quire

fina

ncia

l sta

tem

ents

to b

e pr

epar

ed in

acc

orda

nce

with

US

GAA

P or

oth

er a

pplic

able

acc

ount

ing

stan

dard

s.•

Reta

in p

erso

nnel

at t

he jo

int v

entu

re w

ho a

re v

erse

din

appl

icab

le s

ecur

ities

and

acc

ount

ing

requ

irem

ents

with

resp

ect t

o in

tern

al c

ontro

ls o

ver f

inan

cial

repo

rtin

g.

15Baker & McKenzie


Cultu

ral R

isks

Ris

kIs

sue

Poss

ible

Sol

utio

ns

Lang

uage

/Soc

iety

•W

hat i

s th

e pr

imar

y la

ngua

ge s

poke

n by

peo

ple

in th

eco

untr

y? H

ow p

reva

lent

is th

e us

e of

Eng

lish?

•W

hat i

s th

e pr

edom

inan

t rel

igio

n in

the

coun

try?

•Ar

e in

tera

ctio

ns b

etw

een

mem

bers

of s

ocie

ty b

ased

upo

nw

ealth

? Cl

ass?

Rac

e? P

edig

ree?

Sen

iorit

y?

•Cu

ltura

l brie

fing

for t

he n

on-lo

cal p

arty

repr

esen

tativ

esne

gotia

ting

the

join

t ven

ture

.•

Cultu

ral t

rain

ing

prog

ram

for e

xpat

riate

em

ploy

ees

of th

eno

n-lo

cal p

arty

.•

Cultu

ral t

rain

ing

prog

ram

(inc

ludi

ng c

omm

unic

atio

ns tr

aini

ng,

prob

lem

-sol

ving

and

cul

tura

l aw

aren

ess)

for l

ocal

em

ploy

ees.

•H

ire lo

cal m

anag

er to

repr

esen

t the

non

-loca

l par

ty in

the

join

t ven

ture

.•

Appo

int j

oint

ven

ture

team

repr

esen

tativ

es w

ho id

eally

spe

akth

e lo

cal l

angu

age

or o

ther

wis

e ar

e lo

cally

trai

ned.

•Re

gula

r tra

inin

g pr

ogra

ms

on p

ract

ices

and

sta

ndar

ds o

f the

non-

loca

l par

ty.

•H

old

mee

tings

freq

uent

ly in

the

loca

l jur

isdi

ctio

n an

d in

the

hom

e ju

risdi

ctio

n of

the

non-

loca

l par

ty (e

.g.,

boar

d m

eetin

gs,

busi

ness

mee

tings

, em

ploy

ee re

treat

s).

Busi

ness

/Cul

tura

lPr

actic

es•

Do p

eopl

e co

mm

unic

ate

with

eac

h ot

her e

xplic

itly

or im

plic

itly?

•Is

com

mon

com

mun

icat

ion

com

bativ

e or

frie

ndly

?•

Wha

t are

the

impo

rtan

t dos

and

don

’ts o

f doi

ng b

usin

ess

inth

e lo

cal j

uris

dict

ion?

Sha

king

han

ds?

Smili

ng?

Han

ding

out

busi

ness

car

ds?

Bein

g ea

rly/l

ate?

Tre

atin

g m

en a

nd w

omen

diffe

rent

ly?

Tipp

ing

in a

bar

/res

taur

ant?

View

of F

orei

gn C

ount

ries

•Is

ther

e an

ant

i-for

eign

(e.g

., an

ti-Am

eric

an) s

entim

ent i

nth

eco

untr

y?•

Has

suc

h a

sent

imen

t his

toric

ally

exi

sted

in th

e co

untr

y?W

hat a

re th

e ke

y hi

stor

ical

eve

nts

of th

e co

untr

y in

volv

ing

the

non-

loca

l par

ty’s

hom

e co

untr

y? I

nvol

ving

the

Unite

d St

ates

?•

Wha

t is

the

leve

l of i

nflu

ence

of f

orei

gn b

usin

ess,

cul

ture

,en

tert

ainm

ent,

etc.

in th

e lo

cal c

ount

ry?

16 Baker & McKenzie


Exhi

bit 2

(b)

Com

patib

ility

Ass

essm

ent C

heck

list

Ope

ratio

nal C

onsi

dera

tions

Ris

kIs

sue

Dis

cuss

ion

Alig

nmen

t of G

oals

•Ar

e th

e go

als

of th

e po

tent

ial j

oint

ven

ture

par

ties

com

plem

enta

ry a

nd a

ligne

d to

war

d th

e su

cces

s of

the

join

tven

ture

?

This

ana

lysi

s re

quire

s th

e co

llect

ion

of th

e go

als

of e

ach

part

y,us

ually

obt

aine

d th

roug

h fra

nk d

iscu

ssio

ns b

etw

een

the

part

ies.

This

dat

a m

ust t

hen

be c

ompa

red

and

care

fully

con

side

red.

In

som

e in

stan

ces,

goa

ls m

ay b

e co

mpl

emen

tary

and

a p

rosp

ectiv

ejo

int v

entu

re p

arty

may

iden

tify

oppo

rtun

ities

for a

ligni

ng g

oals

.In

oth

er c

ases

, a p

rosp

ectiv

e pa

rty

may

det

erm

ine

that

its

goal

san

d th

e go

als

of th

e po

tent

ial p

artn

er a

re n

ot a

ligne

d.

Busi

ness

Cul

ture

s•

Are

the

busi

ness

cul

ture

s of

the

pote

ntia

l joi

nt v

entu

re p

artie

sco

mpa

tible

? F

acto

rs to

con

side

r inc

lude

:-

How

doe

s th

e po

tent

ial p

artn

er m

ake

deci

sion

s(e

.g.,

empl

oyee

em

pow

erm

ent o

r rig

id to

p-do

wn

styl

e)?

-Ar

e re

sults

rew

arde

d?-

How

muc

h va

lue

does

the

pote

ntia

l par

tner

pla

ce o

nlif

esty

le (e

.g.,

valu

ing

empl

oyee

s as

peo

ple

as w

ell a

sw

orke

rs)?

Busi

ness

cul

ture

can

pla

y a

key

role

in s

ever

al a

spec

ts o

f bus

ines

spr

oces

s, in

clud

ing

fost

erin

g in

nova

tion,

dec

isio

n-m

akin

gan

dris

k-ta

king

. In

form

atio

n as

to a

par

ty’s

bus

ines

s cu

lture

can

be

glea

ned

from

fran

k di

scus

sion

s no

t onl

y be

twee

n th

e pr

ospe

ctiv

em

anag

ers

of th

e jo

int v

entu

res,

but

, ide

ally,

als

o w

ith th

e ra

nkan

d fil

e em

ploy

ees.

Out

side

cons

ulta

nts,

inclu

ding

hum

an re

sour

cean

d ot

her b

usin

ess

cons

ulta

nts,

may

be

able

to a

ssis

t with

this

asse

ssm

ent.

Thi

s in

form

atio

n m

ay th

en b

e co

mpa

red

to th

eno

n-lo

cal p

arty

’s b

usin

ess

cultu

re a

nd fo

rmal

bus

ines

s pr

oces

ses

to d

eter

min

e th

e le

vel o

f com

patib

ility.

The

Loc

al R

isk

Asse

ssm

ent

Chec

klis

t in

EExxhhii

bbiitt 22

((aa)) c

onta

ins

addi

tiona

l dis

cuss

ion

rega

rdin

gge

nera

l cul

tura

l ris

ks th

at m

ay b

e pr

esen

t in

the

loca

l jur

isdi

ctio

nth

at c

ould

impa

ct th

e su

cces

s of

the

join

t ven

ture

.

Fina

ncia

l Res

ourc

es•

Will

the

part

ies

be a

ble

to m

eet t

he fu

ndin

g ne

eds

of th

e jo

int

vent

ure?

Part

ies

that

are

not

stro

ng fi

nanc

ially

may

lack

the

reso

urce

sto

com

mit

to a

suc

cess

ful j

oint

ven

ture

ope

ratio

n. P

artie

s th

atar

e st

rong

fina

ncia

lly m

ay b

e be

tter a

ble

to m

eet t

heir

fund

ing

and

oper

atio

nal c

omm

itmen

ts to

the

join

t ven

ture

. Th

e fin

anci

alst

reng

th o

f the

pot

entia

l par

tner

may

be

dete

rmin

ed th

roug

hpu

blic

ly av

aila

ble

info

rmat

ion,

cre

dit c

heck

s an

d fro

m o

ther

sou

rces

supp

lied

by th

e po

tent

ial p

artn

er.

This

info

rmat

ion

shou

ld a

lso

be u

sed

to c

raft

appr

opria

te re

quire

men

ts a

nd p

rote

ctio

ns w

ithre

spec

t to

on-g

oing

cap

ital c

ontri

butio

ns.

17Baker & McKenzie


Ris

kIs

sue

Dis

cuss

ion

Oper

atio

nal S

avvy

•D

oes

the

pote

ntia

l par

tner

hav

e th

e de

sire

d op

erat

iona

l and

perfo

rman

ce c

apab

ilitie

s?In

form

atio

n ab

out o

pera

tiona

l and

per

form

ance

cap

abili

ties

may

be d

eriv

ed th

roug

h re

view

s of

a p

oten

tial p

artn

er’s

stre

ngth

in it

spa

rtic

ular

mar

kets

, an

anal

ysis

of t

he p

artn

er’s

pot

entia

l mar

ket

wea

knes

ses

and

the

part

ner’s

his

toric

al o

pera

ting

and

finan

cial

perfo

rman

ce. T

his

info

rmat

ion

may

be

iden

tifie

d th

roug

h in

terv

iew

san

d di

scus

sions

with

key

man

ager

s, b

usin

ess

clien

ts a

nd a

ssoc

iate

sof

the

pote

ntia

l joi

nt v

entu

re p

artn

er.

A re

view

of a

pot

entia

lpa

rtne

r’s o

pera

tiona

l sav

vy s

houl

d al

so ta

ke in

to c

onsi

dera

tion

the

com

petit

ive

envi

ronm

ent i

n th

e m

arke

ts in

whi

ch it

doe

sbu

sine

ss.

It is

als

o he

lpfu

l to

cons

ider

the

exte

nt o

f the

pot

entia

lpa

rtne

r’s e

xper

ienc

e in

coo

pera

tive

arra

ngem

ents

of t

he s

ort

cont

empl

ated

, or w

ith s

imila

r par

tner

s (e

.g.,

othe

r mul

tinat

iona

ls).

Lead

ersh

ip C

omm

itmen

t •

Will

the

part

ies

com

mit

the

nece

ssar

y in

tern

al le

ader

ship

toth

e su

cces

s of

the

join

t ven

ture

?Th

is in

clud

es a

n an

alys

is o

f the

pro

spec

tive

party

’s o

wn

lead

ersh

ipsu

ppor

t for

any

par

ticul

ar jo

int v

entu

re a

nd th

e le

ader

ship

supp

ort

of th

e po

tent

ial p

artn

er.

This

ana

lysis

sho

uld

incl

ude

iden

tific

atio

nof

the

lead

ers

from

eac

h pa

rty

that

are

com

mitt

ed to

the

join

tve

ntur

e’s

succ

ess

(incl

udin

g th

eir t

itles

and

role

s w

ithin

thei

rre

spec

tive

orga

niza

tions

), th

e de

gree

to w

hich

any

per

form

ance

eval

uatio

ns o

f the

se in

divi

dual

s w

ill b

e tie

d to

the

succ

ess

of th

ejo

int v

entu

re (i

.e.,

inte

rnal

acc

ount

abili

tyfo

r the

join

t ven

ture

), an

dth

e ro

le th

at th

ese

indi

vidu

als

will

pla

y in

the

join

t ven

ture

.

Busi

ness

Pla

n•

Do

the

part

ies

have

a c

lear

and

wel

l-dev

elop

ed b

usin

ess

plan

for t

he jo

int v

entu

re?

A cl

ear a

nd w

ell-d

evel

oped

bus

ines

s pl

an th

at a

ligns

the

goal

sof

the

pote

ntia

l par

ties

is v

alua

ble

in g

uidi

ng th

e pa

rtie

s to

war

da

succ

essf

ul re

latio

nshi

p. T

he k

ey d

ata

elem

ent f

or th

is a

naly

sis

is th

e pr

elim

inar

y dr

aft b

usin

ess

plan

and

its

rela

tions

hip

to th

ego

als

of th

e pa

rtie

s. I

n m

any

inst

ance

s, p

oten

tial p

artie

s w

ill be

hesi

tant

to e

xpen

d co

nsid

erab

le re

sour

ces

deve

lopi

ng a

det

aile

dbu

sine

ss p

lan

befo

re b

elie

ving

that

the

vent

ure

will

pro

ceed

.At

a m

inim

um, h

owev

er, t

he p

artie

s sh

ould

agr

ee o

n th

e ba

sic

outli

ne o

f the

fund

amen

tals

of t

he b

usin

ess

plan

, inc

ludi

ngec

onom

ic in

tere

sts

with

resp

ect t

o pr

ofits

(i.e

., di

strib

utio

ns v

s.re

inve

stm

ent i

n th

e jo

int v

entu

re),

befo

re a

gree

ing

to m

ove

forw

ard

toge

ther

as

busi

ness

par

tner

s.

18 Baker & McKenzie


Non

-Ope

ratio

nal C

onsi

dera

tions

Ris

kIs

sue

Dis

cuss

ion

Repu

tatio

n•

Doe

s th

e po

tent

ial p

artn

er h

ave

a go

od re

puta

tion

in th

e lo

cal

and

glob

al b

usin

ess

com

mun

ity?

A pr

ospe

ctiv

e pa

rty

shou

ld c

onsi

der t

he o

bvio

us p

oten

tial

dow

nsid

es o

f alig

ning

itse

lf w

ith d

isre

puta

ble

busi

ness

es a

ndbu

sine

ss p

ract

ices

, par

ticul

arly

if th

e re

latio

nshi

p w

ith th

edi

srep

utab

le b

usin

ess

coul

d da

mag

e it

or it

s br

and

imag

e in

the

loca

l or w

orld

mar

ket.

Info

rmat

ion

abou

t bus

ines

s re

puta

tion

may

be

iden

tifie

d th

roug

h pu

blic

pre

ss re

leas

es a

s w

ell a

sth

roug

h in

terv

iew

s an

d di

scus

sion

s w

ith b

usin

ess

clie

nts

and

asso

ciat

es o

f the

pot

entia

l joi

nt v

entu

re p

artn

er.

In a

dditi

on,

enga

ging

a p

rivat

e in

vest

igat

ion

firm

can

pro

vide

add

ition

alin

sigh

t.

Lega

l Com

plia

nce

•W

hat i

s th

e po

tent

ial p

arty

’s le

gal t

rack

reco

rd?

Not

onl

y sh

ould

the

pros

pect

ive

part

y in

quire

as

to th

e po

tent

ial

part

ner’s

trac

k re

cord

for l

egal

com

plia

nce

and

the

proc

esse

san

d pr

oced

ures

that

the

pote

ntia

l par

tner

has

in p

lace

for e

nsur

ing

com

plia

nce

with

app

licab

le la

ws,

but

it s

houl

d al

so c

onsi

der t

hege

nera

l leg

al c

ompl

ianc

e la

ndsc

ape

for t

he ju

risdi

ctio

n in

whi

chth

e jo

int v

entu

re m

ay o

pera

te (e

.g.,

esta

blis

hed

rule

s of

law,

effe

ctiv

e an

d co

nsis

tent

enf

orce

men

t of t

hose

law

s an

dso

phis

ticat

ion

of ju

dici

al s

yste

m).

Thi

s in

form

atio

n is

ofte

nob

tain

ed th

roug

h tra

ditio

nal d

ue d

ilige

nce

requ

ests

and

sea

rche

sof

pub

licly

ava

ilabl

e lit

igat

ion

reco

rds.

Ongo

ing

Dis

pute

s•

Wha

t is

the

natu

re a

nd e

xten

t of a

ny o

ngoi

ng le

gal d

ispu

tes

that

invo

lve

the

pote

ntia

l par

tner

?W

hile

dis

pute

s in

volv

ing

the

pote

ntia

l par

tner

(eve

n if

unre

late

dto

the

pote

ntia

l joi

nt v

entu

re) m

ay n

ot d

irect

ly im

pact

its

repu

tatio

n or

com

plia

nce

hist

ory,

sign

ifica

nt d

ispu

tes

may

dist

ract

lead

ersh

ip a

ttent

ion

from

the

succ

ess

of th

e jo

int v

entu

re.

Lega

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19Baker & McKenzie


Ris

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Baker & McKenzie 21

International Joint Ventures HandbookSection 3 – Structure

SECTION 3 STRUCTUREOnce a party has decided to proceed with a joint venture with a particular partner,the next step is to determine how the joint venture should be structured. Thereare a number of business, legal and tax considerations that any prospective partyshould take into account in this regard. First, a party will need to consider whatcorporate structure it should use in order to own its interest in the joint venture.It will also need to consider what type of equity ownership and management controlit should have. This section provides an overview of the considerations with respectto the jurisdiction in which to organize the vehicle (and general entity forms fromwhich to choose), capital and financial interests, equity participation, managementcontrol, and director and officer liability.

1. Note on Tax StrategiesA detailed discussion of tax planning strategies is outside the scope of this handbook;however, it is essential to involve tax specialists and seek their input at the earlieststages of joint venture planning. Some of the key tax areas to consider whenplanning a joint venture structure include the following taxes and duties applicableto the future business (which are common to most jurisdictions):

• Income/profit taxes;

• Value added tax (VAT)/sales tax;

• Real and personal property taxes;

• Employee-related taxes;

• Customs duties;

• Tax holidays;

• Withholding taxes;

• Double taxation treaties; and

• Marketplace transfer pricing regulations applicable for goods andservices.

22 Baker & McKenzie


2. Jurisdiction in Which to Organize the VehicleFor tax efficiency, initial consideration should be given to the jurisdiction wherethe direct jointly owned entity should be organized. For example, it may well bebeneficial from a tax perspective for the parties to form an entity outside thejurisdiction in which the joint venture operates (such as a Delaware limited liabilitycompany, a British Virgin Islands company, or other entity formed in a low taxcommon law jurisdiction), which will then own the local joint venture operatingentity.

In many cases, however, the parties will create a new local joint venture entity.Under this scenario, the prospective party will need to consider what entity formis appropriate to the particular joint venture. The chart in Exhibit 3(a) highlightsthe characteristics of three potential entity forms that a party may consider.

Exhibit 3(a) Example Entity Forms

Baker & McKenzie 23


Entity Type Characteristics

Corporation • Limited liability• Double taxation• Flexibility in equity structure (e.g., joint venture parties typically could cause shares

to be issued with preferred allocation of profits, preferred return, preference upondissolution or other special features)

• Local corporate formalities (e.g., some jurisdictions require a company to file auditedaccounts, which can be costly to prepare and result in a loss of confidentiality)

• Strong identity (the corporate form is generally familiar to potential lenders, customersand employees, and local corporate laws are generally well-established)

• Similar non-US entities: Brazil: SA (Sociedade por Ações); Germany: AG(Aktiengesellschaft); Japan: KK (Kabushiki Kaisha); Netherlands: NV (NaamlozeVennootschap)

Limited LiabilityCompany

• Limited liability• Often flow-through treatment• Flexibility in equity structure (see above)• Local corporate formalities (see above)• Strong identity (although the LLC is a relatively new entity form in the United States,

its US popularity is increasing and it shares many of the same advantages of beinga stand-alone entity as does a corporation; in many non-US jurisdictions, the localequivalent of an LLC has been permissible and common for many decades)

• Similar non-US entities: Brazil: Ltda (Sociedade por Quotas de ResponsabiliadadeLimitada); China: WFOE (wholly foreign owned enterprise); Germany: GmbH(Gesellschaft mit beschränkter Haftung); Japan: GDK (Godo Kaisha); Netherlands: BV (Besloten Vennootschap)

Partnership • Unlimited liability for a general partnership (both joint venture partners would havejoint and unlimited liability for any liabilities incurred by the joint venture, excludingonly those situations where one of the joint venture partners did not act with eitherexpress or implied authority to bind the joint venture)

• Typically flow-through treatment• Fewer corporate formalities (the joint venture would in most circumstances not need

to make local law filings, e.g., the reporting of financials or reporting of changes inofficers and directors)

• Lack of corporate identity (it is relatively rare to find a joint venture organized asa partnership unless the partners to the general partnership are special purposecompanies with limited liability)

• Consider limited partnership (a limited partnership would allow the non-local partnerto retain limited liability while the local joint venture partner could act as generalpartner with unlimited liability; however, this entity form would preclude the non-localpartner from taking any role in the management of the joint venture. Thus, the partiescould form a jointly owned general partnership in which the management provisionsare laid out)

• Similar non-US entities: Germany: GmbH & Co. KG (limited partnership with a limitedliability entity as the general partner); Japan: YSJK (Yugen sekin jigyo Kumiai – variantof US LLP); Netherlands: VOF (Vennootschap ondar firma – general partnership);CV (Commanditaire vennotschap – limited partnership)

24 Baker & McKenzie


A prospective party might also consider acquiring a portion of its joint venturepartner’s interest in an existing entity, thereby inheriting the corporate form ofthe existing entity. Under this scenario, the prospective party should perform duediligence to assess and plan for liabilities it might assume by acquiring part of theexisting entity.

Regardless of whether the joint venture vehicle is a newly formed entity or anexisting entity, from the non-local party’s perspective the joint venture vehicleshould be organized, if possible, in a jurisdiction in which: (i) there is a well-testedcorporate law regime, (ii) specific performance is available as a remedy (this isparticularly important with respect to enforcing provisions in the joint ventureagreement on equity transfers), and (iii) the parties are able to limit the potentialliabilities of the representatives who sit on the joint venture board.

Holding Company Outside of Local JurisdictionBecause these criteria will not be met in many developing countries, a prospectiveparty should consider establishing a holding company in a well-established legaljurisdiction, utilizing a joint venture agreement governed by the laws of thejurisdiction in which the holding company is established, and operating the jointventure through a company that is wholly owned by the holding company.If a holding company structure is not possible, the prospective party could considerusing an escrow for the parties’ shares in the joint venture vehicle and an irrevocableproxy to guarantee the non-local party’s rights with respect to equity transfers.A simple diagram of a holding company structure is:

Holding company structure

JV party

JV (localjurisdiction)

JV party

HoldCo (taxefficient entity)

The following threshold questions should be asked in considering whether a holdingcompany structure is appropriate:

• Is 100% foreign ownership (i.e., by the holding company) of a local entity(i.e., the joint venture operating entity) permitted under local law andpractice of the jurisdiction in which the joint venture will operate?

• Is it possible to address favorably any significant practical disadvantages,such as obtaining investment control clearance or any permits required tooperate the business, which are presented by 100% foreign ownership?

• Are local nationals or local entities (i.e., the local joint venture party)permitted to own part or all of a foreign entity (i.e., the holdingcompany)?

If the answer to these questions is “yes,” the prospective party might be able tonegotiate for a vehicle outside the jurisdiction where the joint venture will conductits business if that local jurisdiction does not have a well-tested legal regime.Although any holding company structure will be informed largely by the tax positionof the parties, common law jurisdictions (e.g., the United States, Canada and thecomponent jurisdiction of the United Kingdom) tend to offer greater flexibility incapital structure, management structure, transfers of interests and dissolution ascompared to civil law jurisdictions (e.g., Continental European jurisdictions).

Directly Owned Entity In the Local JurisdictionIf it is not possible to establish a joint venture vehicle outside the jurisdiction wherethe joint venture will conduct its business, the prospective party will need to examinethe different local entity types and available flexibility with respect to tax, equity,management, transfers of interest, and accounting/auditing issues in the jurisdictionin which the joint venture will operate. A simple diagram of a direct ownershipstructure is:

Direct ownership structure

Baker & McKenzie 25


JV party JV party

JV(local

jurisdiction)

26 Baker & McKenzie


The following are among the questions that should be asked when determining theappropriateness of a given local entity type:

EEnnttiittyy TTyyppee

• What are the available entity types in the local jurisdiction? Are theysimilar to a US corporation, limited liability company, partnership orhybrid of the foregoing?

• Which of these entity types may legally be used for a business of thekind contemplated for the joint venture? Which are normally/commonlyused (as a matter of local practice) for the kind of business contemplatedfor the joint venture?

• Which types of entities provide limited liability for the equity owners?

TTaaxx

• What tax rates will be applicable to the joint venture vehicle?

• What other taxes will be applicable to the non-local party as a foreignshareholder in the joint venture vehicle (e.g., withholding or othertaxes on dividends, royalties, or payment for products or services)?Do applicable double taxation treaties reduce these taxes?

• What are the rules permitting deduction and set-off of losses andexpenses?

EEqquuiittyy

• How is the equity interest in the joint venture vehicle determined(e.g., by number of shares or units, or by specified percentages)?

• If equity participation is expressed in shares or units, to what extent isit possible to have shares or units with special preferences, such thatsome shares or units carry a preferred allocation of profits, preferredreturn or a preference on dissolution?

• Are there restrictions on majority ownership by a non-resident entity?Is the non-local party in any way prohibited from owning a majorityinterest? Are shares/units of the same class capable of being held bymore than one person?

• May the voting power of each share/unit be different from one voteper share/unit? May the entity have non-voting shares/units?

• If it is possible to express the equity interest of the parties inpercentage terms:

– May a party’s share of profits be different from its share of assetson dissolution?

– May there be special allocations of profits to one or another party(including a preferred return to one party)?

– May a party’s voting percentage be different from its percentageinterest in profits or asset distributions on dissolution?

MMaannaaggeemmeenntt

• May the parties manage the entity directly, without directors, managersor officers? If so, must one vote attach to each share/unit or is itpossible to vary the number of votes that attach to the shares/units?

• Are there any matters for which a supermajority vote is required asa matter of law?

• Are the parties free to agree on a requirement of unanimity orsupermajority for certain specified decisions? Are these types ofprovisions specifically enforceable as opposed to merely legal andbinding?

• What notice and quorum requirements apply to board/shareholdermeetings? What will happen if a quorum does not exist? Will it bepossible to hold meetings on short notice or to take actions by writtenresolution? Must meetings be held within the local jurisdiction?

• Is it customary or possible to utilize a board of directors? If so, maythe parties each appoint a specified number of directors? If so, is itpossible to have two (or more) classes of directors, each with the samevoting power but each class appointed by one of the joint ventureparties? If not, is it mandatory that each joint venture party have avote for director equal to its number of shares/units? Are there anyresidency or nationality requirements for directors or officers?

Baker & McKenzie 27


28 Baker & McKenzie


• Is it possible for the joint venture parties to adopt a voting agreementpursuant to which they agree to vote for the individual directorsnominated by the other party? Is such an agreement specificallyenforceable (i.e., would a court step in and appoint a director nominatedby a party even if the other party refused to vote for the director)?May directors grant proxies?

• Is a two-tier board with supervisory and managing levels appropriateor applicable under local law?

• Is it permissible or mandatory for the joint venture vehicle to haveofficers (i.e., persons given a specific function in the conduct of theday-to-day business of the entity, with specified powers)? If so, howare officers appointed (e.g., by the board of directors)?

• Does local law require information with respect to the names andauthority of officers and directors to be filed publicly?

• Are limitations on the authority of an officer or director valid andbinding on third parties? Is there a way under local law to notify thirdparties of any such limitations (e.g., commercial register)?

• What are the rules with respect to removing officers and directors?Can a party revoke its own appointment, or is a shareholder or boardvote required?

TTrraannssffeerrss ooff IInntteerreessttss

• Are interests in this kind of entity transferable? If so, how is a transferaccomplished (e.g., delivery of a certificate, recordation on the entity’sregister)?

• Are complete prohibitions on transfers and assignments valid? If not,are limitations on the right to transfer/assign (e.g., right of first refusalor requiring shareholder or management consent) legal and binding?Are these types of restrictions binding on third parties? Are thereany formal requirements for these restrictions to be binding, such asa notation on a certificate or a notation in the commercial register?

Baker & McKenzie 29


• If transfer restrictions are binding on third parties, are both the entityand the other party nonetheless required to recognize any rights inan assignee/transferee if interests are transferred in violation of sucha restriction?

• Does an assignee/transferee who has acquired an interest in violationof a restriction nonetheless have economic rights as against the entity(e.g., rights to profit and/or asset distributions)?

• Does a party have any right to withdraw and have its interest redeemedby the entity? If so, how is the redemption price determined?

AAccccoouunnttiinngg//AAuuddiittiinngg

• Does local law require the entity to name a statutory (or other)auditor or commissaire? What are the specific functions of this office?Is any financial information required to be publicly filed?

• Does local corporate law specify accounting rules for the entity or arethe joint venture parties free to choose themselves?

• Are there any limitations (including requirements that may be imposedby local lenders) on the ability of the non-local party to require theuse of its own accounting standards? Do the non-local party’saccounting and auditing standards conform to relevant local law?

3. Capital and Financial InterestsFundamental to the establishment of a joint venture is identifying the contributionsthat the parties will make to the venture. These contributions may be both tangibleand intangible and the parties will have to agree on their respective valuations. Thenature and value of these contributions will in turn be reflected in some manner inthe degree of ownership of each of the parties in the joint venture. Further, whileownership will typically reflect each party’s financial interest in the venture, it alsois likely to impact the degree of control over the venture by each party and themanagement structure through which that control will be exercised.

Capital ContributionsSubject to local law considerations, the parties’ contributions may be in a varietyof forms, including cash, tangible property (including real property) know-how orother intellectual property, and other intangibles. In some cases, one or anotherof the parties will be contributing a going concern to be continued by the jointventure. The following questions should be considered with respect to capitalcontributions in connection with the proposed joint venture structure:

• Are there restrictions under local law on the percentage amount thatcan be owned by a non-resident?

• May a joint venture party’s share of profits be different from its shareof assets on dissolution?

• May there be special allocations of profits to one or another party(including a preferred return to one party)?

• May a party’s voting percentage be different from its percentageinterest in profits or asset distributions on dissolution?

• Are there any minimum capital requirements? Does a capitalcontribution need to be registered with any governmental authorities?

• Are there any rules or restrictions on in-kind contributions(e.g., contributions of assets necessary to conduct the business of thejoint venture)? Is there a required ratio under local law of cash versusin-kind contributions? What type of valuation is required for in-kindcontributions (e.g., by independent firm or governmental authorities)?

• How, and when, are in-kind contributions to be valued? Will one partyconduct due diligence on in-kind contributions of the other party?Will the contributing party give any representations and warrantieswith respect to assets being contributed?

• Are any third party consents or notices required for any in-kindcontributions?

• If assets are being contributed and those assets are located in a separatejurisdiction, is a separate conveyancing document required under thelaws of that jurisdiction?

30 Baker & McKenzie


• Are any transfer taxes or duties applicable to in-kind-contributions?

• Can the entity be capitalized through loans? Does local law regulatedebt-to-equity levels? Are there any tax or other advantages tofunding through debt rather than equity, or vice versa?

• Will the joint venture business require ongoing funding (e.g., forworking capital, expansion)? If so, will each party be required tocontribute to future calls for funding pro rata to its initial investment?Will the commitment to fund be capped or open-ended? What shouldhappen if any ongoing funding obligation is not met?

• What are the requirements for reducing capital (e.g., approval ofcommercial court)?

Ongoing Financing NeedsIf a joint venture is sufficiently capitalized and is organized as a stand-alone entity,it may be able to obtain financing on its own to meet its ongoing operational needs.Frequently, however, substantial financing will have to depend upon the support ofthe parties themselves, including in the form of additional capital contributions.If the parties are to provide loan financing in addition to capital contributions,it should be determined at the outset. As an alternative, the parties may preferto have the joint venture obtain financing locally but supported by the parties’guarantee. Financial institutions will generally prefer that these guarantees bejoint and several, that is, that each party be responsible for the full amount of anyloans issued in reliance on the guarantees. On the other hand, if the parties havediffering financial standing, this may as a practical matter more significantly exposethe stronger party in the event that the joint venture fails. In a US joint venturebetween US and non-US parties, the US party or parties may feel more exposedsimply because it will be easier for the financial institution to enforce the guaranteein the United States. In this case, the parties may wish to negotiate for several (andnot joint) guarantees, under which each party is responsible only for its pro ratashare of any financing of the venture.

Profit DistributionIn addition to planning for the financing needs of the joint venture, the parties alsomust address their plans with respect to profit distribution. As a threshold matter,

Baker & McKenzie 31


the parties should agree on whether, and to what extent, profits will be reinvestedin the business of the joint venture. This goes to the parties’ overall goals for enteringinto the relationship and it should be assessed during the diligence phase. Beyondthat, tax planning will be a crucial element for structuring the joint venture ina way that enables the parties to extract profits in an economically efficient manner.The following questions should be considered in this regard:

• What are the rules for declaring dividends and distributing profits?If the parties have developed a plan for the payment of dividends, doestheir plan conform to relevant local law? For example, are the partiesfree to determine when voluntary distributions can be made and bywhom? Are there tax or regulatory constraints on the distribution ofprofits? Will it be necessary to establish a special structure for theeffective distribution of profits (e.g., an income access structure)?

• Can distributions be made out of capital or only out of profits underlocal law? Are there requirements for mandatory reserves?

• Is it possible to provide for “special allocations” of profits (e.g., allocationof profits from one aspect of the business to one of the parties ina ratio different from the allocation of profits from another aspect ofthe business)?

ConsolidationFinancial Accounting. Parties to a joint venture frequently need or at least wantto be able to treat their interest in the venture on a consolidated basis for financialaccounting purposes. The accounting rules relating to consolidation vary fromcountry to country.

In the United States, it is ordinarily necessary for a party to a joint venture to“control” the venture in order to consolidate under generally accepted accountingprinciples. Control is generally present where the party owns more than 50%of the voting shares or equivalent equities in the joint venture. A more difficultsituation arises where the ownership of the joint venture is split 50/50. Here, it issometimes possible for a party to be considered in “control” by having the right todecide something of considerable importance without the agreement of the otherparty (e.g., the right to appoint or remove the majority of the board of directorsor other governing body, or the power to direct their votes). The nuances of

32 Baker & McKenzie


determining whether control is present are beyond the scope of this handbook butit is vital that parties contemplating a venture take these issues into account as earlyas possible.

Consolidation is particularly important to a party contributing a business to theventure. If the contributing party can consolidate, it can report the financial resultsof the venture on a line-item-by-line-item basis. Thus, the party’s share of the sales,costs and earnings of the venture will be reported as part of the sales, costs andearnings of the party. If the results cannot be reported on a consolidated basis, onlythe net profit can be reported.

Tax. Separate from the analysis of consolidation for financial accounting purposes iswhether the joint venture entity can be included in a consolidated income tax filing.Subject to certain limitations, advantages of filing consolidated tax returns forUS federal income tax purposes include the following:

• offsetting operating losses of the joint venture against the controllingparty’s profits;

• offsetting capital losses of the joint venture against the controllingparty’s capital gains;

• avoidance of tax on distributions from the joint venture to thecontrolling party;

• deferral of income on transactions between the joint venture and thecontrolling party; and

• use by the controlling party’s corporate group of the excess of thejoint venture’s foreign tax credit over its limitation.

Disadvantages of filing consolidated tax returns for US federal income tax purposesinclude the following:

• deferral of losses on transactions between the controlling party and thejoint venture;

• additional bookkeeping required to keep track of deferred transactionsbetween the controlling party and the joint venture;

• possible elimination of foreign tax credits because of a lack of foreignincome on the part of the joint venture; and

Baker & McKenzie 33


34 Baker & McKenzie


• possible accumulated earnings tax liability when the consolidatedaccumulated earnings and profits of the group exceed the minimumcredit amount.

Internal Controls Over Financial ReportingThe Sarbanes-Oxley Act of 2002, together with its related regulatory reforms,significantly changed the corporate governance practices not only of US publiccompanies, but also of non-US companies with securities that are listed, traded orotherwise registered in the United States. Often of particular concern in the jointventure context are the rules that require maintenance of internal control overfinancial reporting that conforms to US accounting and securities law standards.In particular, Section 404 of the Sarbanes-Oxley Act requires each annual report ofa public company to include a report by management on the company’s internalcontrol over financial reporting. Section 404 also requires the company’s auditorsto attest to, and report on, management’s assessment of the effectiveness of thecompany’s internal control over financial reporting. Careful diligence and on-goingmonitoring are typically necessary to assess the risk of a particular target or jointventure party with respect to Sarbanes-Oxley compliance.

Even in situations where the US company does not consolidate or otherwise controlthe joint venture vehicle, internal control issues still arise to varying degrees,depending on such factors as the level of the US company’s ownership, the materialityof the investment to the US company, and the level of control that the US companyexerts. For example, where a US company is a minority partner in a joint venture,it may not need to expressly certify and obtain an audit report with respect to theinternal controls of the joint venture, but it will need to do so with respect to itsown financial statements and various line items which contain financial informationwith respect the joint venture. Accordingly, a joint venture party who is subject tothe Sarbanes-Oxley Act will typically need to ensure that the joint venture maintainsan appropriate level of internal control over financial reporting.

4. Equity ParticipationWhen determining how a joint venture will be controlled, a prospective party mustconsider both the equity interest that each joint venture party will own in the jointventure, and what each joint venture party’s role will be in the management anddecision-making of the joint venture.

Baker & McKenzie 35


There are generally three options for structuring the equity ownership of a jointventure: (1) 50/50 equity ownership split between the prospective party and itsjoint venture counterpart; (2) the prospective party owning a majority equity interest;and (3) the prospective party owning a minority equity interest. The EquityParticipation Considerations chart in Exhibit 3(b) compares these options.

5. Management ControlManagement of a joint venture will typically consist of a board of directors (orsimilar body) that makes extraordinary decisions on behalf of the joint venture aswell as a slate of officers or managers who oversee the day-to-day business of thejoint venture. Typically, the level of management control held by a joint ventureparty will correspond to its level of equity ownership. However, subject to any locallaw limitations, it is possible for joint venture parties to establish a managementstructure in whatever form they think is most beneficial, even if the allocation ofmanagement control does not correspond with each joint venture party’s equityinterest.

There are generally three options for structuring the management of a joint venture:(1) 50/50 management control; (2) non-local party with a stronger managementrole; (3) non-local party with a weaker management role. The Management ControlConsiderations chart in Exhibit 3(c) compares these options. A prospective partyshould individually analyze each joint venture to determine what managementstructure best suits its particular set of circumstances.

6. Director and Officer LiabilityAnother area to consider when determining the structure of the joint venture is thepotential exposure to liabilities at the director and officer level, particularly wherethe parties envision a joint venture vehicle in a foreign jurisdiction.

Although, as a general matter, the duties of a director of a foreign entity are similarin many respects to those of a US corporate director, the exact nature and scope ofthose duties and liabilities may vary depending on the laws of the country in whichthe joint venture entity is incorporated. Individuals who are asked to serve as adirector of a foreign entity should familiarize themselves with the broad range ofissues that they are likely to face while serving in that capacity in any given country

and should be prepared to address them, if and when they arise. They should remainfully informed of the company’s activities and monitor the company’s compliancewith the legal requirements of that jurisdiction.

Appendix A – Overview of D&O Duties and Liabilities in Foreign Entitiesprovides a brief overview of the duties, risks and potential civil and criminalliabilities of a director of a non-US entity.

Likewise, several US laws, including the Foreign Corrupt Practices Act, moneylaundering, trade and investment sanctions, export controls and anti-boycottregulations could impact the joint venture and expose the joint venture, its directorsand a US joint venture party to liability. Appendix B - Overview of ApplicableUS Laws Impacting D&O Liability briefly summarizes these laws.

36 Baker & McKenzie


37Baker & McKenzie


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ina

grea

t dea

l of c

onfli

ct.

•P o

tent

ially

mor

e w

ork

for t

he p

artie

s: A

50/5

0st

ruct

ure

coul

d m

ean

mor

e in

tens

e w

ork

and

agr

eate

r tim

e co

mm

itmen

t for

bot

h jo

int v

entu

repa

rtie

s, a

s co

mpa

red

to a

maj

ority

or m

inor

itysi

tuat

ion,

in o

rder

to k

eep

a w

orka

ble

bala

nce

betw

een

the

join

t ven

ture

par

ties.

•M

aint

ain

cont

rol:

By o

wni

ng a

maj

ority

of t

hejo

int v

entu

re, t

he n

on-lo

cal p

arty

can

bet

ter

impl

emen

t its

bus

ines

s pl

an a

nd s

trate

gy fo

rth

ejo

int v

entu

re.

•Co

ntr o

l exp

osur

e of

inte

llect

ual p

rope

rty

and

know

-how

: Thi

s st

ruct

ure

can

help

pre

vent

the

prem

atur

e ex

posu

re o

f tec

hnol

ogic

al o

r oth

erkn

ow-h

ow to

the

loca

l par

ty a

nd m

ight

pre

vent

the

loca

l par

ty fr

om g

aini

ng a

com

petit

ive

adva

ntag

e in

the

join

t ven

ture

’s in

dust

ry.

•M

a y re

sult

in la

ck o

f mot

ivat

ion

by lo

cal j

oint

vent

ure

partn

er:

Whe

re m

ultin

atio

nal c

orpo

ratio

nsm

aint

ain

cont

rol o

ver a

join

t ven

ture

, the

y of

ten

have

a te

nden

cy to

run

the

join

t ven

ture

as

asu

bsid

iary

cor

pora

tion.

The

dis

adva

ntag

e of

this

appr

oach

is th

at th

e m

ultin

atio

nal c

orpo

ratio

nco

uld

lose

the

expe

rtise

of i

ts lo

cal j

oint

ven

ture

part

ner a

nd ru

n th

e ris

k th

at th

e lo

cal j

oint

vent

ure

part

ner w

ill lo

se it

s m

otiv

atio

n to

max

imiz

e th

e su

cces

s of

the

join

t ven

ture

. On

ewa

yto

coun

tera

ctth

is p

robl

em is

to re

inve

st th

epr

ofits

bac

k in

to th

e jo

int v

entu

re, w

hich

can

resu

lt in

incr

ease

d go

odw

ill a

nd le

ss c

once

rnab

out t

he d

eval

uatio

n of

the

loca

l cur

renc

y.

•Co

nsid

er re

stric

tions

on

fore

ign

inve

stm

ent:

Acqu

isiti

on ta

rget

s m

ay n

ot b

e av

aila

ble

in a

coun

try

and

som

e co

untri

es re

stric

t the

leve

lof

equi

ty o

wne

rshi

p by

a n

on-re

side

nt e

ntity

;th

eref

ore,

the

non-

loca

l par

ty m

ay h

ave

noch

oice

but

to h

old

a m

inor

ity in

tere

st in

som

eju

risdi

ctio

ns.

•Al

low

s fo

r pas

sive

inve

stm

ent:

Thi

s st

ruct

ure

allo

ws

for t

he n

on-lo

cal p

arty

to te

st o

ut a

mar

ket

ofte

n w

ith a

low

er in

itial

inve

stm

ent o

f cap

ital

and

othe

r res

ourc

es.

•M

a y re

sult

in p

rem

atur

e ex

posu

re o

f int

elle

ctua

lpr

oper

ty a

nd k

now

-how

: Th

is s

truct

ure

mig

htin

crea

se th

e ris

k of

pre

mat

ure

expo

sure

of

tech

nolo

gica

l or o

ther

kno

w-h

ow to

the

loca

lpa

rty

and

poss

ibly

lead

to th

e lo

calp

arty

gai

ning

a co

mpe

titiv

e ad

vant

age

in th

e jo

int v

entu

re’s

indu

stry

.•

Loss

of c

ontr o

l: O

ne im

port

ant d

isad

vant

age

ofth

is s

truct

ure

is th

at th

e no

n-lo

cal p

arty

wou

ldlo

se a

sig

nific

ant a

mou

nt o

f con

trol o

ver t

heop

erat

ions

of t

hejo

int v

entu

re.

How

ever

, the

rear

e so

me

stra

tegi

es b

yw

hich

the

non-

loca

l par

tyco

uld

incr

ease

its

equi

ty o

wne

rshi

p in

a jo

int

vent

ure

or o

ther

wis

e pr

otec

t its

min

ority

inte

rest

,in

clud

ing

the

follo

win

g:—

right

to tr

igge

r the

sal

e of

the

join

t ven

ture

upon

am

ater

ial b

reac

h by

the

loca

l joi

ntve

ntur

e pa

rty

—rig

ht to

pur

chas

e ad

ditio

nal s

hare

s—

put o

ptio

n—

drag

-alo

ng ri

ghts

—

man

agem

ent c

ontro

l or o

ther

righ

ts to

app

oint

key

man

ager

ial p

erso

nnel

38 Baker & McKenzie


Exhi

bit 3

(c)

Man

agem

ent C

ontr

ol C

onsi

dera

tions

50/5

0N

on-lo

cal p

arty

str

onge

r con

trol

Non

-loca

l par

ty w

eake

r con

trol

•Eq

ual i

ncen

tives

: A 5

0/50

man

agem

ent s

truct

ure

can

max

imize

trus

t and

mut

ual c

once

rn b

etwe

entw

o jo

int v

entu

re p

artie

s be

caus

e ea

ch w

ill ha

ve a

neq

ual v

oice

in th

e m

anag

emen

t of t

he jo

int

vent

ure.

•D

eadl

ock :

Thi

s m

anag

emen

t stru

ctur

e re

lies

heav

ily o

n co

oper

atio

n be

twee

n th

e tw

o jo

int

vent

ure

part

ies.

How

ever

, the

re is

a p

ossi

bilit

yth

at th

e jo

int v

entu

re p

artie

s m

ay re

ach

a de

adlo

ckon

par

ticul

ar is

sues

. Th

ere

are

cert

ain

corp

orat

ego

vern

ance

mec

hani

sms

that

can

be

craf

ted

tohe

lp b

reak

a d

eadl

ock

if on

e ar

ises

, inc

ludi

ngth

e fo

llow

ing:

—gi

ve c

hairm

an o

f the

boa

rd a

tieb

reak

ing

vote

—gi

ve in

depe

nden

t, no

n-ex

ecut

ive

dire

ctor

atie

brea

king

vot

e—

refe

r dea

dloc

k m

atte

rs to

an

inde

pend

ent

third

par

ty (e

.g.,

an in

dust

ry e

xper

t or

arbi

trato

r) fo

r res

olut

ion

—re

fer d

eadl

ock

mat

ters

to th

e jo

int v

entu

repa

rtie

s’ re

spec

tive

seni

or m

anag

emen

t to

atte

mpt

reso

lutio

n—

trigg

er b

uy-s

ell o

ptio

n•

Allo

ws

for l

ocal

exp

ertis

e: S

harin

g co

ntro

l with

its

loca

l joi

nt v

entu

re p

artn

er c

an a

ssis

t the

non

-loca

lpa

rty

in le

arni

ng fr

om th

e ex

perie

nce

of it

s lo

cal

join

t ven

ture

par

tner

with

resp

ect t

o th

e lo

cal

busin

ess

and

econ

omic

clim

ate

as w

ell a

s un

fam

iliar

bure

aucr

atic

circ

umst

ance

s (e

.g.,

loca

l sys

tem

sof

labo

r man

agem

ent a

nd re

gula

tory

aut

horit

ies)

.

•M

ay b

e re

quire

d fo

r pur

pose

s of

con

solid

atio

n:A

dom

inan

t man

agem

ent r

ole

mig

ht b

e re

quire

dfo

r pur

pose

s of

est

ablis

hing

“fin

anci

al c

ontro

l”of

the

join

t ven

ture

in o

rder

for t

he n

on-lo

cal

party

to in

clud

e th

e jo

int v

entu

re o

n a

cons

olid

ated

basi

s in

its

finan

cial

sta

tem

ents

. •

Ma y

be

adva

ntag

eous

to th

e jo

int v

entu

re:

Ther

eis

som

e em

piric

al e

vide

nce

that

a jo

int v

entu

rew

ill b

e m

ore

succ

essf

ul w

here

one

par

ty h

asdo

min

ant c

ontro

l bec

ause

the

join

t ven

ture

will

be ru

n w

ith o

ne v

oice

, one

bus

ines

s st

rate

gy a

ndon

e m

anag

emen

t sty

le.

•Co

nsid

er th

e e x

pens

e of

mai

ntai

ning

con

trol:

Mai

ntai

ning

con

trol o

ver a

join

t ven

ture

can

be

very

exp

ensi

ve, e

spec

ially

whe

re th

e jo

int v

entu

reis

geo

grap

hica

lly d

ista

nt fr

om th

e do

min

ant j

oint

vent

ure

part

y, an

d ca

n in

clud

e th

e fo

llow

ing

cost

s: p

rovi

ding

the

tech

nolo

gy fo

r the

join

tve

ntur

e, p

rovi

ding

all

supp

ort n

ot o

ther

wis

eco

vere

d by

a c

ontra

ct b

etw

een

the

non-

loca

lpa

rty

and

the

loca

l par

ty, a

nd m

aint

aini

ngex

patri

ate

man

ager

s fo

r the

join

t ven

ture

.•

Cons

ider

app

oint

ing

loca

l man

ager

s: O

ne w

ayfo

r a m

ultin

atio

nal c

orpo

ratio

n to

reta

in a

hig

hle

vel o

f con

trol a

nd o

vers

ight

is to

mai

ntai

nco

ntro

l of t

he b

oard

of d

irect

ors

as w

ell a

ssp

ecifi

cally

del

inea

ted

mat

ters

, but

app

oint

loca

lm

anag

ers

to ru

n th

e da

y-to

-day

ope

ratio

ns o

f the

join

t ven

ture

.

•Al

low

s fo

r loc

al e

xper

tise:

It c

an b

e be

nefic

ial

tole

t the

loca

l par

ty m

aint

ain

cont

rol o

ver t

hem

anag

emen

t of t

he jo

int v

entu

re w

here

the

loca

lpar

ty le

nds

grea

ter c

ritic

al re

sour

ces

and

rele

vant

bus

ines

s an

d in

dust

ry e

xper

tise

to th

ejo

int v

entu

re.

•T r

ustin

g th

e lo

cal j

oint

ven

ture

par

tner

: Un

der

this

man

agem

ent s

truct

ure,

the

non-

loca

l par

ty,

havi

ng le

ss m

anag

eria

l con

trol o

ver t

he jo

int

vent

ure,

wou

ld re

ly h

eavi

ly o

n th

e di

scre

tion

and

man

agem

ent d

ecis

ions

of i

ts lo

cal p

artn

er.

Ther

efor

e, it

is im

port

ant f

or th

e no

n-lo

cal p

arty

to k

now

its

loca

l joi

nt v

entu

re p

artn

er a

ndm

aint

ain

ahi

gh le

vel o

f tru

st in

the

join

t ven

ture

part

ner.

•Co

nsid

er p

r ovi

ding

for a

vet

o rig

ht:

The

non-

loca

lpa

rty s

houl

d co

nsid

er re

ques

ting

that

it b

e pr

ovid

edw

ith v

eto

powe

r with

resp

ect t

o sp

ecifi

cally

delin

eate

d“e

xtra

ordi

nary

” de

cisi

ons

—e.

g., t

heis

suan

ce o

f add

ition

al s

hare

s by

the

join

t ven

ture

or th

e sa

le o

f a s

ubst

antia

l por

tion

of th

e jo

int

vent

ure’

s as

sets

.•

Cons

ider

pr o

vidi

ng fo

r cum

ulat

ive

votin

g:By

prov

idin

g fo

r cum

ulat

ive

votin

g, th

e no

n-lo

cal

part

y w

ould

incr

ease

its

abili

ty to

impa

ctde

cisi

ons

of th

e bo

ard

of d

irect

ors.

39Baker & McKenzie


50/5

0N

on-lo

cal p

arty

str

onge

r con

trol

Non

-loca

l par

ty w

eake

r con

trol

•Co

nsid

er ro

le o

f man

agem

ent:

Thi

s m

anag

emen

tst

ruct

ure

can

be b

enef

icia

l whe

re tw

o jo

int

vent

ure

part

ies

brin

g di

ffere

nt s

kills

to th

e jo

int

vent

ure

—e.

g., o

ne p

arty

brin

gs m

anuf

actu

ring

tech

nolo

gy a

nd e

xper

tise

and

the

othe

r par

tybr

ings

kno

wle

dge

of, a

nd a

cces

s to

, loc

al m

arke

ts.

Unde

r thi

s sc

enar

io, e

ach

party

cou

ld b

e re

spon

sible

for c

erta

in d

ecis

ions

and

mig

ht e

ven

have

sol

ede

cisi

on-m

akin

g au

thor

ity fo

r tho

se d

ecis

ions

.H

owev

er, t

he jo

int v

entu

re a

gree

men

t cou

ldpr

ovid

e th

at c

erta

in k

ey d

ecis

ions

requ

ireap

prov

al b

y bo

th p

artie

s.•

Cons

ider

loca

l la w

rest

rictio

ns:

Cons

ider

whe

ther

loca

l law

requ

ires

supe

rmaj

ority

app

rova

ls u

nder

cert

ain

circ

umst

ance

s, p

rovi

des

for s

peci

ficen

forc

emen

t for

vot

ing

arra

ngem

ents

bet

wee

njo

int v

entu

re p

artie

s, re

quire

s a

“one

sha

re, o

nevo

te”

stru

ctur

e, re

quire

s a

chai

rman

of t

he b

oard

of d

irect

ors,

or p

rovi

des

for a

ny o

ther

requ

irem

ents

or l

imita

tions

on

the

man

agem

ent

stru

ctur

e of

a jo

int v

entu

re.

Whe

re lo

cal l

awdo

es n

ot a

llow

for d

epar

ture

s fro

m a

“on

e sh

are,

one

vote

” st

ruct

ure,

con

side

r hav

ing

the

join

tve

ntur

e ag

reem

ent g

over

ned

in a

juris

dict

ion

whi

ch d

oes.

Thi

s w

ill a

llow

gre

ater

flex

ibili

tyin

deci

ding

how

the

join

t ven

ture

sho

uld

bego

vern

ed.

•Co

nsid

er p

rovi

ding

for a

vet

o rig

ht:

The

non-

loca

lpa

rty

may

con

side

r pro

vidi

ng th

e lo

cal p

arty

with

veto

pow

er w

ith re

spec

t to

spec

ifica

lly d

elin

eate

d“e

xtra

ordi

nary

” de

cisi

ons

—e.

g., t

he is

suan

ce o

fad

ditio

nal s

hare

s by

the

join

t ven

ture

or t

he s

ale

of a

sub

stan

tial p

ortio

n of

the

join

t ven

ture

’s a

sset

s.•

Cons

ider

pr o

vidi

ng fo

r cum

ulat

ive

votin

g:In

orde

r to

max

imiz

e th

e lo

cal p

arty

’s in

cent

ive,

cons

ider

pro

vidi

ng fo

r cum

ulat

ive

votin

g, w

hich

wou

ld in

crea

se th

e lo

cal p

arty

’s a

bilit

y to

impa

ctde

cisi

ons

of th

e bo

ard

of d

irect

ors.

•Co

nsid

er lo

cal l

a w re

stric

tions

: Th

ese

are

gene

rally

the

sam

e co

nsid

erat

ions

as

thos

ede

scrib

ed u

nder

the

50/5

0 ap

proa

ch.

•Hi

gher

resp

onsi

bilit

y : W

ith “c

ontro

l” th

e no

n-lo

cal

party

wou

ld li

kely

hav

e a

high

er le

vel

ofre

spon

sibi

lity

with

resp

ect t

o, e

.g.,

impr

oper

cond

uct o

f the

join

t ven

ture

ent

ity.

•Co

nsid

er a

ppoi

ntin

g ke

y m

anag

emen

t per

sonn

el:

If th

e no

n-lo

cal p

arty

doe

s no

t mai

ntai

n m

ajor

ityco

ntro

l ove

r the

join

t ven

ture

’s b

oard

of d

irect

ors,

itco

uld

cons

ider

app

oint

ing

key

man

agem

ent

pers

onne

l tha

t will

be

invo

lved

in th

e da

y-to

-day

man

agem

ent o

f the

join

t ven

ture

suc

h as

a fi

nanc

ial

cont

rolle

r. T

his

appr

oach

can

incr

ease

itspa

rtic

ipat

ion

and

influ

ence

in th

e jo

int v

entu

re.

This

app

roac

h ca

n be

esp

ecia

lly e

ffect

ive

whe

reth

e no

n-lo

cal p

arty

is g

eogr

aphi

cally

dis

tant

from

the

join

t ven

ture

bec

ause

it p

hysi

cally

pla

ces

itsm

anag

ers

at th

e si

te o

f the

join

t ven

ture

. Ho

weve

r,th

ere

are

certa

in c

osts

invo

lved

in s

endi

ng e

xpat

riate

man

ager

s to

hel

p m

anag

e a

join

t ven

ture

—e.

g.,t

he fi

nanc

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SECTION 4 EXIT AND TERMINATIONWhere the joint venture is intended to have a fixed duration or a specific andlimited purpose, termination issues are often dealt with early in the negotiations.Where the joint venture is intended as a long-term relationship, however, the partiesmay be reluctant to discuss terminating their relationship while negotiating thejoint venture documentation. Nevertheless, it is always possible that one or bothof the parties will wish to no longer participate in the joint venture for somereason. Further, studies suggest that the average alliance lasts between four andseven years, with very few lasting more than 15 years.1

Even where the termination provisions of the joint venture agreement are notstrictly followed (especially where the joint venture has been in existence for manyyears), they nevertheless provide a context within which the parties can negotiatean appropriate exit. Accordingly, careful attention should be paid to draftingappropriate termination provisions in the joint venture agreement.

Generally speaking, when the parties contemplate a long-term relationship,a prospective party’s first choice for an exit mechanism is often the transfer of thejoint venture interests, then the sale of the entire company, and then the dissolutionof the company. These topics, as well as various post-termination and transitionissues, are addressed in checklist format in the remainder of this Section. In addition,the Sample Term Sheet included as Exhibit 6(b) includes provisions and detailedcommentary with respect to many of these issues.

Under each of the topics listed below, consider the extent not only to which theprospective party desires a particular right, but also the extent to which it wouldbe willing to permit the local partner to have the reciprocal right. If the non-localparty is unwilling to grant a particular right to the local partner, it will be difficultto obtain that right for itself.

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International Joint Ventures HandbookSection 4 – Exit and Termination

______________________1 Alison Maitland, Joint ventures: Getting out without getting hurt, Financial Times, October 10, 2002.

1. Transfer of InterestsThe broad categories for the transfer of interests are: third party transfers, transfersto a joint venture party or to the joint venture vehicle itself, and withdrawal or exit.The following questions should be asked with respect to any transfer of interest:

• What bases for the right to transfer are enforceable under local law?

– Deadlock?

– Failure to reach certain milestones?

– Change in control of a party to the joint venture?

– Completion of a particular project?

– Expiration of initial lock-in (e.g., 10 years)?

– Insolvency of a party to the joint venture?

– Voluntary desire to terminate?

– Material breach?

– Failure to agree on capital expenditures for more than e.g., 3 consecutive years?

– Other?

• In the event of a withdrawal from or sale to the joint venture vehicle,would the joint venture vehicle have the financial resources to be ableto pay cash up front for the exiting party’s interest?

• Are interests in this kind of entity assignable? If so, how is an assignmentaccomplished (e.g., delivery of a certificate, recordation in a publicregister, other formal process)?

• Are complete prohibitions on assignment and transfer valid?

• If not, what transfer restrictions are enforceable under local law?

– Management consent?

– Other party’s consent?

– Right of first offer?

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– Right of first refusal?

– Other?

• Are these transfer restrictions binding on third parties?

• Are there any formal requirements for these restrictions to be bindingagainst the joint venture parties or third parties, such as a notation ona certificate or a notation in the commercial register?

• If transfer restrictions are binding on third parties, are both the jointventure vehicle and the joint venture parties nonetheless required torecognize any rights in an assignee/transferee if interests aretransferred in violation of the restrictions?

• Does an assignee/transferee who has acquired an interest in violationof a restriction nonetheless have economic rights as against the jointventure vehicle (e.g., rights to profit and asset distributions)?

• Are there local law rules on how the interests are to be valued, or arethe parties free to determine a mechanism? Price-to-earnings ratio?Discounted cash flow analysis? Net asset test? An offer from a bonafide third party? A valuation by an independent expert?

• Will partial transfers be permitted, or will the exiting party be requiredto sell (or the remaining party be required to buy) all of the exitingparty’s shares?

• Will the parties permit intra-group transfers without prior consentfrom the other joint venture party? Or without triggering any rightsin the other joint venture party (e.g., right of first refusal)?

• Will the minority party have tag-along rights?

• Will the majority party have drag-along rights?

• Will the parties have buy-sell rights?

• Should the obligations of the exiting joint venture party be required tobe assumed by a transferee (e.g., guarantees)?

• Should any loans payable by the exiting joint venture party be requiredto be paid upon exit or should they be required to be assumed bya transferee?

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• Consider including a provision in the joint venture agreement requiringthe parties to refinance (e.g., reinsertion of capital/reinvestment intothe joint venture), whether by agreement or as required by local law,and, in the event a party fails to do so, the joint venture may beterminated by the other party.

2. Sale or DissolutionIf it is not possible for one joint venture party to purchase the other party’s interests,then, in general, the next best approach may be to provide for a sale of the jointventure company as a going concern. This will tend to maximize shareholder value;however, the most significant risk is a competitor taking over the joint venture.In connection with the sale or dissolution of the joint venture, consider thefollowing questions:

• What are the local law mechanics for the sale of the joint venturevehicle?

• How will the value of the business be determined?

If a sale is not possible (or not desirable), dissolution or liquidation of the vehiclemight allow the parties to recover all or part of their investment.

• What are the local law mechanics for terminating the venture,followed by dissolution? Followed by liquidation?

• What are the local law mechanics of an auction sale?

• How will the value of the business be determined?

3. Intellectual Property ConsiderationsWhen negotiating the termination provisions of the joint venture agreement, theparties should establish what will happen upon termination to their respectiveintellectual property, as well as the intellectual property developed during the termof the joint venture. The following issues should be addressed:

• The joint venture should be required to change its corporate name ifthe name includes the trademark or brand of the exiting joint ventureparty. A time limit should be established for this requirement.

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Consideration should also be given to whether, and on what terms,the joint venture would be permitted to continue using the trademarkor other intellectual property of the exiting joint venture party.

• The joint venture agreement should address what happens to theintellectual property developed by the parties during the course ofthe joint venture. For example, the parties may each be free to use andexploit this “joint” intellectual property after the termination of thejoint venture.

• The joint venture agreement should address the effect of terminationon any intellectual property license agreements between the jointventure and the exiting joint venture party. If the joint venture entitysurvives (e.g., because the exiting party has exercised its put rights),the other party will want to make sure that the exit does not destroythe viability of the business itself. If a long-term joint venture iscontemplated the parties could provide that the license survives butthen becomes a royalty-bearing license (if it is not already structuredthat way). If the license does survive, the parties may want tounderstand in advance, however, whether the scope of any licensedintellectual property, or the contributing party’s retained rights tothat intellectual property, should change upon an exit. These issuesshould be considered closely in conjunction with any non-competitioncommitments applicable to the exiting party as described in thefollowing sub-section.

4. Non-CompetitionIt may be appropriate for the parties to implement a cooling-off period aftertermination of the joint venture, during which the exiting party and the jointventure vehicle agree not to compete. The following questions should be asked:

• What is an appropriate duration of the non-compete?

• Will the territory of the non-compete be limited to the jurisdiction ofthe joint venture entity? Will it cover other jurisdictions in which thejoint venture did business while both parties participated in the jointventure? Will it cover jurisdictions in which the joint venture plans todo business?

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• How should the business to which the non-compete covenant relatesbe defined?

• What scope and duration is enforceable under local law?

• Will the confidentiality provisions of the joint venture agreementcontinue after the termination of the joint venture? If so, for how long?

• What should be the procedure for the return of confidentialinformation upon termination of the joint venture?

The next chapter of this handbook contains further discussion of non-competearrangements in the joint venture context. In particular, see Section 5.3 (OtherKey Considerations – Non-Competition Provisions).

5. Other Transition IssuesIf one party is permitted to exit the joint venture but the joint venture will continueto operate, the remaining party may want to secure transition services from theexiting party. This will depend upon the extent of the exiting party’s contributionsto the joint venture (e.g., services, assets, employees) and whether a transition periodis needed to minimize business interruptions. The specific transition services maybe difficult to anticipate at the time of entry into the joint venture, in which casethe parties may need to negotiate a transition services agreement in connection withthe exit. In this regard, the parties may agree at the time of entry into the jointventure that an exiting party will agree to provide transition services to be mutuallyagreed by the parties at the time of exit. The following questions should be asked:

• What services are required from the exiting joint venture party? Whatare the fees for these services? What is the duration of the transitionperiod?

• What agreements are appropriate to document the provision oftransition services?

• Will any consents from or notices to third parties (e.g., customers)be required due to a change of control in the joint venture?

• What other issues arise as a result of the termination of the joint venturethat require the cooperation of the exiting party and remaining partyin order to ensure a smooth transition for the joint venture business?

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International Joint Ventures HandbookSection 5 – Other Key Considerations

SECTION 5 OTHER KEY CONSIDERATIONSThis section contains discussion and checklists of other key considerations that shouldbe addressed by any prospective party during the joint venture process. This sectionassumes that a decision has already been made to establish an equity joint venture(i.e., a jointly-owned vehicle), as opposed to entering into a contractual joint venture(i.e., a contract under which the parties agree to the terms of their commercialrelationship without any sharing of profits and losses).

1. Dispute ResolutionDespite careful evaluation of the potential joint venture partner and detailedformulation of the business plan and other key commercial terms, the parties willinevitably have differences of opinion concerning some aspects of the operation ofthe venture. Accordingly, the joint venture agreement should provide a thoughtfulmechanism for resolving disputes before they threaten to impact the long-termprospects of the relationship. The following questions should be asked in this regard:

• If the parties cannot agree on an issue which is fundamental to thejoint venture, how should matters be resolved? Specifically, in whatcircumstances will deadlock arise:

– on all material issues?

– on certain issues determined by the parties when the jointventure is established?

– on issues designated as deadlock issues by one of the parties at thetime they arise?

• Will deadlock issues be referred to the respective chief executiveofficers of the parties in the first instance? Will alternative mechanismsto resolve deadlock be used, such as:

– the joint venture chairman’s tie-breaking vote?

– reference to an independent director?

– reference to an independent third party?

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• Will different deadlock issues be resolved by different methods?Should an alternative dispute resolution procedure be developed?

• What rights will a party have on a deadlock? For example, will a partybe able:

– to require the termination of the joint venture and either awinding up or sale?

– to exercise a “buy-sell” option requiring the other party to sell orpurchase its interest in the joint venture?

Generally speaking, the parties will prefer issue resolution by senior managementpersonnel, as most joint venture disputes concern business issues, not legal issues.Since arbitration awards are often easier to enforce than foreign court judgments,the parties may wish to consider that the joint venture documentation provide forarbitration in the event that senior management is unable to resolve disputes. Thefollowing questions should be asked in this regard:

• Where will the non-local party most likely want to enforce the variousprovisions of the joint venture agreement?

• What are the standard dispute resolution practices for joint ventures inthe local jurisdiction? Is it appropriate from a local perspective to holdarbitration outside the local jurisdiction?

• Is there an advantage to the non-local party to have arbitration in oroutside of the jurisdiction where the joint venture vehicle is organized?

• How can the party holding relevant intellectual property best enforceits rights?

• How can the parties best enforce the confidentiality and non-competecovenants?

2. Methods for Contributing AssetsWhen the parties are contributing assets to the joint venture they will need toconsider precisely how to make those contributions.

Intellectual PropertyFrom the intellectual property perspective, it may be a no-brainer as to whetherone or both parties possess the relevant intellectual property, but it is a separatequestion to decide how that intellectual property is contributed – e.g., by way oflicense or assignment.

License. With a license the contributing party maintains control of the asset andcan insist on a right to terminate the license in the event of a breach by the jointventure. A license may make particular sense where the contributing party alsouses the intellectual property outside the scope of the joint venture and wherethe contributing party does not have sufficient control over the management anddirection of the joint venture. The contributing party also maintains control overthe prosecution and maintenance of the intellectual property registration and isoften the only party that can enforce the intellectual property rights against thirdparty infringers.

Assignment. With an assignment, by contrast, the joint venture controls the asset.This can help ensure that the joint venture is not at the mercy of the contributingparty for its intellectual property rights (and the proper maintenance of thoserights). If the joint venture will have marketing rights, ownership is helpful inthat it encompasses the right to sue third party infringers without the need to jointhe contributing party as a plaintiff in the action (thus mitigating the contributingparty’s own potential exposure). This structure may be a natural choice wherethe joint venture is formed upon the divestiture by the contributing party ofa subsidiary or stand-alone business unit, or where most of the creative talentassociated with the intellectual property will be transitioned to the joint venture.In addition, by owning outright its key assets, the joint venture may be a moreviable entity where, for example, the exit strategy is an IPO or other scenariowhere the parties may ultimately become passive participants over time.

Bear in mind, however, that these are rarely mutually exclusive choices and therewill likely be a need for both assignments and licenses as part of the final dealdocuments. If a contribution is made by license, for example, the contributor maywant an assignment of any improvements made by the joint venture or other party.If a contribution is made by an assignment, then one or both of the participantsmay want a license-back if for no other reason than to ensure their continuedfreedom to operate.

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Other assets Similar issues arise with respect to contributions of any real property which thejoint venture will occupy to conduct its operations. If one party is to contributereal property, will that contribution be made by way of a sale, lease or license, andwill any parent or other guarantee be required in connection with the paymentof any related purchase price or lease/license payments or satisfaction of othercontractual obligations?

Likewise, even where it is clear which party will be providing human resourcesto an equity joint venture, that contribution can be in the form of a transferof employees, secondment, or services agreement. Section 5.6 (Other KeyConsiderations – Employee Transfers and Benefits) discusses employee transferissues in greater detail.

3. Non-Competition ProvisionsIn most joint ventures, it will be understood that the parties will engage in otherbusiness activities. In fact, the joint venture may represent a relatively small part ofthe overall activities of a given party. Competing with the joint venture is anentirely different matter, however, and it is not at all unusual for joint ventureagreements to prohibit competition.

These prohibitions may take a variety of forms. In certain cases, it would beintended that the joint venture engage broadly in a given line of business, in whichcase the parties may be prohibited from engaging at all in that line of business. Allopportunities within the scope of that business will be reserved to the joint venture.On the other hand, if the joint venture is intended to have a more limited objective,the parties may merely be prohibited from directly competing with those definedactivities. The joint venture agreement may also provide that no party may solicitbusiness, or even do business, with a customer or client of the joint venture orseek to employ anyone that has been employed by the joint venture, all subject toappropriate time periods. There may also be restrictions on the parties’ ability touse or disclose any confidential information regarding the venture.

In the United States, the enforceability of non-competition agreements, generally,depends to a large extent on the reasonableness of the restrictions. Althoughnon-competition standards vary from jurisdiction to jurisdiction, it is generallyconsidered reasonable to restrict direct competition at least within the geographic


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area and range of business activities in which the joint venture actually engages.If the joint venture involves an acquisition, a non-competition undertaking may beenforced even more broadly since the undertaking will be seen as a means of insuringthat the joint venture will receive the full benefit of the acquired business. Again,however, these laws vary from jurisdiction to jurisdiction, and it is important toinvolve local counsel in assessing the enforceability and impact of non-competeprovisions which the parties seek to impose.

4. Competition/Antitrust LawRegardless of whether the parties intend to directly impose non-competitionprovisions, they will be required to assess and comply with relevant competitionor antitrust laws with respect to the formation of the joint venture.

Regulatory FilingsMost equity joint ventures will be required to file a notice with appropriategovernment agencies if the parties are substantial and the size of the ventureexceeds a certain amount. For example, in the US if the joint venture involvesan acquisition of assets or voting securities, the formation of a for-profit jointventure may require a filing with the US antitrust agencies. Since a filing is likelyto be required prior to closing and implementation of the venture, it is importantto determine all regulatory requirements prior to closing and to consider whetherthe joint venture is likely to raise any competitive concerns.

The following questions should be asked in this regard with respect to filingrequirements with antitrust or competition authorities:

• Which competition law(s) will apply to the joint venture (e.g., national,regional, local)?

• Are there any filing requirements for the joint venture and, if so,in which countries or jurisdictions?

• Are the relevant thresholds met?

• If the relevant thresholds are met, are there any available exemptions?

• If there are no available exemptions, are the parties required to makea filing or give notification before or after the closing or implementation

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of the joint venture? What is the relevant waiting period or likelytime frame before the parties can expect to receive approval fromthe authorities?

• What are the specific documentary requirements for the relevantfilings or notifications?

• What are the relevant standards of review by the relevant authorities?

• Are any industry-specific approvals required? Are any sensitiveindustries involved such that governmental approval or notification(e.g., Exon-Florio in the United States) is advisable?

Impact on CompetitionEven if no regulatory filing is required, a joint venture between competitors orpotential competitors can trigger antitrust or competition law concerns. In thatevent, it is important to consider the structure of the venture, its purpose, themarket in which it competes, and any competitive restrictions that it imposeson the parties. The fundamental question in any joint venture or collaborationbetween competitors is whether the parties intend a genuine joint venture(i.e., their operations are integrated and financial risks are shared) in which casethe venture is likely to be viewed as procompetitive, or only a sham arrangementwhose principal purpose is price fixing, territorial or customer allocation, controlof production, or other anticompetitive purpose.

Although joint ventures vary significantly, most involve one or more businessactivities (e.g., production, marketing, sales, research and development, or groupbuying). Of these, the most likely to cause competitive harm and therefore tobe challenged on antitrust or competition grounds is a marketing and sales jointventure, particularly if there is little integration or economic risk-sharing tojustify any restraints on price or territories. On the other hand, joint venturesinvolving production, research and development or purchasing are typically moreprocompetitive in that their purpose is usually to lower prices, improve quality,enhance service or create a new product. Generally, these ventures do not presentan antitrust or competitive risk so long as neither the venture nor the parties tothe venture have a large market share or a dominant market position in the marketin which the venture competes.


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In addition, any competitive restrictions must be limited to the joint venture andnot extend beyond the joint venture. Thus, parties to a production joint venturemay jointly set the price for the products produced by the venture but not theprice of products outside the venture. Similarly, parties to a co-developmentagreement may restrict research on the products that are the subject of theagreement but not with respect to other unrelated products.

Accordingly, the following questions should be answered at least with respect toa US joint venture regardless of whether there is a regulatory filing:

• What is the business purpose of the joint venture?

• Is the joint venture between competitors or potential competitors?If so, what are the respective market shares of the parties, and what isthe projected market share of the venture?

• Will the parties to the venture be allowed to compete with theventure? If not, what is the extent of the covenant not-to-compete?

• What is the term of the venture? Can either of the parties terminatethe venture?

• What is each party contributing to the venture?

• Are the parties going to share the profits and losses of the venture?If so, on what basis?

• What are the likely consumer benefits resulting from the venture? Isthe venture likely to reduce prices, improve quality, enhance serviceor create any new products or services? If so, how is this likely to beaccomplished?

• To what extent will the venture be able to set prices, divide territoriesor customers or otherwise restrict the parties to the venture fromcompeting?

• Have the parties agreed to any restrictions beyond the scope of theventure? If so, what are these restrictions?

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• Have either of the parties or the venture itself been the subject of anyprior investigation, review or enforcement action by an antitrust orcompetition authority or a defendant in antitrust litigation by a privateparty?

5. Foreign Ownership RestrictionsIt is important for a multinational corporation, as the non-local joint venture party,to understand the restrictions under relevant local law and practice on its ability toown, manage and otherwise participate in the joint venture business. The followingthreshold questions should be asked in this regard:

• Are there any foreign investment law approvals or licenses requiredfor the non-local party’s participation in the joint venture vehicle? Ifso, how long does the approval procedure take and what are theapplication requirements? (In this regard, note that even a minorityforeign investment may require foreign investment law approval.)

• Are there any central bank or exchange control requirements for thenon-local party’s participation in the joint venture vehicle? For itsexpatriation of profits? For any payments by the joint venture vehicle tothe non-local party for products, services or management fees?

• Will the local party contribute real property to the joint venture? Arethere any restrictions on ownership by the joint venture vehicle of realproperty, taking into consideration the non-local party’s participationin the joint venture vehicle? Is the real property owned by thegovernment?

• Will the non-local party be contributing intellectual property orknow-how to the joint venture? Are there any restrictions on itsability to do so? For example, are there any tax implications orexchange control restrictions on royalty payments from the jointventure vehicle to the non-local party for use of the know-how?

• Will it be possible to enforce and protect the non-local party’sintellectual property rights in the local jurisdiction?

6. Employee Transfers and BenefitsWhen two companies engage in a joint venture, there are a number of significantemployee, management, and employee benefit issues that result. The majority ofemployee transfer issues will flow from the structure of the transaction, namely,how the joint venture is established and from which joint venture party theemployees will come. These issues should be addressed early in negotiation stagebecause they can greatly impact the timing of the formation of the joint venture.The following are the types of questions that should be asked in this regard:

Employee Transfer Issues• Who are the employees who will be employed by (that is, directed

and controlled by) the joint venture?

• How will the employees transfer to the joint venture? Corporatespin-off? Offer/Acceptance? Automatic transfer of employment?Right of employees to oppose automatic transfer?

• Are any approvals or consultations required to transfer employees tothe joint venture? If so, which party is obligated to secure them?

• Are employee notices required prior to transfer? If so, which party isobligated to provide them? Are there any minimum statutory periodsfor employee notices/employee oppositions?

• Is employee consent required to transfer the employees to the jointventure?

• What terms and conditions of employment will apply to the jointventure employees?

• Are employment contracts required for some or all joint ventureemployees?

• Does seniority transfer?

• Are joint venture employees entitled to severance/terminationindemnities or change in control payments when transferring to thejoint venture? If so, who is liable for payment?

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• What happens to employees who do not transfer to the joint venture?If they are terminated, are they entitled to severance? If so, who is liable?

• Will joint venture employees be subject to restrictive covenants(e.g., non-competition, non-disclosure)? Note that existingagreements may not protect the rights and interests of the co-venturer,so new agreements may be required. What is enforceable in the localjurisdiction?

• Will any expatriates transfer to the joint venture? If so, who will betheir employer? Will they be tax-equalized or tax-protected? Whatemployee benefits will they receive? How can the non-local party bestminimize the expatriate’s and its own tax liabilities?

• Will the managers be employees of the joint venture vehicle, or willthey be retained as consultants? What are the tax and employment lawimplications of each type of relationship?

• What are the employment, immigration and tax law implications ofusing seconded employees?

Employee Benefits Issues• What employee benefits will cover the joint venture employees?

– Retirement plans?

– Incentive plans?

– Equity compensation plans?

– Health and other welfare benefit plans?

– Pension plans?

• Will the joint venture establish its own plans or will employees remainin existing plans?

• If the joint venture establishes its own plans, will there be a transfer ofassets/liabilities to the joint venture plans?

• Will the joint venture retirement plans be fully funded? If so, at whatfunding level?


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• Will the joint venture employees have the same/similar/substantiallysimilar employee benefits as they enjoyed prior to transfer to the jointventure?

• Will the joint venture replicate the employee benefit plans the jointventure employees participated in prior to transfer?

• Will the joint venture plans be in place at the commencement of thejoint venture?

• Will current employee benefit plans need to cover the joint ventureemployees during a transition period?

• If the joint venture employees participated in equity compensationplans prior to transfer, will the joint venture create a new equitycompensation plan for those employees? If so, will equity of the jointventure or one of the joint venture parties be used?

• Will the joint venture need transitional services (e.g., payroll,HR administration, benefits administration, and so forth)? If so,for how long and at what cost to the joint venture?

• Will the joint venture employees receive service credit under the jointventure plans for their service prior to transfer to the joint venture?

• What steps are required to establish plans for the joint ventureemployees? How long will these steps take?

Local Legal Regulations• What local rules apply to the transfer of employees to the joint

venture (e.g., in the United Kingdom, the Transfer of Undertakings(Protection of Employment) Regulations 1981 or “TUPE”)? Will anyother termination, transfer or relocation laws (e.g., in the United States,the Worker Adjustment and Retraining Notification Act or “WARNAct”) have an effect on the joint venture?

• What local rules apply to the employment relationship (e.g., statutoryseverance, wrongful dismissal)?

• Are there any collective labor agreements that cover the joint ventureemployees?

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• Will the joint venture have one or more works councils?

• What non-discrimination, workplace safety, privacy, and other similarrules apply to protect the joint venture employees?

• Are restrictive covenants (e.g., non-competition, non-disclosure)enforceable against employees or former employees?

• What is the role, strength and influence of the unions, if any?


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International Joint Ventures HandbookSection 6 – Documentation

SECTION 6 DOCUMENTATIONAs the potential joint venture participants assess the business and legal issues that arelikely to have a significant impact on the joint venture and decide whether and underwhat terms to proceed with the venture, it will be necessary to memorialize theirunderstandings and responsibilities at various stages of the process and to ultimatelyexecute binding agreements governing the formation, operation and managementof the joint venture.

This section includes model documents, checklists and accompanying discussionof material issues designed to assist in successfully negotiating and drafting the jointventure documents.

At the highest level, the following are the documents which one would expect tobe entered into and the general issues which they typically address:

1. Confidentiality AgreementAt the outset of discussions, it will be in the parties’ interests to ensure that theirdiscussions (and any due diligence information that they may disclose to each other)are kept completely confidential. Exhibit 6(a) contains a sample mutualconfidentiality agreement. Note that in relation to the standard provision whichentitles a party to make a disclosure when securities laws require it to do so, it maybe worth checking what securities laws apply to any local joint venture party andestablishing the circumstances when a disclosure is required under those laws.

2. Term SheetA term sheet generally contains a statement of the proposed key terms of thetransaction and it is intended to serve as the basis for negotiating the joint ventureagreement. Exhibit 6(b) contains a sample term sheet accompanied by twosupplements containing detailed commentary. A letter of intent is sometimes usedin place of or in addition to a term sheet, but either document can be drafted tocontain the appropriate provisions. Care should be taken in relation to any statementsof obligation to negotiate in good faith, and in particular to the governing lawwhich may apply to the term sheet or letter of intent, since in some jurisdictions

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an “agreement to agree” may be enforceable and a duty to negotiate in good faithcould be triggered not only upon entering into a term sheet or letter of intent, butalso with respect to the negotiation of the term sheet or letter of intent itself.

3. Joint Venture AgreementThe joint venture agreement is the core document to be executed between theparties which will govern the formation of the joint venture vehicle and any applicableconditions precedent, the running of the joint venture vehicle, its funding anddistribution policies, transferability of shares, termination and exit. This documentwill vary considerably depending on the objectives of the parties and, accordingly,is not included in this handbook. However, Exhibit 6(c) contains a general issueschecklist to consider when establishing a joint venture, including items that aretypically addressed in the joint venture agreement.

4. Company Formation DocumentsThese will vary considerably depending on where the joint venture vehicle is tobe formed and, for that reason, are not included in this handbook. Considerationshould be given to the relationship between the rules established in any charterdocuments, and the obligations set out in the joint venture agreement.

5. Ancillary AgreementsThe parties will often need to enter into various ancillary documents to enable thejoint venture to conduct its business. Again these documents will vary dependingon the precise nature of the deal and templates are not included in this handbook.Typically, they will include the following:

• IP assignments/licenses. It would be unusual for the parties not tocontribute a certain amount of intellectual property to the jointventure vehicle to enable it to exploit the parties’ combined resources.These documents will need to address what, if anything, will happento the intellectual property assigned or licenses granted in the event oftermination of the joint venture.

• Secondment agreements. Often, these will be standard templatesto cover any employees of either party who are agreed to be secondedto the joint venture vehicle. These agreements should also addresssuch matters as the ownership of any intellectual property developedduring the course of the secondment.

• Services and supply agreements. These will cover the sourcing ofany required services and products required by the joint venture fromeither party.

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International Joint Ventures HandbookSection 6 – Sample Confidentiality Agreement

Exhibit 6(a) Sample Mutual Confidentiality Agreement

CONFIDENTIALITY AGREEMENT

This Confidentiality Agreement (the “Agreement”) is dated [date] and is byand between [company name], a [jurisdiction] [form of entity], and[company name], a [jurisdiction] [form of entity]. In this Agreement,the party disclosing its Confidential Information (as defined below), is referredto as the “Disclosing Party,” and the party receiving Confidential Information isreferred to as the “Investigating Party.”

Preliminary Statement

Each party desires to share certain of its Confidential Information with the otherparty in connection with a possible transaction (the “Transaction”).

Agreement

The parties, intending to be legally bound, agree as follows:

1. Confidential Information

(a) “Confidential Information” means all non-public information ofthe Disclosing Party disclosed or made available to the InvestigatingParty or any of the directors, officers, employees, agents,consultants, advisors, legal counsel or accountants (collectively,“Representatives”) of the Investigating Party, regardless of theform or manner of disclosure, including:

(i) all information relating to the Disclosing Party’s tradesecrets (including all information that applicable law definesas “trade secrets”);

(ii) all information concerning products, product specifications,data, formulae, compositions, designs, sketches, photographs,graphs, drawings, samples, inventions, discoveries, ideas,know-how, past, current, and planned research anddevelopment, current and planned methods and processes,client or customer lists and files, current and anticipated

client or customer requirements, vender and supplier listsand files, price lists,1 market studies, business plans andbusiness opportunities;

(iii) all information concerning [computer hardware,]software that was developed or modified by or for theDisclosing Party (including object and source codes),databases, data modules or structures, algorithms,[mask works, circuit layouts] and computer systemarchitectures;2

(iv) all information concerning the Disclosing Party’s businessand affairs, assets, liabilities, historical and current financialstatements, financial projections and budgets, forecasts,historical, current and projected sales, capital spending,budgets, strategic plans, marketing and advertising plans,publications, agreements, the names and backgrounds of keypersonnel, personnel training techniques and materials andthe names, contact information and any other informationrelating to an identified or identifiable natural person;

(v) all third-party confidential information in the possession ofthe Disclosing Party;

(vi) all information relating to the ability to finance the Transaction;and

(vii) all notes, analyses, compilations, studies, summaries,interpretations and other material prepared by the InvestigatingParty or its Representatives to the extent they contain, arebased on or refer to, in whole or in part, any informationdescribed in (i) through (vi) above (collectively, “Notes”).

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______________________1 If the parties are competitors, applicable antitrust/competition laws should be considered before

they disclose pricing or other confidential market information to each other.2 Include “computer hardware” only if the Disclosing Party views information about it as sensitive,

e.g., if the Disclosing Party manufactures computer hardware. Include “mask works” and “circuitlayouts” if the Disclosing Party produces microchips.

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(b) The term “Confidential Information” does not include anyportions of such information:

(i) that become generally available to the public, other than asa result of disclosure by the Investigating Party or any of itsRepresentatives; or

(ii) that becomes available to the Investigating Party ona non-confidential basis from a source (other than theDisclosing Party or its Representatives) which, to theInvestigating Party’s knowledge after due inquiry, is notprohibited from disclosing such information to theInvestigating Party by a legal, contractual or fiduciaryobligation to the Disclosing Party.3

(c) Any trade secrets of the Disclosing Party will also be entitled toall of the protections and benefits under applicable trade secretslaw and any other applicable law. If any information that theDisclosing Party deems to be a trade secret is found by a courtof competent jurisdiction not to be a trade secret for purposes ofthis Agreement, the information nonetheless will be consideredConfidential Information for purposes of this Agreement unlessit falls within the exception described in Section 1(b).

______________________3 The following alternative to 1(b)(ii) requires the Investigating Party to inform the Disclosing

Party of otherwise “Confidential Information” that is or becomes available to it. It may beappropriate to seek this type of an undertaking from the Investigating Party where, for example,the Disclosing Party and Investigating Party are close competitors and have serious questions orconcerns about what information each may claim to already be available:

that were, are or become available to the Investigating Party on a non-confidential basis priorto being made available by the Disclosing Party, but only if (A) the source of such informationis not bound by a duty of confidentiality, and (B) the Investigating Party provides the DisclosingParty with written notice of such prior possession either (1) prior to the execution anddelivery of this Agreement or (2) if the Investigating Party later becomes aware of (throughdisclosure to the Investigating Party or otherwise through the Investigating Party’s work onthe Transaction) any aspect of the Confidential Information of which the Investigating Partyhad prior possession, promptly upon the Investigating Party becoming aware of such aspect.

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2. Restricted Use and Nondisclosure

(a) The Investigating Party agrees that the Investigating Party andits Representatives (i) will keep the Confidential Informationconfidential and (ii) without limiting the foregoing, will notdisclose the Confidential Information to any person (includingcurrent or prospective financing sources) except with the specificprior written consent of the [insert names or titles] of theDisclosing Party (collectively, the “Disclosing Party Contacts”and individually, the “Disclosing Party Contact”) or except asexpressly otherwise permitted by the terms of this Agreement ora Definitive Agreement (as defined in Section 8). It is understoodthat the Investigating Party may disclose Confidential Informationonly to those of the Investigating Party’s Representatives whorequire such material for the purpose of evaluating the Transaction,and who are informed by the Investigating Party of the confidentialnature of the Confidential Information and the obligations of thisAgreement. The Investigating Party and its Representatives willnot use any of the Confidential Information for any reason orpurpose other than to evaluate and negotiate the Transaction.

(b) The Investigating Party will enforce the terms of this Agreementas to its Representatives and will take all steps (including allaction the Investigating Party would take to protect its own tradesecrets and confidential information) necessary to cause them tocomply with this Agreement and thereby prevent their disclosureof the Confidential Information, except as permitted by thisAgreement. If an unauthorized use or disclosure occurs, theInvestigating Party will immediately notify the Disclosing Partyand take, at the Investigating Party’s expense, all steps (includingavailable actions for seizure and injunctive relief) necessary torecover the Confidential Information and prevent its subsequentunauthorized use or dissemination. If the Investigating Party fails totake these steps in a timely and adequate manner, the DisclosingParty may take them in its own or in the Investigating Party’sname and at the Investigating Party’s expense.

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3. Nondisclosure of Transaction

Except as expressly permitted by a Definitive Agreement, neither theInvestigating Party nor its Representatives will, without prior writtenconsent of the Disclosing Party Contact, disclose to any person the termsor existence of this Agreement, the fact that the Confidential Informationhas been made available to the Investigating Party or the InvestigatingParty’s Representatives, the fact that discussions or negotiations aretaking place concerning a Transaction, or any of the terms, conditions,or other facts with respect thereto; provided, however, that theInvestigating Party and its Representatives may disclose suchinformation to those of the Investigating Party’s Representatives whorequire such information for purposes of assisting with the Transaction.

4. Legal Compulsion to Disclose Confidential Information

If the Investigating Party or any of its Representatives become legallycompelled (including pursuant to any rule or regulation promulgatedby any securities regulation authority or any securities exchange) tomake any disclosure that is prohibited or otherwise constrained by thisAgreement, then the Investigating Party or such Representative, as thecase may be, will give the Disclosing Party immediate written noticeof such requirement so that it may seek a protective order or otherappropriate relief, or waive compliance with the nondisclosure provisionsof this Agreement. Subject to the foregoing, the Investigating Party orsuch Representative may make only such disclosure that, in the writtenopinion of counsel reasonably acceptable to the Disclosing Party, it islegally compelled or otherwise required to make to avoid standingliable for contempt or suffering other material censure or penalty;provided, however, that the Investigating Party and its Representatives mustuse reasonable efforts to obtain reliable assurance that confidentialtreatment will be accorded any Confidential Information so disclosed.

5. Disclosing Party Contact

The Disclosing Party will determine, in its sole discretion, whatinformation, properties and personnel it wishes to make available tothe Investigating Party. All requests by the Investigating Party or itsRepresentatives for Confidential Information, meetings with

Disclosing Party personnel or Representatives, inspections ofDisclosing Party properties, and discussions or questions regardingprocedures will be made exclusively to a Disclosing Party Contact.The Investigating Party and its Representatives will not initiate anycommunications with any director, officer or employee of the DisclosingParty (other than a Disclosing Party Contact) without the prior writtenconsent of a Disclosing Party Contact.

6. Return of Confidential Information

If either party notifies the other party that it does not wish to proceedwith the Transaction, then the Investigating Party will, within fivebusiness days of such notification, (a) deliver to the Disclosing PartyContact all documents and other materials constituting ConfidentialInformation, other than Notes, in the possession or under the controlof the Investigating Party or the Investigating Party’s Representatives,and (b) destroy all Notes, without retaining a copy of any such material.Alternatively, if the Disclosing Party Contact so requests or gives hisor her prior written consent to the Investigating Party’s request, theInvestigating Party will destroy all documents and other materialsconstituting Confidential Information in the possession or underthe control of the Investigating Party or the Investigating Party’sRepresentatives, including all copies that are stored in an electronic orother medium and are retrievable in perceivable form. An appropriate4

officer of the Investigating Party must certify any such destruction tothe Disclosing Party in writing, and a list of the destroyed documentsand materials must accompany the certification.

7. Attorney Work Product and Attorney-Client Privilege

The Investigating Party acknowledges that the Disclosing Party may beentitled to the protections of the attorney work-product doctrine,attorney-client privilege or similar protections or privileges with

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______________________4 Many drafters find it cumbersome at such an early stage in the transaction to name a specific

officer in charge of certifying the destruction of documents. The Disclosing Party should notbe comfortable accepting the certification of “any officer,” however. The word “appropriate” isintended to signal that the officer must be one who had first-hand knowledge of or supervisoryresponsibility for the destruction.

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respect to certain of the Confidential Information. The Disclosing Partyis not waiving, and will not be deemed to have waived or diminished,any of its attorney work-product protections, attorney-client privilegesor similar protections or privileges as a result of the disclosure of suchConfidential Information to the Investigating Party in connection withthe Transaction. The parties (a) share a common legal and commercialinterest in such Confidential Information, (b) are or may become jointdefendants in proceedings to which such Confidential Informationrelates, and (c) intend that such protections and privileges remainintact should either party become subject to any actual or threatenedproceeding to which such Confidential Information relates.

In furtherance of the foregoing, the Investigating Party will not claimor contend, in proceedings involving either party, that the DisclosingParty waived the protections of the attorney work-product doctrine,attorney-client privilege or similar protections or privileges as a resultof the disclosure of Confidential Information to the Investigating Partyin connection with the Transaction.5

8. No Obligation to Negotiate Definitive Agreement

The Disclosing Party reserves the right, in its sole discretion, to rejectany and all proposals made by the Investigating Party or the InvestigatingParty’s Representatives with regard to a Transaction and to terminatediscussions and negotiations with the Investigating Party and theInvestigating Party’s Representatives at any time. No contract providingfor a Transaction will be deemed to exist unless and until a definitiveagreement, if any, with respect to a Transaction (a “Definitive

______________________5 Jurisdictions vary in their application of the attorney work-product doctrine and the attorney-

client privilege, and some apply them quite narrowly, if at all. A court may ignore this provision,particularly if a third party is claiming waiver of the attorney-client privilege or if the transactionnever closes. Therefore, even with a provision like this in the Confidentiality Agreement, counselfor the Disclosing Party should monitor the disclosure of any information that may be protected.When the Investigating Party is contemplating acquiring the target business, it will want thework-product protection and attorney-client privilege preserved if it ultimately purchases thetarget business. If, however, the Investigating Party is or may become adverse to the DisclosingParty in litigation involving information to be disclosed, counsel to the Investigating Party mayseek to eliminate this provision.

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Agreement”) has been executed and delivered, and the parties waiveany claims (including breach of contract claims, but excluding allclaims directly or indirectly based on this Agreement) in connectionwith a Transaction unless and until they enter into a DefinitiveAgreement. Neither party nor their respective Representatives orstockholders will have any legal obligation of any kind with respect toa Transaction by virtue of this Agreement, except to the extentexplicitly set forth herein.

9. No Representations or Warranties

Neither the Disclosing Party nor its Representatives make anyrepresentation or warranty (express or implied) concerning thecompleteness or accuracy of the Confidential Information, exceptpursuant to representations and warranties that may be made to theInvestigating Party in a Definitive Agreement if, when, and as executedand subject to such limitations and restrictions as may be specifiedtherein. The Investigating Party also agrees that if the InvestigatingParty determines to engage in a Transaction, the Investigating Party’sdetermination will be based solely on the terms of such DefinitiveAgreement and on the Investigating Party’s own investigation, analysis,and assessment of the business to be acquired.

10. [Compliance with Securities Laws6

The Investigating Party is aware, and its Representativeswho are apprised of the Transaction will be advised, thatthe securities laws of the United States prohibit any personwho has material, non-public information concerning theDisclosing Party from purchasing or selling securities inreliance upon such information or from communicatingsuch information to any other person or entity undercircumstances in which it is reasonably foreseeable that suchperson or entity is likely to purchase or sell such securitiesin reliance upon such information.]

______________________6 Include if Disclosing Party is a public company or an affiliate of a public company.

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11. Data Protection and Privacy Restrictions7

The Investigating Party will inform itself about and observe allapplicable data protection and/or privacy requirements in [insertnames of the jurisdictions in which the ConfidentialInformation is located] and any other relevant jurisdictions. TheInvestigating Party will also implement and maintain all such technicaland organizational security measures as may be reasonably available(having regard to technical developments at the time) and as areappropriate in the circumstances to protect Confidential Informationagainst unauthorized or unlawful processing, accidental loss, distributionor damage. In addition, in the event that any Confidential Informationis located in a jurisdiction that restricts the transfer of such informationto other countries or locations, the Investigating Party will maintainsuch information within that jurisdiction only, and will not transfer it toany other country or location in a manner that violates such restrictions.The Investigating Party will indemnify and hold the Disclosing Partyharmless for any damage or expense (including legal fees and costs)resulting from the Investigating Party’s contravention or otherviolation of any applicable data protection and/or privacy laws.8

12. Remedies

The Investigating Party acknowledges that the Disclosing Party wouldbe damaged irreparably if any of the provisions of this Agreement arenot performed in accordance with the specific terms, that the

______________________7 Include this provision if either party or Confidential Information is located in a jurisdiction that

has or may have applicable data protection or privacy laws (such as the European Union, theUnited States, Switzerland, Hungary, Canada, Argentina and Australia). Also, before disclosing anypersonally identifiable information to the Investigating Party, the Disclosing Party should ensurethat such disclosure does not violate any privacy policy or representation that it has made to theaffected individuals, and should also ensure that such disclosure does not violate any applicabledata protection or privacy law.

8 In many jurisdictions, depending on the particular circumstances, the Disclosing Party could beheld primarily liable for any violations of data protection laws that are caused by the InvestigatingParty. The indemnification clause is intended to help address this issue, but the Disclosing Partyshould closely review how the Investigating Party intends to use and disclose personally identifiableinformation, in particular in circumstances where cross-border transfers might be involved.

Disclosing Party would encounter extreme difficulty in attempting toprove the actual amount of damages suffered by it as a result of theInvestigating Party’s breach and that any breach of this Agreement by theInvestigating Party would not be adequately compensated by monetarydamages alone. Accordingly, the Investigating Party agrees that, inaddition to any other right or remedy to which the Disclosing Partymay be entitled at law or in equity, the Disclosing Party will be entitledto enforce any provision of this Agreement by a decree of specificperformance and to temporary, preliminary and permanent injunctiverelief to prevent any breach or threatened breach of this Agreement,without posting any bond or other security and without the necessityof proving the amount of any actual damage to the Disclosing Partyresulting therefrom.9 In addition, the Investigating Party will indemnifyand hold the Disclosing Party and its stockholders harmless from anydamages, loss, cost or liability (including reasonable legal fees and thecost of enforcing this indemnity) arising out of or resulting from theInvestigating Party’s breach of the terms of this Agreement or anyother unauthorized use or disclosure by the Investigating Party or itsRepresentatives of the Confidential Information.The Disclosing Party’sstockholders have the right to enforce all indemnity obligations of the

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______________________9 The following subsection could be added where disclosure may be made to employees or agents

of the Investigating Party located in civil law jurisdictions where there is no effective injunctiverelief. Formulation of the penalty would be dictated by the laws of the Investigating Party’sjurisdiction:

“(b) In the event that the Disclosing Party is unable to obtain effective injunctive relief or otherequitable remedy against the Investigating Party in a court of competent jurisdiction, then theInvestigating Party agrees to pay the Disclosing Party a penalty in the amount of [maximumpenalty allowable in jurisdiction in which agreement would be enforced].”

If this subsection is added, then the bold-face language that follows should be added to thegoverning law provision:

“This Agreement will be governed by and construed under the laws of [jurisdiction] withoutregard to conflicts of law principles that would require application of any other law,provided, however, that if the Disclosing Party pursues a remedy pursuantto Section 12(b), then Section 12(b) alone will be governed by and construedunder the laws of the jurisdiction where the Disclosing Party brings the claim.”

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Investigating Party under this Agreement independently of theDisclosing Party.The rights and remedies of the parties to thisAgreement are cumulative and not alternative.

13. Notice

All notices and other communications under this Agreement must be inwriting and are deemed duly delivered when (a) delivered if deliveredpersonally or by nationally recognized overnight courier service (costsprepaid), (b) sent by facsimile with confirmation of transmission bythe transmitting equipment (or, the first business day following suchtransmission if the date of transmission is not a business day) or(c) received or rejected by the addressee, if sent by certified mail,return receipt requested; in each case to the following addresses orfacsimile numbers and marked to the attention of the individual (byname or title) designated below (or to such other address, facsimilenumber or individual as a party may designate by notice to the otherparty):

[Company name]:

Attention: [Disclosing Party Contact]Address: __________________Facsimile No.: ________________

[Company name]:

Attention: [Disclosing Party Contact]Address: __________________Facsimile No.: ________________

14. Entire Agreement

This Agreement constitutes the entire agreement between the partiesand supersedes any prior understandings, agreements or representationsby or between the parties, written or oral, with respect to the subjectmatter of this Agreement. This Agreement may not be amended,supplemented or otherwise modified except by a written agreementexecuted by the party to be charged with the modification.

15. Severability

If any court of competent jurisdiction holds any provision of thisAgreement invalid or unenforceable, the other provisions of thisAgreement will remain in full force and effect. Any provision of thisAgreement held invalid or unenforceable only in part or degree willremain in full force and effect to the extent not held invalid orunenforceable.

16. Waiver

Neither any failure nor any delay by any party in exercising any right,power, or privilege under this Agreement will operate as a waiver ofsuch right, power, or privilege, and no single or partial exercise of anysuch right, power, or privilege will preclude any other or furtherexercise of such right, power, or privilege or the exercise of any otherright, power or privilege.

17. Governing Law [;Jurisdiction; Service of Process]

(a) This Agreement will be governed by and construed under thelaws of [jurisdiction] without regard to conflicts of lawprinciples that would require application of any other law.

[(b) Any action or proceeding arising out of or relating tothis Agreement may be brought in the courts of the Stateof [state], County of [county], or, if it has or can acquirejurisdiction, in the United States District Court for the[district] District of [state], and each of the partiesirrevocably submits to the jurisdiction of each suchcourt in any such action or proceeding and waives anyobjection it may now or hereafter have to venue orconvenience of forum. Process in any action orproceeding referred to in the preceding sentence maybe served on any party anywhere in the world.]

[Alternative to (b): Any action or proceeding arisingout of or relating to this Agreement will be referred toand finally resolved by arbitration under [arbitrationrules], which [arbitration rules] are deemed to be

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incorporated by reference into this Section. Thetribunal will consist of a sole arbitrator. The place ofarbitration will be ______________. The language ofthe arbitration will be English. Process in any sucharbitration proceeding may be served on any partyanywhere in the world [by notice given to the party inaccordance with this Agreement].]10

18. Expenses

[Each party will bear its own expenses incurred inconnection with pursuing or consummating theTransaction, including any broker’s or finder’s fees and allfees and expenses of its Representatives.]11

19. Counterparts

This Agreement may be executed in one or more counterparts,including by means of faxed signature pages, any one of which neednot contain the signature of more than one party, but all suchcounterparts taken together will constitute one and the sameinstrument.

______________________10 An advantage of arbitration is that disputes over the confidential sale, evaluation and offer process

do not become a matter of public record. Disadvantages include plaintiff’s difficulty in obtaininginjunctive relief and the unavailability of extensive discovery. Arbitration is particularly ill suitedto enforcement of a standstill provision in a public deal.

11 A provision concerning expenses may be advisable if the parties are not going to enter into a letterof intent. If a cost provision is included in the confidentiality agreement, make certain that anycost provisions in subsequent agreements are either consistent with it or explicitly supersede it.

The parties have executed and delivered this Agreement as of the date indicated inthe first sentence.

[Company name]

By: _______________________________[Name][Title]

[Company name]

By: _______________________________[Name][Title]

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Exhibit 6(b) Sample Term Sheet(50/50 Joint Venture – Initial Discussion Draft)

CCoommmmeennttaarryy: This term sheet is intended for use as an initial discussion draft innegotiating a joint venture in which the non-local party initially will take a 50% equityinterest and roughly share management responsibility with the local joint venturepartner. Because this term sheet assumes that all major management decisions willneed to be taken initially with the agreement of both parties, this term sheet does notfocus on which decisions need to be taken by a supermajority versus a simple majority.If the non-local party is able to negotiate a clear path to an increased equity position,care should be taken in considering which decisions will require a supermajority andin establishing an appropriate supermajority threshold. If the non-local party seeksinitially to possess a greater degree of control, the “Majority Position Considerations”in Supplement A to this term sheet (Commentary and Alternative Provisions) shouldbe considered in negotiating the term sheet and subsequent joint venture agreement.If the non-local party initially will take a minority position in the joint venture, the“Minority Position Considerations” in Supplement A to this term sheet similarly shouldbe considered in negotiating the term sheet and subsequent joint venture agreement.This term sheet assumes that the non-local party will not enter into a 50/50 joint venturewithout either (i) a clear path to control or (ii) a clear exit right. See Supplement B tothis term sheet (Sample Exit Rights Provisions) for a discussion regarding exit rights.

TERM SHEET

This Term Sheet summarizes the principal terms with respect to the potentialformation of a joint venture (“JV”). In consideration of the time and expensedevoted and to be devoted by the parties with respect to this transaction, theExpenses provision of this Term Sheet shall be binding on the parties whether ornot the JV is consummated. No other legally binding obligations will be createduntil definitive agreements are executed and delivered by the parties. This TermSheet is not a commitment to invest or to proceed with a transaction, and isconditioned on the completion of due diligence, legal review and documentationthat is satisfactory to the parties. This Term Sheet shall be governed in all respectsby the laws of [jurisdiction].

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International Joint Ventures HandbookSection 6 – Sample Term Sheet

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Parties: ______________________ (“Non-local Party”) and______________________ (“JV Partner”).

Structure: JV would be established as a [jurisdiction] [form of entity].

Purposes: JV would be organized for the purpose of _______________ (the“Joint Venture Purpose”), and all other activities that are necessary infurtherance of the Joint Venture Purpose. JV would not engage in anyother activity.

Term: The term of JV would be indefinite, unless terminated earlier inaccordance with the definitive written agreement providing for JV(the “Joint Venture Agreement”).

Territory: The geographic scope of JV’s business would be limited to[country/region] (the “Territory”).

Business Plan: The parties would draft and agree on, prior to the formation of JV,a written business plan (the “Business Plan”) for the first [three]years of operation of JV.

Initial CapitalContributionsandOwnership:

Upon establishment of JV, the parties would make the following cashcontributions and have the following membership interests in JV:

Member Cash Contribution Membership Interest

Non-local Party $______________ ___%JV Partner $______________ ___%

AdditionalContributions:

The parties would be obligated to make the following additionalcapital contributions:

Member Amount Timing

Non-local Party $_______________ ______________JV Partner $_______________ ____________________________ $_______________ ______________

Distributions: Distributions would be made to the parties on the following basis:

[_________________________________________________]

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IntellectualProperty:

Any IP licensed or contributed to JV will be licensed or contributedpursuant to a separate IP licensing agreement that would includestandard terms and protections for such IP. Any IP licensed to JV bythe Non-local Party, including any goodwill appurtenant thereto, willremain the exclusive property of the Non-local Party or its licensors.The JV Partner and JV will not have or acquire any rights in or to suchIP except as may be provided in the applicable license or contributionagreement. In the event that the JV Partner or JV have or acquireany rights in or to any of the Non-local Party’s IP, the JV Partner willassign and agree to assign and to cause JV to assign all such rights tothe Non-local Party for no additional consideration. Upondissolution of JV all licensed IP would be returned to the respectivelicensees and all IP owned by JV would be distributed as follows:

[________________________________________________]

Management: JV would be managed by a board of directors (the “Board”)consisting of [four] directors. The Non-local Party and the JVPartner would each appoint [two] directors to the Board (initially____________ and ____________ designated by the Non-localParty, and ____________ and ____________ designated by theJV Partner). The Board would make all decisions with respect to JV,and the parties would not be entitled to vote on any matters in theircapacities as equity holders. All decisions would require a majorityvote of all directors, not just of those in attendance at a meeting. TheBoard would meet at least [monthly] [quarterly]. Each directorwould be entitled to one vote on all matters to be voted upon by theBoard. Any director would be entitled to call a special meeting ofthe Board and 75% of the directors would constitute a quorum for thetransaction of business.

An affirmative vote of a majority of the Board would be required to:

• establish or modify the Joint Venture Purpose;• establish or modify the Business Plan;• amend JV’s charter documents;• appoint and enter into employment agreements with the officers;• consummate transactions or otherwise make expenditures outside

the ordinary course of business;• acquire or divest a business or merge or consolidate with any

other entity;

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Management:(continuation)

• make material loans, borrow material sums, grant securityinterests, or guaranty the debt of third parties;

• approve transactions or other arrangements between or involvingJV and any party or affiliate thereof;

• raise capital from the parties;• make any distributions to the parties or repurchase any equity of

the parties;• appoint or change public accountants;• admit new parties to JV; or• liquidate, dissolve, wind up or file voluntary bankruptcy

proceedings with respect to JV.

Officers: The day-to-day operations of JV would be run by a [chief executiveofficer] designated by _____________. The Board also wouldappoint a [chief financial] officer designated by ____________.

DeadlockEvents:

If a majority of the Board is not able to agree on any materialbusiness or management issue arising out of the venture during a_____ month period, a deadlock would be deemed to exist(a “Deadlock”). Upon the occurrence of a Deadlock, the partieswould be required to first seek resolution through managementconciliation procedures, and if such procedures do not lead toa resolution either party would have the right to:

• [submit the matter to [binding] arbitration];• exercise the Buy-Sell Option set forth below;• [other specified action]

Buy-SellOption:

Under a Deadlock [and [other specified events]], each partywould have the right to exercise a buy-sell option (the “Buy-SellOption”), whereby the exercising party would be required to designatea price at which it would be willing to sell its interest or to purchasethe other party’s interest in JV, and the non-exercising party wouldhave the option to buy or sell such interest at that price.

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CommercialAgreements:

JV would enter into the following commercial agreements with[Non-local Party and/or JV Partner], providing reimbursement foragreed upon services and goods provided to JV on the following basis:

• [trademark license agreement]• [patent license agreement]• [sourcing agreement]• [services agreement]

Compliance: The Joint Venture Agreement would include provisions requiring JV tocomply with all Non-local Party compliance requirements, includingthe Sarbanes-Oxley Act of 2002, the Foreign Corrupt Practices Act of1977 [and the Non-local Party code of conduct].

Exit Rights: The Joint Venture Agreement would provide the parties withappropriate rights of exit from JV.

See Supplement B to this term sheet for sample exit rights provisions and relateddiscussion.

Restrictions onCompetition:

Each party and its affiliates would be prohibited from directly orindirectly competing with JV in the Territory during the term of JV[and for ____ years thereafter].

RepresentationsandWarranties:

The Joint Venture Agreement would contain representations andwarranties that are customary for a joint venture transaction.

Conditions toClosing:

The Joint Venture Agreement would contain customary closing conditionsincluding the approval of the Non-local Party’s board of directors forthe transaction and the completion of satisfactory due diligence.

AnticipatedDocumentation:

The Non-local Party would be responsible for preparing first drafts ofthe following documents:• JV’s charter/formation documents• Joint Venture Agreement• Organizational resolutions of the Board of JV• Contribution agreements (with representations and warranties

appropriate for the contemplated contributions)• Business Plan• [Commercial agreements]• [Loan agreement]• [Other agreements]

The parties have executed and delivered this Term Sheet as of [date].

[Non-local Party]

By:_______________________[Name][Title]

[JV Partner]

By:_______________________[Name][Title]

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GoverningLaw:

The Joint Venture Agreement and other related agreements would begoverned by ___________ law.

DisputeResolution:

The Joint Venture Agreement would provide the parties withappropriate means to resolve disputes.

Expenses: Each party will bear its own expenses incurred in connection withpursuing or consummating the JV, including any broker’s or finder’sfees and all fees and expenses of its directors, officers, employees,agents, consultants, advisors, legal counsel or accountants.

Schedule: The expected time schedule is as follows:

Event Date

First draft of definitive agreements ____________

Approval by boards of directors ____________

Regulatory filings ____________

Signing definitive agreements ____________

Closing date ____________

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International Joint Ventures HandbookSection 6 – Supplement A to Term Sheet

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::50

/50

stru

ctur

e pr

ovid

es b

oth

part

ies

with

max

imum

ince

ntiv

e to

mak

e re

latio

nshi

pw

ork,

but

pro

vide

s lit

tle c

larit

y as

to w

ho w

illco

ntro

l.

CCoomm

mmeenn

ttaarryy

::M

ajor

ity p

ositi

on p

rovi

des

the

Non

-loca

l Par

tyw

ith p

ositi

ve c

ontro

l allo

win

g it

to im

plem

ent

its b

usin

ess

stra

tegi

es w

ith lo

w ri

sk o

f giv

ing

cont

rol o

ver i

ts te

chno

logy

and

oth

er a

sset

sto

the

JV P

artn

er.

The

JV P

artn

er, h

owev

er,

has

a lo

w in

cent

ive

to c

ontri

bute

.

CCoomm

mmeenn

ttaarryy

::M

inor

ity p

ositi

on m

ay a

llow

the

Non

-loca

lPa

rty

to k

eep

its fi

nanc

ial i

nves

tmen

t in

JVre

lativ

ely

low

and

to p

artn

er w

ith a

suc

cess

ful

JV P

artn

er th

at w

ishe

s to

mai

ntai

n co

ntro

l.Th

e N

on-lo

cal P

arty

, how

ever

, wou

ld h

ave

few

right

s to

impl

emen

t its

ow

n bu

sine

ssst

rate

gies

and

may

risk

losi

ng c

ontro

l ove

rits

tech

nolo

gy o

r oth

er c

ontri

bute

d as

sets

toth

e JV

Par

tner

.

Part

ies

CCoomm

mmeenn

ttaarryy

::Th

e id

entit

y of

the

entit

ies

that

ulti

mat

ely

will

hold

JV’

s eq

uity

inte

rest

s w

ill d

epen

d on

ata

x st

ruct

ure

that

the

part

ies

view

as

the

mos

t effi

cien

t. If

the

Non

-loca

l Par

ty o

r the

JV P

artn

er d

oes

not h

old

dire

ctly

the

equi

tyin

tere

sts

in J

V, t

he N

on-lo

cal P

arty

and

/or

the

JV P

artn

er g

ener

ally

will

nee

d to

ent

erin

to e

ither

(i) t

he J

oint

Ven

ture

Agr

eem

ent

(inad

ditio

n to

its

desi

gnat

ed a

ffilia

te h

oldi

ngth

e eq

uity

inte

rest

) or (

ii) a

sep

arat

e gu

aran

tee.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

, as

the

maj

ority

par

ty,

islik

ely

to c

onso

lidat

e JV

, but

the

choi

ce o

fho

w it

ulti

mat

ely

hold

s its

inte

rest

, and

wha

tty

pe o

f ent

ity to

use

, has

impl

icat

ions

not

onl

yw

ith re

spec

t to

taxe

s, b

ut a

lso

with

resp

ect

toex

posu

re to

liab

ilitie

s, a

bilit

y to

extra

ct p

rofit

s,an

d ho

w to

pro

vide

for t

he jo

int v

entu

re’s

on-g

oing

cap

ital r

equi

rem

ents

, am

ong

othe

ras

pect

s.

CCoomm

mmeenn

ttaarryy

::W

hile

it m

ay n

ot c

onso

lidat

e JV

for t

ax a

ndfin

anci

al p

urpo

ses,

the

Non-

loca

l Par

ty s

houl

dst

ill ca

refu

lly c

onsi

der h

ow it

sho

uld

ultim

atel

yho

ld it

s in

tere

st in

JV,

and

wha

t typ

e of

ent

ityto

use

for t

hat p

urpo

se.

This

has

impl

icat

ions

not o

nly

with

resp

ect t

ota

xes,

but

als

o w

ithre

spec

t to

expo

sure

tolia

bilit

ies,

abi

lity

toex

tract

pro

fits,

and

how

topr

ovid

e fo

r the

join

t ven

ture

’s o

n-go

ing

capi

tal r

equi

rem

ents

,am

ong

othe

r asp

ects

, whe

ther

the

Non

-loca

lpa

rty

hold

s a

maj

ority

or m

inor

ity in

tere

st.

83Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Stru

ctur

eCCoo

mmmm

eennttaa

rryy::

JV s

houl

d be

est

ablis

hed,

if p

ossi

ble,

as

anen

tity

and

in a

juris

dict

ion

in w

hich

(i) t

here

isa

wel

l-tes

ted

corp

orat

e la

w re

gim

e,(ii

)spe

cific

-per

form

ance

is a

vaila

ble

asa

rem

edy

(this

is p

artic

ular

ly im

port

ant w

ithre

spec

t to

enfo

rcin

g pr

ovis

ions

in th

e Jo

int

Vent

ure

Agre

emen

t on

equi

ty tr

ansf

ers)

, and

(iii)

the

parti

es a

re a

ble

to li

mit

the

pote

ntia

llia

bilit

ies

of th

e re

pres

enta

tives

who

sit

onth

eJV

Boa

rd.

Beca

use

thes

e cr

iteria

will

not

be m

et in

man

y de

velo

ping

cou

ntrie

s, th

eN

on-lo

cal P

arty

sho

uld

push

from

the

outs

etfo

r a h

oldi

ng c

ompa

ny s

truct

ure

ina

well-e

stab

lishe

d le

gal j

urisd

ictio

n, th

e Jo

int

Vent

ure

Agre

emen

t sho

uld

be g

over

ned

by th

ela

ws o

f the

juris

dict

ion

in w

hich

the

hold

ing

com

pany

ises

tabl

ishe

d, a

nd th

e ac

tual

oper

atio

ns in

the

loca

l com

pany

sho

uld

beru

nth

roug

h an

ope

ratin

g co

mpa

ny th

at is

who

lly-o

wne

d by

the

hold

ing

com

pany

. If

aho

ldin

g co

mpa

ny s

truct

ure

is n

ot p

ossi

ble,

the

Non-

loca

l Par

ty s

houl

d co

nsid

er u

se o

fan

escr

ow fo

r the

par

ties’

sha

res

in JV

and

an

irrev

ocab

le p

roxy

to g

uara

ntee

the

Non-

loca

lPa

rty’s

righ

ts w

ith re

spec

t to

equi

ty tr

ansf

ers.

See

the

rela

ted

hand

book

Sec

tion

3 (S

truct

ure)

for f

urth

er d

iscus

sion.

CCoomm

mmeenn

ttaarryy

::W

ith a

larg

er in

vest

men

t and

/or s

hare

of t

hepr

ofits

and

loss

es, t

he N

on-lo

cal P

arty

’s ta

xex

posu

re is

like

ly to

be

mor

e si

gnifi

cant

inam

ount

. Ho

weve

r, co

nsid

erat

ion

shou

ld b

egi

ven

to a

ny s

truct

ural

issu

es th

at c

ould

adve

rsel

y affe

ct th

e JV

Par

tner

as

the

JV P

artn

erm

ay re

quire

som

e fo

rm o

f com

pens

atio

n to

acce

pt p

oten

tially

adv

erse

tax

cons

eque

nces

.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

as

the

min

ority

par

tysh

ould

stil

l pur

sue

a ta

x-ef

ficie

nt s

truct

ure

and

shou

ld s

eek

com

pens

atio

n fo

r a ta

xst

ruct

ure

that

adv

erse

ly a

ffect

s it,

whe

ther

inth

e w

ay o

f spe

cial

allo

catio

ns o

r oth

erw

ise.

84 Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Purp

oses

CCoomm

mmeenn

ttaarryy

::It

is n

ot u

ncom

mon

to p

rovi

de fo

r a b

road

purp

oses

cla

use

that

per

mits

a jo

int v

entu

reen

tity

to e

ngag

e in

all

activ

ities

per

mis

sibl

eun

der a

pplic

able

law.

How

ever

, a n

arro

wpu

rpos

e cl

ause

may

be

an im

port

ant

prov

isio

n if

the

Non

-loca

l Par

ty w

ishe

s to

use

JV to

con

duct

onl

y a

subs

et o

f the

Non

-loca

lPa

rty’

s bu

sine

ss -

any

broa

deni

ng o

f the

Joi

ntVe

ntur

e Pu

rpos

e w

ould

requ

ire a

men

ding

JV’s

cha

rter

doc

umen

ts, w

hich

may

be

diffi

cult

or ti

me-

cons

umin

g if

neith

er p

arty

hold

s su

ffici

ent v

otes

to e

ffect

suc

h an

amen

dmen

t.

CCoomm

mmeenn

ttaarryy

::A

broa

dly

defin

ed p

urpo

se c

laus

e, in

clud

ing

all a

cts

perm

issi

ble

unde

r app

licab

le la

w,w

ould

allo

w th

e N

on-lo

cal P

arty

to d

irect

JV

topu

rsue

cha

ngin

g bu

sine

ss s

trate

gies

with

out

requ

iring

the

appr

oval

of t

he JV

Par

tner

, unl

ess

othe

rwise

requ

ired

in JV

’s g

over

ning

doc

umen

ts.

How

ever

, if t

he J

oint

Ven

ture

Agr

eem

ent

prov

ides

the

JV P

artn

er w

ith p

oten

tial r

ight

sto

acq

uire

con

trol o

f JV

durin

g th

e N

on-lo

cal

Part

y’s

cont

inue

d pa

rtic

ipat

ion,

the

Non

-loca

lPa

rty

shou

ld c

onsi

der l

imiti

ng th

e st

atem

ent

of p

urpo

se to

ens

ure

that

JV

cann

ot c

ompe

tew

ith th

e N

on-lo

cal P

arty

with

out i

ts c

onse

nt.

CCoomm

mmeenn

ttaarryy

::A

narro

wly

def

ined

pur

pose

cla

use

may

be

part

icul

arly

impo

rtan

t if t

he N

on-lo

cal P

arty

wis

hes

to li

mit

JV’s

con

duct

to o

nly

a su

bset

of th

e N

on-lo

cal P

arty

’s b

usin

ess

- any

broa

deni

ng o

f the

Join

t Ven

ture

Pur

pose

wou

ldre

quire

am

endi

ng JV

’s c

harte

r doc

umen

ts,

whic

h m

ay b

e di

fficu

lt or

tim

e-co

nsum

ing

ifne

ither

par

ty h

olds

suf

ficie

nt v

otes

to e

ffect

such

an

amen

dmen

t. In

this

rega

rd, t

heN

on-lo

cal P

arty

sho

uld

ensu

re th

at a

nybr

oade

ning

of t

he p

urpo

se c

laus

e w

ould

requ

ire th

e am

endm

ent o

f JV’

sch

arte

rdo

cum

ents

and

be

subj

ect t

o a

Non

-loca

lPa

rty

veto

righ

t bas

ed u

pon

Supe

rmaj

ority

votin

g re

quire

men

ts, a

s di

scus

sed

unde

r“M

anag

emen

t” b

elow

.

Term

CCoomm

mmeenn

ttaarryy

::Th

e te

rm n

eed

not b

e in

defin

ite a

nd a

spec

ified

term

for t

he o

pera

tion

of J

V m

ay b

eap

prop

riate

in s

ome

case

s. A

spe

cifie

d te

rmm

ay b

e pa

rtic

ular

ly a

ppro

pria

te w

here

JV

has

a pu

rpos

e th

at w

ill b

e ac

com

plis

hed

with

in a

disc

reet

per

iod

of ti

me

or u

pon

com

plet

ion

ofa

disc

reet

goa

l.

CCoomm

mmeenn

ttaarryy

::Ap

prop

riate

exi

t and

term

inat

ion

prov

isio

nsgo

han

d in

han

d w

ith th

e di

scus

sion

of t

hete

rm.

See

the

rela

ted

hand

book

Sec

tion

4(E

xit a

nd T

erm

inat

ion)

and

Sup

plem

ent B

toth

is te

rm s

heet

(Sam

ple

Exit

Righ

tsPr

ovis

ions

) for

furt

her d

iscu

ssio

n.

CCoomm

mmeenn

ttaarryy

::Ap

prop

riate

exi

t and

term

inat

ion

prov

isio

nsgo

han

d in

han

d w

ith th

e di

scus

sion

of t

hete

rm.

See

the

rela

ted

hand

book

Sec

tion

4(E

xit a

nd T

erm

inat

ion)

and

Sup

plem

ent B

toth

is te

rm s

heet

(Sam

ple

Exit

Righ

tsPr

ovis

ions

) for

furt

her d

iscu

ssio

n.

Terr

itory

CCoomm

mmeenn

ttaarryy

:: Th

e de

finiti

on o

f the

Ter

ritor

y w

ill b

ecr

itica

lto

anal

yzin

g w

heth

er th

ere

are

any

sign

ifica

nt c

ompe

titio

n or

ant

itrus

tis

sues

unde

r loc

al la

w a

nd th

e en

forc

eabi

lity

of th

e no

n-co

mpe

te p

rovi

sion

s.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

85Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Busi

ness

Pla

nCCoo

mmmm

eennttaa

rryy::

A w

ell-d

efin

ed b

usin

ess

plan

can

ser

vese

vera

l pur

pose

s. F

irst,

the

busi

ness

pla

n(in

clud

ing

budg

ets)

can

ens

ure

at th

e ou

tset

that

ther

e is

a m

eetin

g of

the

min

ds b

etw

een

the

part

ies

on s

ever

al k

ey a

spec

ts o

f the

JVin

clud

ing

man

ager

ial a

nd o

pera

tiona

l rol

esan

d re

spon

sibi

litie

s, a

ntic

ipat

ed fi

nanc

ing

need

s, a

nd a

ntic

ipat

ed d

istri

butio

n po

licy.

Seco

nd, t

he b

usin

ess

plan

can

def

ine

cert

ain

“crit

ical

targ

ets.

" If

thes

e cr

itica

l tar

gets

are

not m

et, t

he p

artie

s m

ay h

ave

reco

urse

toce

rtai

n “n

o fa

ult”

exi

t pro

visi

ons.

Fin

ally,

the

busi

ness

pla

n ca

n pr

ovid

e st

abilit

y in

the

even

tof

a d

eadl

ock,

as

JV m

ay c

ontin

ue to

ope

rate

unde

r the

mos

t rec

ent v

ersi

on o

f the

bus

ines

spl

an (w

ith th

e po

ssib

ility

of a

pply

ing

rele

vant

cost

of l

ivin

g ad

just

men

ts) u

ntil

the

dead

lock

has

been

reso

lved

. G

ener

ally,

the

busi

ness

plan

sho

uld

empl

oy a

“ro

lling

” co

ncep

t und

erw

hich

eac

h ye

ar th

e pa

rtie

s m

odify

the

busi

ness

pla

n to

cov

er a

n ag

reed

upo

n pe

riod.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

may

wis

h to

con

side

rre

quiri

ng a

ppro

val o

f the

bus

ines

s pl

an o

na

bian

nual

or l

onge

r bas

is to

lim

it th

e ne

edto

neg

otia

te w

ith th

e JV

Par

tner

on

an a

nnua

lba

sis.

Pro

visi

ons

rega

rdin

g em

erge

ncy

expe

nditu

res

in e

xces

s of

the

busi

ness

pla

nsh

ould

als

o be

add

ress

ed in

the

Join

tVe

ntur

e Ag

reem

ent.

CCoomm

mmeenn

ttaarryy

::Th

e bu

sine

ss p

lan

can

prov

ide

the

Non

-loca

lPa

rty

with

neg

ativ

e co

ntro

l ove

r the

ope

ratio

nof

JV b

y req

uirin

g th

e No

n-lo

cal P

arty

’s a

ppro

val

of th

e bu

sine

ss p

lan

on a

n an

nual

bas

isan

d/or

for s

igni

fican

t exp

endi

ture

s no

tin

clud

ed in

the

curr

ent b

usin

ess

plan

.

Initi

al C

apita

lCo

ntrib

utio

ns a

ndOw

ners

hip

CCoomm

mmeenn

ttaarryy

:: It

is c

ritic

al th

at th

e pa

rtie

s’ in

itial

cap

ital

cont

ribut

ions

are

spe

lled

out.

If th

e pa

rtie

sar

e m

akin

g in

-kin

d co

ntrib

utio

ns, i

t is

criti

cal

to c

onfir

m w

heth

er th

ere

are

any

requ

irem

ents

unde

r app

licab

le la

w fo

r an

inde

pend

ent

valu

atio

n of

the

cont

ribut

ion.

In

addi

tion,

ifin

-kin

d co

ntrib

utio

ns a

re a

ntic

ipat

ed, i

t is

impo

rtan

t tha

t the

par

ty m

akin

g th

ose

cont

ribut

ions

mak

e ap

prop

riate

repr

esen

tatio

nsan

d wa

rrant

ies.

To

the

exte

ntth

at th

eN

on-lo

cal P

arty

ant

icip

ates

that

it a

nd/o

r the

JV P

artn

er w

ill be

requ

ired

to p

rovid

efin

anci

ngto

the

JV, k

ey te

rms

shou

ld b

e ag

reed

to in

the

term

she

et a

nd re

flect

ed in

the

busi

ness

plan

.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

86 Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Addi

tiona

lCo

ntrib

utio

nsCCoo

mmmm

eennttaa

rryy::

Beca

use

the

busi

ness

pla

nnin

g pr

oces

s m

ayre

quire

a s

ubst

antia

l per

iod

of ti

me,

it m

ay b

ehe

lpfu

l at t

he te

rm s

heet

sta

ge to

add

ress

any

antic

ipat

ed a

dditi

onal

cap

ital c

ontri

butio

ns,

the

timin

g fo

r suc

h co

ntrib

utio

ns, a

nd th

eef

fect

of a

ny fa

ilure

to m

ake

them

.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

sho

uld

seek

to p

rovi

deth

at it

can

mak

e re

quire

d ad

ditio

nal

cont

ribut

ions

if th

e JV

Par

tner

refu

ses

oris

othe

rwis

e un

able

to m

ake

a re

quire

dco

ntrib

utio

n. T

he N

on-lo

cal P

arty

sho

uld

also

cons

ider

impo

sing

app

ropr

iate

pen

altie

s fo

rfa

iling

to m

ake

addi

tiona

l cap

ital c

ontri

butio

ns,

part

icul

arly

whe

n th

e JV

Par

tner

’s fi

nanc

ial

capa

bilit

ies

are

in q

uest

ion.

The

se c

anin

clud

e th

e rig

ht to

term

inat

e JV

, the

righ

t to

a pr

efer

red

allo

catio

n of

futu

re d

istri

butio

nsan

d th

e rig

ht to

mod

ify o

ther

asp

ects

of t

here

latio

nshi

p.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal p

arty

, as

the

min

ority

par

ty,

shou

ld a

lso

rese

rve

the

right

to m

ake

addi

tiona

l con

tribu

tions

if th

e JV

Par

tner

refu

ses

or is

una

ble

to m

ake

the

cont

ribut

ion.

In

addi

tion

to th

e ty

pes

ofpe

nalti

es d

iscu

ssed

und

er th

e m

ajor

itypo

sitio

n co

nsid

erat

ions

, a k

ey p

enal

ty in

the

min

ority

par

ty’s

favo

r is

to in

crea

se it

s co

ntro

lov

er th

e m

anag

emen

t and

ope

ratio

ns o

f JV.

Dis

tribu

tions

CCoomm

mmeenn

ttaarryy

::Th

e pa

rtie

s sh

ould

spe

cify

, to

the

exte

ntpo

ssib

le, t

he p

rinci

ples

that

will

be

appl

ied

inde

term

inin

g w

hat t

o do

with

any

dis

tribu

tabl

epr

ofits

. Fo

r exa

mpl

e, in

the

Join

t Ven

ture

Agre

emen

t, th

e N

on-lo

cal P

arty

may

con

side

rex

plic

itly

defin

ing

“Net

Cas

h Fl

ow”

and

requ

iring

regu

lar d

istri

butio

ns n

et o

f any

requ

ired

tax

paym

ents

.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

Inte

llect

ual

Prop

erty

CCoomm

mmeenn

ttaarryy

:: Sp

ecia

l atte

ntio

n sh

ould

be

paid

to a

ny IP

that

will

be

cont

ribut

ed o

r lic

ense

d to

JV.

See

the

rela

ted

hand

book

Sec

tions

4.3

(Exi

tand

Ter

min

atio

n-In

telle

ctua

l Pro

pert

yCo

nsid

erat

ions

) and

5.2

(oth

er K

eyCo

nsid

erat

ions

-Met

hods

for C

ontri

butin

gAs

sets

) for

furt

her d

iscu

ssio

n of

key

IP-re

late

d is

sues

.

CCoomm

mmeenn

ttaarryy

::Al

l crit

ical

Non

-loca

l Par

ty IP

sho

uld

besu

bjec

t to

sepa

rate

IP li

cens

ing

agre

emen

tsun

der w

hich

the

Non

-loca

l Par

ty w

ould

reta

inth

e rig

hts

to th

e cr

itica

l IP

in th

e ev

ent o

f ate

rmin

atio

n. T

o th

e ex

tent

that

the

Non

-loca

lPa

rty’

s go

al is

to a

cqui

re lo

cal b

rand

s an

d/or

othe

r int

elle

ctua

l pro

pert

y, it

is im

port

ant t

hat

the

Non

-loca

l Par

ty h

as a

righ

t to

expl

oit

thes

e br

ands

and

or o

ther

inte

llect

ual

prop

erty

upo

n te

rmin

atio

n of

JV.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

may

exe

rt g

reat

er c

ontro

lov

er J

V op

erat

ions

thro

ugh

sepa

rate

IPlic

ensi

ng a

gree

men

ts.

For e

xam

ple,

with

resp

ect t

o tra

dem

ark

licen

ses,

the

Non

-loca

lPa

rty m

ay re

quire

qua

lity

cont

rol c

omm

itmen

ts,

notic

e an

d co

nsen

t with

resp

ect t

o m

arke

ting

and

prom

otio

nal c

ampa

igns

and

com

plia

nce

with

bra

ndin

g pr

ogra

ms.

The

Non

-loca

l Par

tym

ay u

se ro

yalty

bea

ring

licen

ses

to e

xtra

ctre

venu

e fro

m J

V or

to s

et a

min

imum

busi

ness

gen

erat

ion

com

mitm

ent.

87Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Man

agem

ent

CCoomm

mmeenn

ttaarryy

::Th

ese

man

agem

ent p

rovi

sion

s as

sum

e th

atJV

has

onl

y on

e m

anag

emen

t bod

y. If

JV

isre

quire

d by

law

to h

ave

two

man

agem

ent

bodi

es (e

.g.,

boar

d an

d sh

areh

olde

rs m

eetin

g),

it w

ill b

e im

port

ant t

o sp

ecify

whi

ch d

ecis

ions

by la

w m

ust b

e m

ade

by a

dec

isio

n of

the

shar

ehol

ders

(as

oppo

sed

to th

e bo

ard)

and

whe

ther

suc

h de

cisi

ons

mus

t be

mad

e by

asi

mpl

e or

sup

erm

ajor

ity.

To th

e ex

tent

that

JV u

tiliz

es a

hol

ding

com

pany

stru

ctur

e, it

will

be im

porta

nt to

pro

vide

that

JV’s

man

agem

ent

will

con

trol t

he m

anag

emen

t oft

he o

pera

ting

subs

idia

ry.

A si

mpl

e w

ay to

pro

vide

for t

hem

anag

emen

t of a

hol

ding

com

pany

stru

ctur

eis

to p

rovi

de fo

r a m

irror

edm

anag

emen

tst

ruct

ure

at th

e ho

ldin

g co

mpa

ny a

nd o

pera

ting

com

pany

leve

ls.

The

man

agem

ent p

rovi

sion

sm

ust b

e vi

ewed

car

eful

ly in

com

bina

tion

with

the

com

mer

cial

agr

eem

ents

that

the

part

ies

may

ent

er in

to w

ith J

V. I

f the

Non

-loca

l Par

tyde

sires

to c

onso

lidat

e JV

for f

inan

cial r

epor

ting

purp

oses

, it w

ill b

e im

port

ant t

o lo

ok a

t all

ofth

e fa

cts

and

circ

umst

ance

s th

at w

ould

indi

cate

that

the

Non-

loca

l Par

ty h

as “c

ontro

l”of

JV (e

.g.,

abili

ty to

con

trol t

he b

oard

, rig

htto

appo

int k

ey m

anag

ers,

abi

lity

to c

ontro

lop

erat

ions

thro

ugh

com

mer

cial

agr

eem

ents

)to

det

erm

ine

if co

nsol

idat

ion

will

be

poss

ible

.

AAllttee

rrnnaatt

iivvee

PPrroovv

iissiioo

nn::JV

wou

ld b

e m

anag

ed b

y a

boar

d of

dire

ctor

s(th

e “BB

ooaarrdd

”) c

onsi

stin

g of

[[ffiivv

ee]]di

rect

ors.

The

Non

-loca

l Par

ty w

ould

be

entit

led

tode

sign

ate

[[tthhrree

ee]]di

rect

ors

(initi

ally

____

____

____

_, _

____

____

____

, and

____

____

____

_) a

nd th

e JV

Par

tner

wou

ld b

een

title

d to

des

igna

te [[tt

wwoo]]

dire

ctor

s (in

itial

ly__

____

____

___

and

____

____

____

_).

The

Boar

d w

ould

mak

e al

l dec

isio

ns w

ith re

spec

tto

JV

and

the

part

ies

wou

ld n

ot b

e en

title

d to

vote

on

any

mat

ters

in th

eir c

apac

ities

as

equi

ty h

olde

rs.

Exce

pt fo

r mat

ters

requ

iring

a Su

perm

ajor

ity v

ote

as d

escr

ibed

bel

ow,

deci

sion

s w

ould

requ

ire a

maj

ority

vot

e of

all

dire

ctor

s, n

ot ju

st o

f tho

se in

atte

ndan

ce a

ta

mee

ting.

The

Boa

rd w

ould

mee

t at l

east

[[mmoonn

tthhllyy]]

[[qquuaa

rrtteerrllyy

]] . E

ach

dire

ctor

wou

ldbe

entit

led

to o

ne v

ote

on a

ll m

atte

rs to

be

vote

d up

on b

y th

e Bo

ard.

Any

dire

ctor

wou

ldbe

ent

itled

to c

all a

spe

cial

mee

ting

of th

eBo

ard

and

75%

of t

he d

irect

ors

wou

ldco

nstit

ute

a qu

orum

for t

he tr

ansa

ctio

nof

busi

ness

.An

affi

rmat

ive

vote

of 7

5% o

f all

dire

ctor

s(a

“SSuupp

eerrmm

aajjoorr

iittyy”)

of t

he B

oard

wou

ld b

ere

quire

d to

:•

amen

d JV

’s c

hart

er d

ocum

ents

;•

acq u

ire o

r div

est a

bus

ines

s or

mer

ge o

rco

nsol

idat

e w

ith a

ny o

ther

ent

ity;

•m

ake

mat

eria

l loa

ns, b

orro

w m

ater

ial

sum

s, g

rant

sec

urity

inte

rest

s, o

rgu

aran

ty th

e de

bt o

f thi

rd p

artie

s;•

appr

ove

trans

actio

ns o

r oth

erar

rang

emen

ts b

etw

een

or in

volv

ing

JVan

d an

y pa

rty

or a

ffilia

te th

ereo

f;

AAllttee

rrnnaatt

iivvee

PPrroovv

iissiioo

nn::JV

wou

ld b

e m

anag

ed b

y a

boar

d of

dire

ctor

s(th

e “BB

ooaarrdd

”) c

onsi

stin

g of

[[ffiivv

ee]]di

rect

ors.

The

JV P

artn

er w

ould

be

entit

led

to d

esig

nate

[[tthhrree

ee]]di

rect

ors

(initi

ally

___

____

____

__,

____

____

____

_, a

nd _

____

____

____

) and

the

Non

-loca

l Par

ty w

ould

be

entit

led

tode

sign

ate

[[ttwwoo]]

dire

ctor

s (in

itial

ly__

____

____

___

and

____

____

____

_).

The

Boar

d w

ould

mak

e al

l dec

isio

ns w

ithre

spec

t to

JV a

nd th

e pa

rtie

s w

ould

not

be

entit

led

to v

ote

on a

ny m

atte

rs in

thei

rca

paci

ties

as e

quity

hol

ders

. Ex

cept

for

mat

ters

requ

iring

a S

uper

maj

ority

vot

e as

desc

ribed

bel

ow, d

ecis

ions

wou

ld re

quire

am

ajor

ity v

ote

of a

ll di

rect

ors,

not

just

of

thos

e in

atte

ndan

ce a

t a m

eetin

g. T

he B

oard

wou

ld m

eet a

t lea

st [[mm

oonntthh

llyy]] [[qq

uuaarrttee

rrllyy]] .

Each

dire

ctor

wou

ld b

e en

title

d to

one

vot

eon

all

mat

ters

to b

e vo

ted

upon

by

the

Boar

d.An

y di

rect

or w

ould

be

entit

led

to c

all a

spe

cial

mee

ting

of th

e Bo

ard

and

75%

of t

hedi

rect

ors

wou

ld c

onst

itute

a q

uoru

m fo

rth

etra

nsac

tion

of b

usin

ess.

An a

ffirm

ativ

e vo

te o

f 75%

of a

ll di

rect

ors

(a“SS

uuppeerr

mmaajj

oorriittyy

") of

the

Boar

d w

ould

be

requ

ired

to:

•es

tabl

ish

or m

odify

the

Join

t Ven

ture

Purp

ose;

•

esta

blis

h or

mod

ify th

e Bu

sine

ss P

lan;

•am

end

JV’s

cha

rter

doc

umen

ts;

•ap

poin

t and

ent

er in

to e

mpl

oym

ent

agre

emen

ts w

ith th

e of

ficer

s;

•co

nsum

mat

e tra

nsac

tions

or o

ther

wis

em

ake

expe

nditu

res

outs

ide

the

ordi

nary

cour

se o

f bus

ines

s;

88 Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Man

agem

ent

(con

tinua

tion)

•ra

ise

capi

tal f

rom

third

par

ties;

•re

purc

hase

any

equ

ity o

f the

par

ties;

•ad

mit

new

par

ties

to J

V; o

r •

liqui

date

, dis

solv

e, w

ind

up o

r file

volu

ntar

y ba

nkru

ptcy

pro

ceed

ings

with

resp

ect t

o JV

.CCoo

mmmm

eennttaa

rryy::

If JV

is g

over

ned

by tw

o m

anag

emen

t bod

ies

(e.g

., th

e bo

ard

and

the

shar

ehol

ders

), th

eun

anim

ous

or s

uper

maj

ority

vot

e of

the

shar

ehol

ders

may

be

requ

ired

to m

ake

mat

eria

l dec

isio

ns re

gard

ing

JV.

•ac

quire

or d

ives

t a b

usin

ess

or m

erge

or

cons

olid

ate

with

any

oth

er e

ntity

;•

mak

e m

ater

ial l

oans

, bor

row

mat

eria

lsu

ms,

gra

nt s

ecur

ity in

tere

sts,

or

guar

anty

the

debt

of t

hird

par

ties;

•ap

prov

e tra

nsac

tions

or o

ther

arra

ngem

ents

bet

wee

n or

invo

lvin

g JV

and

any

part

y or

affi

liate

ther

eof;

•ra

ise

capi

tal f

rom

third

par

ties;

•m

ake

any

dist

ribut

ions

to th

e pa

rtie

s or

repu

rcha

se a

ny e

quity

of t

he p

artie

s;•

appo

int o

r cha

nge

publ

ic a

ccou

ntan

ts;

•ad

mit

new

par

ties

to J

V; o

r•

liqui

date

, dis

solv

e, w

ind

up o

r file

volu

ntar

y ba

nkru

ptcy

pro

ceed

ings

with

resp

ect t

o JV

.CCoo

mmmm

eennttaa

rryy::

If JV

is g

over

ned

by tw

o m

anag

emen

t bod

ies

(e.g

., th

e bo

ard

and

the

shar

ehol

ders

),th

eun

anim

ous

or s

uper

maj

ority

vot

e of

the

shar

ehol

ders

may

be

requ

ired

to m

ake

mat

eria

l dec

isio

ns re

gard

ing

JV.

Offic

ers

CCoomm

mmeenn

ttaarryy

::G

ener

ally,

it is

impo

rtan

t tha

t the

Non

-loca

lPa

rty

agre

e w

ith th

e JV

Par

tner

on

the

role

san

d re

spon

sibi

litie

s of

eac

h pa

rty.

Depe

ndin

gon

the

loca

l law

app

licab

le to

JV,

it m

ay b

epo

ssib

le to

ens

ure

that

cer

tain

offi

cers

hav

ew

ide

disc

retio

n in

var

ious

ope

ratio

nal o

rfin

anci

al a

reas

. Al

thou

gh th

e bu

sine

ss p

lan

will

con

tain

the

basi

c ag

reem

ent o

f the

part

ies

on h

igh-

leve

l bus

ines

s is

sues

, the

offic

ers

of J

V w

ill s

till n

eed

to a

pply

a g

ood

deal

of d

iscr

etio

n w

ith re

spec

t to

the

oper

atio

nal a

spec

ts o

f JV.

CCoomm

mmeenn

ttaarryy

::It

will

like

ly b

e im

port

ant t

o in

volv

e th

e JV

Part

ner i

n ce

rtai

n de

cisi

on-m

akin

g as

pect

s.Th

is is

bene

ficia

l not

onl

y to

fost

er a

coo

pera

tive

spiri

t, bu

t als

o to

inst

ill in

the

JV P

artn

era

sens

e of

resp

onsi

bilit

y an

d ac

coun

tabi

lity

tow

ard

JV.

Acco

rdin

gly,

the

Non

-loca

l Par

tym

ay w

ish

to a

llow

the

JV P

artn

er to

hol

dof

ficer

pos

ition

s w

ith re

spec

t to

the

area

sof

JV b

usin

ess

for w

hich

the

JV P

artn

er is

expe

cted

to b

e re

spon

sibl

e.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

sho

uld

nego

tiate

for t

herig

ht to

app

oint

a k

ey m

embe

r or m

embe

rsof

the

man

agem

ent t

eam

to p

rovi

de th

eN

on-lo

cal P

arty

with

som

e pa

rtic

ipat

ion

inth

e m

anag

emen

t of J

V an

d to

per

mit

the

Non-

loca

lPar

ty to

acc

urat

ely

mon

itor J

V’s

oper

atio

ns.

89Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Dea

dloc

k Ev

ents

CCoomm

mmeenn

ttaarryy

:: G

ener

ally,

dis

pute

s sh

ould

be

esca

late

d as

high

up

the

exec

utiv

e ch

ain

as p

ract

ical

lypo

ssib

le to

enc

oura

ge “

peac

eful

” re

solu

tion,

part

icul

arly

whe

n th

e di

sput

e co

ncer

nsbu

sine

ss is

sues

. Ar

bitra

tion

may

not

be

anap

prop

riate

veh

icle

thro

ugh

whi

ch to

reso

lve

mos

t dea

dloc

ks, w

hich

typi

cally

occ

urbe

caus

e th

e pa

rtie

s ha

ve a

fund

amen

tal

disa

gree

men

t with

resp

ect t

o th

e bu

sine

ss o

rop

erat

ions

of J

V. I

f the

Buy

-Sel

l Opt

ion

is n

otge

nera

lly a

vaila

ble

as a

mec

hani

sm fo

rre

solv

ing

all d

ispu

tes,

a d

eadl

ock

that

pers

ists

for l

onge

r tha

n a

defin

ed p

erio

d of

time

coul

d tri

gger

aBu

y-Se

ll Op

tion.

Alte

rnat

ively,

the

parti

es c

ould

em

powe

rthe

chai

rman

of t

he b

oard

of J

V to

cas

t the

tie-b

reak

ing

vote

, whi

ch e

ffect

ivel

y sh

ifts

cont

rol t

o th

e pa

rty

appo

intin

g th

e ch

airm

an.

Or, t

he p

artie

s co

uld

craf

t a“s

win

g di

rect

or”

prov

isio

nth

at a

llow

s th

em to

app

oint

an

inde

pend

ent d

irect

or w

ho w

ould

cast

atie

-bre

akin

g vo

te.

This

inde

pend

ent

seat

coul

d be

kep

t ope

n an

d fil

led

only

for

alim

ited

time

to b

reak

a d

eadl

ock,

or i

t cou

ldbe

occ

upie

d at

all

times

. De

spite

its

perc

eive

dsi

mpl

icity

, a s

win

g di

rect

or p

rovi

sion

effe

ctiv

ely

shift

s co

ntro

l to

an o

utsi

der

with

resp

ect t

o de

adlo

ck e

vent

s.

AAllttee

rrnnaatt

iivvee

PPrroovv

iissiioo

nn::If

a Su

perm

ajor

ity o

f the

Boa

rd is

not

abl

e to

agre

e on

any

mat

eria

l bus

ines

s or

man

agem

ent

issu

e ar

isin

g ou

t of t

he v

entu

re d

urin

g a

____

_ m

onth

per

iod,

a d

eadl

ock

wou

ld b

ede

emed

to e

xist

(a “

DDeeaadd

lloocckk

”). U

pon

the

occu

rren

ce o

f a D

eadl

ock,

the

part

ies

wou

ldbe

requ

ired

to fi

rst s

eek

reso

lutio

n th

roug

hm

anag

emen

t con

cilia

tion

proc

edur

es, a

nd if

such

pro

cedu

res

do n

ot le

ad to

a re

solu

tion,

eith

er p

arty

wou

ld h

ave

the

right

to:

•[[ss

uubbmm

iitt tthh

ee mm

aattttee

rr ttoo

[[bbiinn

ddiinngg

]]aarr

bbiittrraa

ttiioonn]]

;•

exer

cise

the

Buy-

Sell

Optio

n se

t for

thbe

low

;•

[[ootthh

eerr ss

ppeeccii

ffiieedd

aaccttiioo

nn]]

AAllttee

rrnnaatt

iivvee

PPrroovv

iissiioo

nn::If

a Su

perm

ajor

ity o

f the

Boa

rd is

not

abl

e to

agre

e on

any

mat

eria

l bus

ines

s or

man

agem

ent

issu

e ar

isin

g ou

t of t

he v

entu

re d

urin

g a

____

_ m

onth

per

iod,

a d

eadl

ock

wou

ld b

ede

emed

to e

xist

(a “

DDeeaadd

lloocckk

"). U

pon

the

occu

rren

ce o

f a D

eadl

ock,

the

part

ies

wou

ldbe

requ

ired

to fi

rst s

eek

reso

lutio

n th

roug

hm

anag

emen

t con

cilia

tion

proc

edur

es, a

nd if

such

pro

cedu

res

do n

ot le

ad to

a re

solu

tion,

eith

er p

arty

wou

ld h

ave

the

right

to:

•[[ss

uubbmm

iitt tthh

ee mm

aattttee

rr ttoo

[[bbiinn

ddiinngg

]]aarr

bbiittrraa

ttiioonn]]

;•

exer

cise

the

Buy-

Sell

Optio

n se

t for

thbe

low

;•

[[ootthh

eerr ss

ppeeccii

ffiieedd

aaccttiioo

nn]]

90 Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Buy-

Sell

Optio

nCCoo

mmmm

eennttaa

rryy::

If th

e JV

Par

tner

has

stro

ng fi

nanc

ial r

esou

rces

,th

e N

on-lo

cal P

arty

sho

uld

cons

ider

pro

posi

ngth

at th

e pa

rtie

s ha

ve a

Buy

-Sel

l Opt

ion

avai

labl

e ge

nera

lly a

fter a

n in

itial

lock

-in p

erio

d.Th

is m

ay b

e pr

efer

able

bec

ause

, in

prac

tice,

it w

ill p

ossi

ble

for e

ither

par

ty to

forc

ea

Dea

dloc

k in

a tr

ue 5

0/50

arr

ange

men

t.Th

eJV

Par

tner

, how

ever

, lik

ely

will

resi

st th

ege

nera

l ava

ilabi

lity

of a

Buy

-Sel

l Opt

ion

if th

eJV

Partn

er is

in a

sub

stan

tially

wea

ker f

inan

cial

posi

tion.

In

that

cas

e, th

e JV

Par

tner

like

lywo

uld

view

suc

h a

Buy-

Sell

Optio

n as

a c

all

optio

n in

the

Non-

loca

l Par

ty’s

favo

r. If

the

JVPa

rtner

stro

ngly

resi

sts

the

gene

ral a

vaila

bilit

yof

the

Buy-

Sell

Optio

n, m

ore

emph

asis

sho

uld

be p

lace

d on

neg

otia

ting

a pu

t/ca

ll op

tion

atan

agr

eed

valu

atio

n.

CCoomm

mmeenn

ttaarryy

::Ev

en w

here

the

JV P

artn

er is

in a

wea

ker

finan

cial

pos

ition

, the

Non

-loca

l Par

ty s

houl

dco

nsid

er w

heth

er th

e re

med

y of

acq

uirin

g a

100%

inte

rest

in J

V is

an

appr

opria

te re

med

yfo

r all

disp

utes

, par

ticul

arly

if J

V’s

oper

atio

nsar

e he

avily

dep

ende

nt o

n th

e JV

Par

tner

.

CCoomm

mmeenn

ttaarryy

::W

here

the

Non

-loca

l Par

ty is

the

min

ority

party

and

if it

has

stro

nger

fina

ncia

l res

ourc

esth

an th

e JV

Par

tner

, it m

ay b

e ab

le to

use

the

Buy-

Sell

Optio

n as

a s

trate

gic

tool

for r

esol

ving

disp

utes

in it

s fa

vor.

Com

mer

cial

Agre

emen

tsCCoo

mmmm

eennttaa

rryy::

The

Non

-loca

l Par

ty s

houl

d co

nsid

er th

eex

tent

to w

hich

com

mer

cial

agr

eem

ents

suc

has

trad

emar

k an

d pa

tent

lice

nses

, as

wel

l as

sour

cing

and

ser

vice

s ag

reem

ents

, can

be

used

to in

crea

se th

e N

on-lo

cal P

arty

’s d

egre

eof

con

trol i

n JV

. Fu

rther

, con

trol o

ver c

omm

ercia

lag

reem

ents

may

sup

port

an

argu

men

t tha

tth

e N

on-lo

cal P

arty

is a

ble

to c

onso

lidat

e JV

for f

inan

cial

repo

rting

pur

pose

s. B

ear i

n m

ind

that

com

mer

cial

agr

eem

ents

, whi

ch a

reof

ten

seen

as

anci

llary

to th

e re

latio

nshi

p,ca

n cr

eate

a c

rush

ing

depe

nden

cy o

f the

join

t ven

ture

on

apa

rtic

ular

par

ty e

ven

thou

gh a

n eq

uity

join

tven

ture

may

be

esta

blis

hed

with

the

over

arch

ing

goal

of

givi

ng th

e jo

int v

entu

re s

ome

mea

sure

of

inde

pend

ence

from

the

part

icip

ants

.

CCoomm

mmeenn

ttaarryy

::Ke

y co

nsid

erat

ions

for t

he N

on-lo

cal P

arty

will

incl

ude

ensu

ring

appr

opria

te p

rote

ctio

nsov

er it

s in

telle

ctua

l pro

pert

y rig

hts.

See

the

gene

ral c

onsi

dera

tions

dis

cuss

ed a

bove

with

resp

ect t

o In

telle

ctua

l Pro

pert

y.

SSeeee

tthhee

SSaamm

ppllee

EExxiitt

RRiigghh

ttss PP

rroovvii

ssiioonn

ssffoo

llllooww

iinngg

tthhiiss

cchhaa

rrtt..

91Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Exit

Righ

tsSSee

ee tthh

ee SSaa

mmppll

ee EExx

iitt RRii

gghhttss

PPrroo

vviissii

oonnss

ffoolllloo

wwiinn

gg tthh

iiss cc

hhaarrtt..

SSeeee

tthhee

SSaamm

ppllee

EExxiitt

RRiigghh

ttss PP

rroovvii

ssiioonn

ssffoo

llllooww

iinngg

tthhiiss

cchhaa

rrtt..SSee

ee tthh

ee SSaa

mmppll

ee EExx

iitt RRii

gghhttss

PPrroo

vviissii

oonnss

ffoolllloo

wwiinn

gg tthh

iiss cc

hhaarrtt..

Rest

rictio

ns o

nCo

mpe

titio

nCCoo

mmmm

eennttaa

rryy::

Cons

ider

able

car

e sh

ould

be

give

n to

the

ultim

ate

defin

ition

of t

he “

Terr

itory

” an

d th

esc

ope

and

natu

re o

f JV’

s bu

sine

ss, w

hich

shou

ld b

e co

nsis

tent

with

the

Join

t Ven

ture

Purp

ose.

Spe

cial

con

side

ratio

n sh

ould

be

give

n as

to w

heth

er s

peci

fic p

erfo

rman

ce w

illbe

ava

ilabl

e w

ith re

spec

t to

a br

each

of t

heno

n-co

mpe

te o

blig

atio

n in

the

juris

dict

ion

ofJV

’s o

pera

tions

. If

spec

ific

perfo

rman

ce is

not a

vaila

ble

in th

e ju

risdi

ctio

n of

ope

ratio

ns,

by u

tiliz

ing

a ho

ldin

g co

mpa

ny s

truct

ure

ina

juris

dict

ion

in w

hich

spe

cific

per

form

ance

is a

vaila

ble,

a b

reac

h of

the

non-

com

pete

oblig

atio

n co

uld

be e

xpre

ssly

dee

med

tobe

am

ater

ial b

reac

h of

the

Join

t Ven

ture

Agre

emen

t thu

s gi

ving

rise

to re

med

ies

unde

r the

Joi

nt V

entu

re A

gree

men

t, w

hich

coul

d in

clud

e sh

iftin

g co

ntro

l of J

V to

the

non-

brea

chin

g pa

rtne

r. T

he p

artie

s sh

ould

also

ens

ure

that

the

non-

com

pete

obl

igat

ions

are

cons

iste

nt w

ith a

pplic

able

com

petit

ion

and

antit

rust

law

s.

CCoomm

mmeenn

ttaarryy

::Th

is is

an

impo

rtan

t con

side

ratio

n no

t onl

ydu

ring

the

life

of J

V, b

ut a

lso

with

resp

ect t

oac

tiviti

es th

at m

ay b

e un

dert

aken

upo

n ex

itor

term

inat

ion

of JV

. Th

e No

n-lo

cal P

arty

sho

uld

be h

esita

nt to

agr

ee to

bro

ad re

cipr

ocal

rest

rictio

nson

com

petit

ion,

par

ticul

arly

whe

reth

e ge

ogra

phic

sco

pe o

f its

gen

eral

bus

ines

sis

gre

ater

than

that

of t

he J

V Pa

rtne

r, or

whe

re it

inte

nds

to e

xpan

d th

e sc

ope

ofits

busi

ness

.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal P

arty

sho

uld

seek

to im

pose

tight

rest

rictio

ns o

n th

e JV

Par

tner

’s a

bilit

yto

com

pete

as

a w

ay to

incr

ease

leve

rage

with

resp

ect t

o ot

her J

V op

erat

iona

l asp

ects

.In

add

ition

, whe

re th

e JV

repr

esen

ts a

n in

itial

fora

y int

o a

parti

cula

r mar

ket a

nd th

e No

n-lo

cal

Part

y is

ulti

mat

ely

seek

ing

to e

xpan

d th

atbu

sine

ss (w

ith o

r with

out t

he a

ssis

tanc

e of

the

JV P

artn

er),

the

scop

e an

d du

ratio

n of

any

post

-term

inat

ion

non-

com

pete

cla

use

shou

ld b

e lim

ited

or a

n ap

prop

riate

pay

men

tto

allo

w th

e N

on-lo

cal P

arty

to c

ompe

tefo

llow

ing

term

inat

ion

of th

e JV

sho

uld

befa

ctor

ed in

to a

buy

-out

righ

t.

Repr

esen

tatio

nsan

d W

arra

ntie

sCCoo

mmmm

eennttaa

rryy::

Cert

ain

basi

c re

pres

enta

tions

and

war

rant

ies

shou

ld b

e in

clud

ed in

the

Join

t Ven

ture

Agre

emen

t. If

in-k

ind

cont

ribut

ions

are

antic

ipat

ed, a

sep

arat

e co

ntrib

utio

n ag

reem

ent,

with

app

ropr

iate

repr

esen

tatio

ns a

ndw

arra

ntie

s, s

houl

d be

use

d.

CCoomm

mmeenn

ttaarryy

::In

dem

nific

atio

n pr

ovis

ions

ofte

n go

han

d in

hand

with

repr

esen

tatio

ns a

nd w

arra

ntie

s.W

here

the

JV P

artn

er m

ay n

ot h

ave

the

finan

cial

reso

urce

s to

sat

isfy

cla

ims

for b

reac

hes

ofre

pres

enta

tions

and

war

rant

ies,

the

Non-

loca

lPa

rty

shou

ld c

onsi

der a

ltern

ativ

e re

med

ies,

such

as

right

s to

pre

fere

ntia

l dis

tribu

tions

.

CCoomm

mmeenn

ttaarryy

::Th

e N

on-lo

cal p

arty

sho

uld

seek

to g

ain

addi

tiona

l con

trol o

ver t

he m

anag

emen

t and

oper

atio

ns o

f JV

as a

rem

edy

for b

reac

hes

ofre

pres

enta

tions

and

war

rant

ies.

92 Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Cond

ition

s to

Clos

ing

CCoomm

mmeenn

ttaarryy

:: Al

thou

gh th

e No

n-lo

cal P

arty

may

wan

t to

mov

equ

ickl

y fro

m te

rm s

heet

to c

losi

ng, s

uffic

ient

flexib

ility

shou

ld b

e bu

ilt in

to th

e Jo

int V

entu

reAg

reem

ent t

o en

sure

that

all

com

plia

nce

(inclu

ding

filin

gs w

ith a

ppro

pria

te g

over

nmen

tal

auth

oriti

es),

finan

cial

repo

rtin

g an

d bu

sine

sspl

anni

ng is

sues

hav

e be

en re

solv

ed to

the

Non

-loca

l Par

ty’s

sat

isfa

ctio

n pr

ior t

o ke

yst

eps

such

as

clos

ing,

con

tribu

tions

of a

sset

sby

the

Non

-loca

l Par

ty, a

nd e

ffect

iven

ess

ofth

e JV

. as

appr

opria

te.

With

resp

ect t

o du

e di

ligen

ce, i

f the

Non

-loca

lPa

rty is

inve

stin

g in

an

exis

ting

busi

ness

, the

nth

ere

shou

ld b

e a

unila

tera

l due

dilig

ence

revi

ew o

f the

exis

ting

busi

ness

by

the

Non-

loca

lPa

rty.

The

Non-

loca

l Par

ty, h

owev

er, m

ay b

ere

quire

d to

pro

vide

dili

genc

ein

form

atio

nre

gard

ing

any s

igni

fican

t non

cash

con

tribu

tions

it m

akes

to th

e jo

int v

entu

re.

If JV

is a

new

lyfo

rmed

bus

ines

s ve

ntur

e, th

en th

e du

e di

ligen

cere

view

will

be a

bila

tera

l end

eavo

r. T

he p

artie

sm

ay w

ish

to li

mit

acce

ss to

cer

tain

per

sonn

el,

cust

omer

s an

d ot

her s

ensi

tive

info

rmat

ion,

atle

ast u

ntil

they

are

reas

onab

ly c

erta

in th

etra

nsac

tion

will

pro

ceed

.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

Antic

ipat

edD

ocum

enta

tion

CCoomm

mmeenn

ttaarryy

:: Fr

om a

pro

ject

man

agem

ent p

ersp

ectiv

e, it

isim

port

ant t

o id

entif

y as

soo

n as

pos

sibl

e th

eun

iver

se o

f agr

eem

ents

that

the

part

ners

antic

ipat

e w

ill c

onst

itute

the

join

t ven

ture

.To

the

exte

nt p

ossi

ble,

the

Non

-loca

l Par

tysh

ould

try

to c

ontro

l the

dra

fts o

f all

rele

vant

docu

men

ts.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

93Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Gov

erni

ng L

awCCoo

mmmm

eennttaa

rryy::

Idea

lly, t

he g

over

ning

law

of t

he J

oint

Ven

ture

Agre

emen

t and

rela

ted

agre

emen

ts s

houl

dbe

the

sam

e as

the

law

gov

erni

ng th

ees

tabl

ishm

ent a

nd o

pera

tion

of J

V. I

n th

isw

ay th

e N

on-lo

cal P

arty

wou

ld m

inim

ize

the

risk

that

the

JV P

artn

er w

ould

try

to fo

rum

shop

or e

xplo

it di

ffere

nces

in th

e de

faul

tru

les

gove

rnin

g th

e Jo

int V

entu

re A

gree

men

tan

d re

late

d ag

reem

ents

and

JV’

s op

erat

ions

and

gove

rnan

ce.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

Dis

pute

Reso

lutio

nCCoo

mmmm

eennttaa

rryy::

Whi

le p

artie

s to

a 5

0/50

join

t ven

ture

will

likel

y in

clud

e a

mec

hani

sm fo

r res

olvi

ngde

adlo

cks,

the

part

ies

may

als

o w

ish

toin

clud

e in

thei

r tra

nsac

tion

agre

emen

tsa

gene

ral d

ispu

te re

solu

tion

clau

se fo

r the

purp

ose

of e

nfor

cing

thei

r agr

eem

ents

.Th

ech

oice

s in

this

rega

rd a

re ty

pica

lly li

tigat

ion

and

arbi

tratio

n, w

ith v

ario

us le

vels

of n

egot

iatio

nan

d/or

med

iatio

n of

ten

incl

uded

as

apr

elim

inar

y st

ep.

The

part

ies

may

als

och

oose

not

to in

clud

e a

disp

ute

reso

lutio

ncl

ause

, whi

ch w

ould

leav

e th

em fr

ee to

file

ala

wsu

it in

any

cou

rt w

hich

they

bel

ieve

will

exer

cise

juris

dict

ion,

but

this

app

roac

h co

uld

incr

ease

unc

erta

inty

ove

r the

out

com

e of

disp

utes

. Th

e ul

timat

e de

cisi

on d

epen

ds o

na

cons

ider

atio

n of

sev

eral

fact

ors

incl

udin

gen

forc

eabi

lity

of ju

dgm

ents

or a

war

ds, t

hele

ngth

of t

ime

requ

ired

to re

solv

e di

sput

es,

the

need

for d

isco

very

, the

rela

tive

cost

s of

the

pote

ntia

l app

roac

hes,

the

need

for i

njun

ctive

or o

ther

inte

rim re

lief,

the

desi

re to

mai

ntai

nco

nfid

entia

lity,

and

the

type

s of

dam

ages

whi

ch p

oten

tially

cou

ld b

e aw

arde

d.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

94 Baker & McKenzie


Prov

isio

nG

ener

al C

onsi

dera

tions

Maj

ority

Pos

ition

Con

side

ratio

nsM

inor

ity P

ositi

on C

onsi

dera

tions

Expe

nses

CCoomm

mmeenn

ttaarryy

::If

an e

xpen

ses

prov

isio

n ha

s pr

evio

usly

bee

nin

clud

ed in

the

conf

iden

tialit

y ag

reem

ent,

mak

e ce

rtai

n th

at a

ny e

xpen

se p

rovi

sion

sin

the

term

she

et a

nd o

ther

sub

sequ

ent

agre

emen

ts a

re e

ither

con

sist

ent w

ith it

orex

pres

sly

supe

rsed

e it.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

Sche

dule

CCoomm

mmeenn

ttaarryy

:: On

ce th

e pa

rtie

s ha

ve re

ache

d th

e st

age

ofne

gotia

ting

a te

rm s

heet

, the

Non

-loca

l Par

tysh

ould

det

erm

ine

as p

rom

ptly

as p

ract

icab

leif

ther

e is

a re

al p

ossi

bilit

yto

clo

se th

e de

alan

d w

heth

er th

e N

on-lo

cal P

arty

is a

ble

tow

ork

effe

ctiv

ely

with

the

JV P

artn

er.

Atra

nsac

tion

sche

dule

can

hel

p in

bot

hre

gard

s.

SSeeee

CCoomm

mmeenn

ttaarryy

uunndd

eerr GG

eenneerr

aallCCoo

nnssiidd

eerraatt

iioonnss

..SSee

ee CCoo

mmmm

eennttaa

rryy uu

nnddeerr

GGeenn

eerraall

CCoonnss

iiddeerr

aattiioo

nnss..

Bake

r & M

cKen

zie

95

Inte

rnat

iona

l Joi

nt V

entu

res

Han

dboo

kSe

ctio

n 6

– Su

pple

men

t B to

Ter

m S

heet

Supp

lem

ent B

to T

erm

She

et

Sam

ple

Exit

Rig

hts

Prov

isio

ns

RR iigg hh

tt ooff FF

ii rr sstt OO

ff ff eerr ff

oo rr TT

rr aann ss

ff eerr ss

oo ff EE

qq uuii tt yy

II nntt ee

rr eess tt

ss ::If

eith

er p

arty

(the

“OO ff

ff eerr ii nn

gg PP aa

rr tt yy”)

inte

nds

to e

nter

into

neg

otia

tions

or

disc

ussi

ons

to s

ell o

r oth

erw

ise

trans

fer a

ll (b

ut n

ot le

ss th

an a

ll) o

f its

equi

ty s

ecur

ities

of J

V, it

wou

ld g

ive

notic

e to

the

othe

r par

ty (t

he “

OO ffff ee

rr eeee

PP aarr tt yy

”) o

f suc

h in

tent

. If

the

Offe

ree

Part

y no

tifie

s th

e Of

ferin

g Pa

rty

of it

sde

sire

to p

urch

ase

such

equ

ity s

ecur

ities

, the

Offe

ring

Part

y w

ould

neg

otia

tein

goo

d fa

ith to

reac

h an

agr

eem

ent w

ith th

e Of

fere

e Pa

rty

for t

he s

ale

ofth

e eq

uity

sec

uriti

es p

rior t

o en

gagi

ng in

any

neg

otia

tions

or d

iscu

ssio

ns fo

rth

e sa

le o

r tra

nsfe

r of a

ny o

f suc

h eq

uity

sec

uriti

es w

ith (o

r mak

ing

any

offe

rto

sel

l suc

h se

curit

ies

to) a

ny th

ird p

arty

. If

the

Offe

ree

Part

y do

es n

otde

sire

to p

urch

ase

the

equi

ty s

ecur

ities

, or i

f the

Offe

ring

Part

y do

es n

otre

ach

an a

gree

men

t with

the

Offe

ree

Part

y w

ithin

30

days

ofr

ecei

pt o

f the

Offe

ree

Part

y’s

notic

e of

its

desi

re to

pur

chas

e, th

en fo

r 90

days

ther

eafte

r,th

e Of

ferin

g Pa

rty

wou

ld b

e en

title

d to

sel

l the

equ

ity s

ecur

ities

to a

bon

afid

e pu

rcha

ser.

CC oomm

mmee nn

tt aarr yy

:: Th

is p

rovi

sion

s co

ntem

plat

es a

righ

t of f

irst o

ffer a

s op

pose

dto

a ri

ght o

f firs

t ref

usal

. In

pra

ctic

e, a

righ

t of f

irst r

efus

al w

ill m

ake

a tra

nsfe

rof

equ

ity e

xtre

mel

y di

fficu

lt be

caus

e it

is g

ener

ally

trig

gere

d on

ly w

hen

apo

tent

ial t

hird

par

ty p

urch

aser

has

mad

e an

offe

r (or

has

bee

n id

entif

ied)

.Th

at th

ird p

arty

, how

ever

, is

unlik

ely

to s

erio

usly

con

side

r a b

id (o

r may

disc

ount

its

bid)

if th

e bi

d is

sub

ject

to th

e rig

ht o

f ano

ther

par

ty to

trum

p it.

The

exam

ple

right

of f

irst o

ffer s

how

n ab

ove

is c

ombi

ned

with

co-

sale

and

drag

-alo

ng ri

ghts

des

crib

ed b

elow

. Th

e co

mbi

natio

n of

the

right

of f

irst o

ffer

with

co-

sale

and

dra

g-al

ong

right

s w

ould

hav

e th

e pr

actic

alef

fect

of r

equi

ring

a di

spos

ition

of t

he JV

to a

third

par

ty.

The

part

ies

may

wan

t to

cons

ider

,as

an a

ltern

ativ

e, a

righ

t to

forc

e a

disp

ositi

on o

f JV

thro

ugh

an a

uctio

npr

oces

s in

itiat

ed b

y an

agr

eed

inve

stm

ent b

ank

– a

proc

ess

in w

hich

eac

hpa

rty

may

par

ticip

ate..

CC oo-- SS

aa llee

RR iigg hh

tt ss ff oo

rr TTrr aa

nn ssff ee

rr ssoo ff

EE qquu ii

tt yy II nn

tt eerr ee

ss ttss ::

Subj

ect t

o th

e rig

ht o

f firs

t offe

r dis

cuss

ed a

bove

, the

Offe

ring

Part

y w

ould

have

the

right

to s

ell a

ll (b

ut n

ot le

ss th

an a

ll) o

f its

equ

ity s

ecur

ities

in J

V to

a th

ird p

arty

, pro

vide

d th

at th

e Of

fere

e Pa

rty

wou

ld h

ave

a rig

ht to

sel

l all

(but

not

less

than

all)

of i

ts e

quity

sec

uriti

es to

the

third

par

ty, u

pon

the

sam

e te

rms

and

cond

ition

s.

DDrr aa

gg --AA ll

oo nngg

RR iigg hh

tt ss ff oo

rr TTrr aa

nn ssff ee

rr ssoo ff

EEqq uu

ii tt yy II nn

tt eerr ee

ss ttss ::

Subj

ect t

o th

e rig

ht o

f firs

t offe

r dis

cuss

ed a

bove

, the

Offe

ring

Part

y w

ould

have

the

right

to c

ompe

l the

Offe

ree

Part

y to

sel

l its

equ

ity s

ecur

ities

in J

Vup

on th

e sa

me

term

s an

d co

nditi

ons

as a

gree

d w

ith a

third

par

ty, a

nd th

eOf

fere

e Pa

rty

wou

ld w

aive

any

dis

sent

er’s

or s

imila

r rig

hts.

CC oo

mmmm

ee nntt aa

rr yy::

Co-s

ale

and

drag

-alo

ng ri

ghts

are

trad

ition

ally

use

d in

the

cont

ext o

f a m

inor

ity s

trat

egic

inve

stm

ent.

How

ever

, by

requ

iring

that

arig

ht o

f firs

t offe

r inc

lude

all

(but

not

less

than

all)

of t

he O

fferin

g Pa

rty’

seq

uity

and

requ

iring

that

a c

o-sa

le o

r dra

g-al

ong

right

requ

ire th

e di

spos

ition

of a

ll (b

ut n

ot le

ss th

an a

ll) o

f the

Offe

ree

Part

y’s

equi

ty, t

he c

o-sa

le a

nddr

ag a

long

righ

ts a

re th

e fu

nctio

nal e

quiv

alen

t of a

sal

e of

the

JV.

Baker & McKenzie96

International Joint Ventures HandbookSection 6 – Supplement B to Term Sheet

PPuutt//CCaallll OOppttiioonn:: Beginning ___ [[mmoonntthhss]] [[yyeeaarrss]] after the date on which the parties maketheir initial capital contributions to JV, the Non-local Party would have a rightto call up to ___% of the JV Partner’s equity and the JV Partner would havea right to put to the Non-local Party up to ___% of its equity for an amountequal to [[aa pprroo rraattaa ppoorrttiioonn ooff ______ ttiimmeess JJVV’’ss EEBBIITTDDAA ffoorr tthhee pprriioorr ffiissccaallyyeeaarr]]//[[ootthheerr aapppprroopprriiaattee mmeeaassuurree]]//[[aammoouunntt ddeetteerrmmiinneedd bbyy iinnddeeppeennddeennttaapppprraaiissaall]].CCoommmmeennttaarryy:: To the extent possible, the Non-local Party will want tonegotiate in advance for a right to take greater control of the JV. Such aright most likely will need to reflect a control premium plus a formula thatlinks the valuation to some determinable measure (whether established bythe parties or an independent party). Alternatively, the parties may agreethat any such put or call would be valued by an independent valuationexpert.

RReemmeeddiieess UUppoonn DDeeffaauulltt:: If one party (the “DDeeffaauullttiinngg PPaarrttyy”): (i) is in material breach of itsnon-compete, confidentiality or additional capital contribution obligations;(ii) transfers its equity in violation of the Joint Venture Agreement;(iii) undergoes a change of control; or (iv) becomes subject to a proceedingfor bankruptcy, dissolution or winding up; the other party (the “NNoonn--DDeeffaauullttiinnggPPaarrttyy”) would have a right to exercise a Buy-Sell Option under which theNon-Defaulting Party would have a right to buy the Defaulting Party’s equityfor [[8800%%]] of fair market value or to sell its equity to the Defaulting Party for[[112200%%]] of fair market value, with fair market value determined in each caseby an independent valuation expert.CCoommmmeennttaarryy:: The remedies upon default are designed to address thesituation where the JV’s operations are located in a jurisdiction in whichspecific performance is unavailable, but a holding company structure is putin place in a jurisdiction in which specific performance is available. In thisway, the non-defaulting party’s practical remedy is to take control of the JV.

Baker & McKenzie 97

International Joint Ventures HandbookSection 6 – Issues Checklist

Exhibit 6(c) Joint Venture Issues ChecklistThe following checklist is intended to help formulate the key provisions of the jointventure documents once the parties have already considered the main internationalissues discussed in this handbook. Cross-references are included to handbooksections that contain relevant preliminary questions to consider under local law.

1. Preliminary matters1.1 Who are the parties to the joint venture? Are they individuals,

companies, partnerships or other entities? Are any of the partiessubsidiary or holding companies?

1.2 If a subsidiary is a party, will a parent company guarantee of itsobligations be required?

1.3 Do the parties want the principle terms embodied in a term sheet orletter of intent?

1.4 Do the parties wish to have a period of exclusivity during which theyare prevented from negotiating with third parties regardingarrangements which may compete with the joint venture business?

1.5 Will confidential information be disclosed during negotiations? If so,the parties should consider entering into a confidentiality agreement.

1.6 Are there any conditions precedent to the final establishment of thejoint venture? For example, is shareholder consent required? Willthird party financing need to be obtained? In certain industries, it mayalso be necessary to obtain governmental or regulatory consent.

2. Relationship between the partiesIs a joint venture appropriate to regulate the relationship between theparties? What are the commercial objectives of the parties? Would anyof the following alternatives be appropriate:

(a) a supply agreement for goods or services;

(b) a distribution or agency agreement;

(c) a license or franchise agreement;

Baker & McKenzie98


(d) a research and development or cooperation agreement;

(e) a 100% acquisition; or

(f) establishment of a wholly-owned subsidiary without participationfrom another party?

3. Business of the joint venture3.1 What activities will be carried on by the joint venture? Is the purpose

of the joint venture to carry out a specific project or a continuingbusiness?

3.2 Has a feasibility study or business plan been prepared?

3.3 Will there be geographical limitations placed on the joint venture’soperations?

3.4 Will any regulatory consents, approvals and/or licenses be requiredfor the joint venture?

3.5 Will any tax clearances be required in connection with either thesetting up or the continuing operation of the joint venture?

4. Financing4.1 How will the joint venture be funded? Will any initial investment by

the parties be in cash or by the contribution of assets? If cash, will thistake the form of loans or equity?

4.2 Will it be necessary for the parties to secure funding from externalsources? If so, what security and/or recourse to the parties will thelenders require (e.g., guarantees)?

4.3 Will any loans by the parties be interest-free? Will they be securedand, if so, will they be subordinated to any external funding?

4.4 Are there any tax or other advantages to funding through debt ratherthan equity, or vice versa?

4.5 Will the joint venture require ongoing funding (e.g., for working capital,expansion) to carry on its business? If so, will each party be required

to contribute to future calls for funding pro rata to its originalinvestment? Will the commitment to fund by capped or open-ended?What should happen if any ongoing funding obligation is not met?

Key preliminary local law considerations: Section 3.3 (Structure – Capital and FinancialInterests).

5. Contribution of assets5.1 Are any specific assets to be contributed to the joint venture by any party?

5.2 If so, will such contribution be by outright transfer or by lease/licenseto the joint venture? Will such lease/license be for a fixed or anindefinite period?

5.3 Will stamp duty or other tax consequences effect the method ofcontribution?

5.4 How, and when, are the contributed assets to be valued? Is itnecessary to incorporate a mechanism to make adjustments for anyshortfall or excess in the relevant funding obligation?

5.5 Are any third party consents required before any assets can betransferred or licensed? If so, should the transfer of the relevant assetsbe a condition to completion of the joint venture?

5.6 Will any due diligence investigation be carried out on the contributedassets and will any representations and warranties or indemnitiesbe given?

Key preliminary local law considerations: Section 3.3 (Structure – Capital and FinancialInterests) and Section 5.2 (Other Key Considerations – Methods for ContributingAssets).

6. Cross-border/local law issuesIs it a cross-border joint venture? If so, local law advice should alwaysbe obtained. The following issues may be relevant.

(a) Are there any specific laws relating to joint ventures in therelevant jurisdictions?

(b) What will be the governing law of the joint venture agreement?

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(c) Where will the joint venture be located? Are there any lawsgoverning foreign ownership or investment?

(d) Are there any restrictions on the repatriation of profits and/orthe payment of dividends? In what currency will payments bemade and at what exchange rate will these be calculated?

(e) Are any local governmental or regulatory consents required?

(f) What will be the governing language of the joint venture agreementand/or any ongoing information provided to the parties?

7. Competition7.1 Will establishing the joint venture trigger any competition or antitrust

laws, including:

(a) the US Hart-Scott-Rodino Antitrust Improvements Act;

(b) the EC Merger Regulation;

(c) Article 81 of the EC Treaty; or

(d) other relevant competition or antitrust laws?

7.2 If so, what competition notifications need to be made?

7.3 Are any industry specific approvals required? Are any sensitiveindustries involved such that government approval or notification(e.g., Exon-Florio in the US) is advisable?

Key preliminary local law considerations: Section 5.4 (Other Key Considerations –Competition/Antitrust Law).

8. Structure of the joint venture8.1 Is the joint venture business to be carried out through a separate

vehicle or through a direct contractual relationship between parties?For example, a contractual arrangement may be more appropriate forjoint research or marketing projects.

8.2 If the joint venture is to be carried out through a separate vehicle, willit be an existing entity or one specially created?

8.3 What form will the joint venture vehicle take? There are a number ofpossible forms, including:

(a) a corporation;

(b) a limited liability company;

(c) a partnership or limited liability partnership; or

(d) a profit pooling or revenue sharing arrangement.

The structure will be influenced by a number of factors, including:

(e) the need to have a separate identity to provide a flexible structurefor investment;

(f) publicity and disclosure requirements; and

(g) tax matters.

8.4 Will the joint venture be incorporated in one jurisdiction or will therebe a series of joint venture vehicles in different jurisdictions? Will thejoint venture be on or offshore?

8.5 Will the structure provide the best tax treatment for the joint ventureitself and for each of the parties?

8.6 Should the joint venture vehicle be party to the joint venture agreement?

8.7 Is an initial public offering of the shares of the joint venturecontemplated as an exit strategy? Will it be possible to convert thejoint venture vehicle into an appropriate entity form in connectionwith such an offering without adverse tax or other consequences tothe joint venture parties?.

Key preliminary local law considerations: Section 3 (Structure).

9. Accounting9.1 How will each joint venture participant account for its interest in the

joint venture? Does a party intend to treat its interest on aconsolidated basis for financial accounting purposes or to fileconsolidated income tax returns? What are the applicable rulesrelating to consolidation?

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9.2 What accounting policies will be adopted by the joint venture?

Key preliminary local law considerations: Section 3.2 (Structure – Jurisdiction inWhich to Organize the Vehicle).

10. Share capital10.1 If the parties contemplate a joint venture vehicle in the form of

a corporation with pre-set share capital, what will be the initialauthorized and issued share capital? In what currency will the sharecapital be denominated?

10.2 Will there by different classes of shares/interests with varying rights,(e.g., will any party have preferential dividend rights)? Willshares/interests of the same class be capable of being held by morethan one person?

10.3 Will there be an obligation on the parties to subscribe for additionalshares/interests? What should happen if any such obligation is not met?

10.4 Will additional shares/interests be issued on a pro rata basis (nodilution) or a pre-emptive basis (dilution will happen if the pre-emptive offer is not accepted)?


11. Profit distribution11.1 What policy will apply to the distribution of profits? Should

a minimum level of profits be retained or distributed every year?Will distribution levels be restricted for an initial period?

11.2 How will changes to the distribution policy be made?

11.3 Are there any tax or regulatory constraints on the distribution ofprofits? Will it be necessary to establish a special structure for theeffective distribution of profits (e.g., an income access structure)?



12. Transfers of interests12.1 Should there be restrictions on transfers of interests in the joint

venture? Should transfers be prohibited within an initial period inorder to firmly establish the joint venture? Should the parties beallowed to transfer part of their respective interests?

12.2 If transfers are permitted, should the other parties have pre-emptiverights?

12.3 Should there be exceptions from any pre-emptive provisions fortransfers to other group companies or to family members and trusts?If so, consider including an obligation to re-transfer if such relationshipis broken.

12.4 How will interests be valued for pre-emption purposes (e.g., marketvalue, fair value)? Will there be a mechanism for valuation by anindependent third party?

12.5 If the pre-emptive rights are not exercised, should a party have a rightto call for liquidation of the joint venture?

12.6 Is it appropriate to include any of the following transfer mechanisms:

(a) “co-sale” rights - the transferor is able to require that a potentialpurchaser also purchases the interests held by other joint venturepartners;

(b) “drag-along” rights - the transferor is able to require other jointventure partners to transfer their interests to a potentialpurchaser; or

(c) “buy-sell” option - a party receiving notice of a potential transfermust elect to either purchase the interests of the other party ortransfer its interests to the other party.

12.7 Should all new joint venture partners be required to enter into thejoint venture agreement on the same terms and conditions as theoriginal parties?

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12.8 Will the name of the joint venture need to be changed if interests aretransferred to a new party? Will arrangements need to be made for thecontinued use of assets contributed by a selling joint venture partner?

12.9 Will the parties be required to transfer their interests in certaincircumstances (e.g., insolvency, breach of the joint venture agreementor a change of control)? How will a change of control be defined?Consider the use of put and call options to cover these events.

12.10 Should the parties be permitted to grant security over their interestsin the joint venture?

Key preliminary local law considerations: Section 4.1 (Exit and Termination – Transfersof Interests).

13. Board of Directors/Management13.1 How many directors will serve on the board? How many directors

will each party be entitled to designate?

13.2 What rights will each party have to remove directors? Can the boarditself appoint additional directors?

13.3 Is a two-tier board structure with supervisory and managing levelsappropriate?

13.4 Will decisions be made by simple majority or will certain directorshave weighted voting rights?

13.5 Who will be the chairman and will he/she be entitled to casta tie-breaking vote? Will the right to appoint the chairman berotated between the parties?

13.6 Will the directors be able to delegate their power?

13.7 How frequently, and where, will board meetings be held?

13.8 What notice and quorum requirements will apply for board meetings?What will happen if a quorum is not present? Will it be possible tohold meetings on short notice or to take action by written resolution?

13.9 Who will be entitled to appoint executive officers? Will theshareholders/members have any direct rights with respect to theappointment of particular executives or management positions?

13.10 Will certain matters be reserved for decision at the shareholder/memberlevel?

13.11 What exculpation and indemnification protections will be extended tothe officers and directors of the joint venture?

13.12 Will the joint venture enter into employment agreements andconfidentially and invention assignment agreements with keyemployees?

13.13 Will a set of common incentives be established for key managementpersonnel?


14. Shareholder meetings14.1 Will the shareholders/members have decision-making power?

14.2 If so, what notice and quorum requirements will apply for shareholdermeetings? What will happen if a quorum is not present? Will it bepossible to hold meetings on short notice or to take actions by writtenresolution?

14.3 Where will shareholder meetings be held?

14.4 Will any shareholders have weighted voting rights?

15. Minority protection15.1 Will the minority be protected against majority decision on certain

matters by:

(a) a requirement for a unanimous vote;

(b) a requirement for a special majority (e.g., in excess of 50.1%) or,in addition to a majority vote on the relevant matter, a vote infavor by a specified percentage of the minority;



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(c) veto rights; or

(d) shareholder class rights?

15.2 Will any such protection be entrenched at board or shareholder level?

15.3 When will the minority protection mechanisms apply? For example,the minority protection may apply to:

(a) establish or modify the purpose of the joint venture;

(b) establish or modify the business plan;

(c) amend the joint venture’s charter documents;

(d) appoint and enter into employment agreements with the officers;

(e) consummate transactions or otherwise make expenditures outsidethe ordinary course of business;

(f) acquire or divest a business or merge or consolidate with anyother entity;

(g) make material loans, borrow material sums, grant securityinterests, or guaranty the debt of third parties;

(h) approve transactions or other arrangements between or involvingJV and any party or affiliate thereof;

(i) raise capital from the parties;

(j) make any distributions to the parties or repurchase any equity ofthe parties;

(k) appoint or change public accountants;

(l) admit new parties to JV;

(m) liquidate, dissolve, wind up or file voluntary bankruptcyproceedings with respect to JV.

16. Representations and warranties16.1 What representations and warranties will the parties be required to

make?

16.2 Will the parties indemnify each other for breaches of representationsand warranties or covenants under the joint venture agreement?

16.3 Will indemnification obligations be subject to limitations based ontime, amount, or otherwise?

17. Restrictive covenants17.1 Will the parties be restricted from competing with the joint venture?

If so, what territorial or other limitations will apply?

17.2 Will the parties be required to refer business opportunities to the jointventure?

17.3 To what extent will the parties have access to, or rights over,confidential information belonging to the joint venture? Will theparties be under any confidentiality obligations regarding the otherparties?

Key preliminary local law considerations: Section 4.4 (Exit and Termination –Non-Competition Provisions) and, with respect to enforceability, Section 5.3(Other Key Considerations – Non-Competition Provisions).

18. Administration18.1 Who will act as the company secretary? What professional advisers

will be appointed and by whom?

18.2 What information on the business and performance of the jointventure will be provided to the parties and how frequently?

18.3 What rights will shareholders have to inspect the accounts and recordsof the joint venture company?

19. Intellectual property19.1 What intellectual property rights will the joint venture acquire? Will

these be transferred or licensed and on what terms? Will thetransferring/licensing party retain the ability to use the intellectualproperty rights?

19.2 Who will own the intellectual property developed by the jointventure?



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19.3 What will happen to the intellectual property rights on termination ofthe joint venture and will this vary depending on the nature of thetermination or exit by a particular party?

Key preliminary local law considerations: Section 4.3 (Exit and Termination –Intellectual Property) and, with respect to enforceability, Section 5.2 (Other KeyConsiderations – Methods for Contributing Assets).

20. Employee issues20.1 How will employees be transferred to the joint venture (e.g.,

offer/acceptance, automatic transfer)? Is there a transfer of a businessto the joint venture? What local rules apply to the transfer ofemployees to the joint venture (e.g., in the United Kingdom, theTransfer of Undertakings (Protection of Employment) Regulations1981)? Will any other termination, transfer or relocation laws (e.g., inthe United States, the WARN Act) impact the joint venture?

20.2 Will the joint venture have its own employees? What terms andconditions of employment will apply to the joint venture employees?Are service contracts required? What share option and pensionarrangements are envisioned?

20.3 Is any particular management structure envisioned?

20.4 Will any of the parties second staff to the joint venture? If so, on whatterms?

Key preliminary local law considerations: Section 5.6 (Other Key Considerations –Employee Transfers and Benefits).

21. Land21.1 What premises will the joint venture occupy?

21.2 Will the joint venture own, lease or license its premises?

21.3 Is a parent or other guarantee required in relation to the occupation ofthe premises?

22. Ancillary arrangementsAre any ancillary arrangements required, for example, in relation to:

(a) the transfer (sale or contribution) of business assets;

(b) the supply of goods;

(c) transitional arrangements for sharing information technologyfacilities, including software;

(d) the provision of technical assistance/know-how/training;

(e) the secondment of staff; or

(f) the provision of facilities?

23. Deadlock23.1 If the parties cannot agree on an issue which is fundamental to the

joint venture, how should matters be resolved? Specifically, in whatcircumstances will deadlock arise:

(a) on all material issues;

(b) on certain issues determined by the parties when the jointventure is established; or

(c) on issues designated as deadlock issues by one of the parties at thetime they arise?

23.2 Will deadlock issues be referred to the respective chief executiveofficers of the parties in the first instance? Will alternative mechanismsto resolve deadlock be used, such as:

(a) the joint venture chairman’s tie-breaking vote;

(b) reference to an independent director; or

(c) reference to an independent third party?

23.3 Will different deadlock issues be resolved by different methods?Should an alternative dispute resolution procedure be developed?



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23.4 What rights will a party have on a deadlock? For example, will a partybe able:

(a) to require the termination of the joint venture and either awinding up or sale; or

(b) to exercise a “buy-sell” option requiring the other party to sell orpurchase its interest in the joint venture?

24. Termination24.1 Is the joint venture for a fixed term or indefinite in duration? If for a

fixed term, can it be renewed and on what basis?

24.2 Are there any circumstances in which the joint venture willautomatically terminate (e.g., the insolvency of any party, thedestruction of a particular asset, loss of regulatory approval)?

24.3 In what circumstances will a party be entitled to terminate the jointventure (e.g., on a material breach of the joint venture agreement byanother party or a change of control of another party)? How will theparties define change of control?

24.4 Will the parties have a right to terminate by notice after an initialperiod?

24.5 What arrangements will apply on termination in relation to thedistribution of assets, the discharge of outstanding contracts, or theassumption or discharge of any other liabilities of the joint venture?

24.6 Will any restrictions on the parties apply after termination of the jointventure?

Key preliminary local law considerations: Section 4 (Exit and Termination).

Appendix AOverview of D&O Duties and Liabilities inForeign EntitiesJoint ventures parties are likely to ask some of their own officers and employeesto serve as directors of the joint venture entity. Most individuals who are askedto serve in this position assume that being a director of a joint venture is nota significant burden and does not involve much risk about which to be concerned.Generally speaking, this is true, provided everything is running smoothly. Theposition of a director of a foreign entity has its pitfalls, however, and a prudentdirector should be aware of their existence and should watch out for them.

This appendix provides a brief overview of the duties, risks and potential civil andcriminal liabilities of a director of an entity incorporated outside the United Statesin order to create a general awareness of the kinds of problems that a director shouldanticipate, particularly if the entity finds itself in financial difficulty. This summaryis not, in any way, intended to be an exhaustive discussion of all the relevant issuesand potential liabilities that a director of a foreign joint venture entity might faceand it should not be construed as legal advice because the recommended approachwill vary according to the issue, the director’s actions and the jurisdiction involved.

Position and Duties of a DirectorA prospective or current director should have a clear understanding of what the term“director” means in a particular jurisdiction. While in the United States there isa clear distinction between a “director” and an “officer,” this is not necessarily thecase in other jurisdictions. For example, in Singapore, the Companies Act definesan “officer” of a company to include any director of the company. In Hong Kong,the Companies Ordinance defines a director as “any person occupying the positionof a director by whatever name called,” and all directors are vested with the samepowers, duties and liabilities, whether they are called “director,” “manager,”“managing director,” “chief executive” or other similar title.

On the other hand, many jurisdictions distinguish between a director (i.e., a memberof the board of directors) and a managing director. In Sweden, for example, theboard of directors is responsible for the management and organization of a limited

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liability company, whereas the powers of a managing director are restricted today-to-day management. A Japanese stock company (K.K.) must have a minimumof three directors of which at least one must be resident in Japan and serve asa “representative director,” carrying on the day-to-day functions of the companypursuant to the direction and policies established by the board of directors.A Dutch private limited liability company (B.V.) is managed by a “managementboard” consisting of one or more “managing directors,” who can be individualsor companies.

The duties and liabilities of a director may also depend on the type of entity.A French S.A. (stock corporation), for example, may have a “Président DirecteurGénéral” (Chairman of the Board), directors (members of the board of directors)and a “managing director.” A French SARL (limited liability company), on the otherhand, only has a “manager” (gérant), who may be held personally liable while actingin his or her managerial capacity.

A director’s duties vary depending on the position (e.g., member of the board ofdirectors vs. manager), the type of legal entity and the jurisdiction. A director’sduties may be defined by a statute, by common law (in common law jurisdictions)or by the articles or bylaws of the company. In some jurisdictions, a director hasthe power to bind the company by his or her single signature. For example, amanaging director (Geschäftsführer) of a German GmbH has unlimited statutorypowers to legally represent the company. Although the shareholders (i.e., the jointventure partners) of a GmbH may internally limit the scope of the managingdirector’s powers by including restrictions in the Articles of Association, themanaging director’s employment contract or so-called “standing orders,” theserestrictions are generally not enforceable against third parties.

A director’s general duties can be broadly described as fiduciary. The director hasa duty, among other things, to act in good faith and with loyalty to the company,to act prudently and in the best interests of the company, to exercise powers anddischarge duties with care and diligence, not to misuse corporate information orthe position for personal gain, and to avoid conflict of interest.

An officer or employee of a US corporation should be aware of the potentialconflict of interest inherent in the situation where he or she serves as a directorof a joint venture entity in which his or her employer is one of the parties to thejoint venture, thus owing a duty to both entities. Most of the time, the interests of

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the joint venture party and the joint venture entity are in alignment; however,circumstances may arise under which a joint venture party’s interest could beadverse to the interest of the joint venture entity. Most notably, this may occurwhen either of the two entities is in financial difficulty. For example, the jointventure party that is struggling to remain financially afloat may want to takecash out of the joint venture entity, which could render the joint venture entityinsolvent. Or, in a situation where the joint venture entity is insolvent, its directorsmay be required by law to take steps to liquidate it contrary to the wishes of thejoint venture parties.

In some jurisdictions, even transactions in which such entities’ interests are inalignment may be deemed legally problematic (i.e., void or voidable) where adirector has a potential conflict of interest. For example, if a director of a FrenchS.A. is also a director of an entity contracting with the S.A. (e.g., of an affiliatedcompany), the transaction between the two entities is considered a “regulatedagreement” and is subject to advance authorization by the board of directors ofthe S.A. and approval by a meeting of its shareholders.

In addition to general fiduciary duties, directors typically have specific duties underthe applicable foreign corporate laws, including, among other duties, the preparationand submission to the shareholders of the annual balance sheet, and an obligation tocall shareholders’ meetings. Directors may also be responsible for the company’scompliance with other laws and regulations of the foreign country, such as unfaircompetition laws, environmental laws, labor laws, workplace hygiene and safetyregulations and personal data protection laws. Individuals serving as directors ofa foreign joint venture entity should make a special effort to ascertain the specificduties of their positions in each jurisdiction where they are serving as a directorand endeavor to discharge them with diligence and care.

Civil Liability of DirectorsSources of Potential LiabilityAs in the United States, most foreign jurisdictions recognize the general principlethat corporations and limited liability companies are distinct legal entities, separatefrom their shareholders, and are responsible for their own debts and liabilities.(Limited partners in limited partnerships may also benefit from principles oflimited liability although often at the expense of giving up managerial rights.)

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Nonetheless, there are various circumstances in which directors of foreign entitiesmay become liable not only to the entity itself, but also to its shareholders (i.e., theparties to the joint venture) or to third parties.

Corporate Compliance. One usual source of personal liability for directors is thefailure to comply with corporate formalities. For example, under Dutch law, thefailure to comply with the formalities of incorporation makes the directors liable onthe company’s obligations to third parties. In Singapore, directors are personallyliable for the company’s failure to comply with various corporate and filing formalitiesin connection with an increase in the company’s capital and share allotments, forfailure to properly maintain the company’s registers, failure to hold an annualmeeting, failure to have a registered office which is open and accessible to thepublic (as required by law) and other corporate compliance requirements.

Income and Payroll Taxes. In many jurisdictions, directors may become personallyliable for unpaid company tax or social security contributions. For example,a director (gérant) of a French SARL may be personally liable for the payment ofunpaid corporate tax and penalty if he or she has made tax and penalty assessmentsand payments impossible, either through fraud or through serious and repeatedfailure to comply with the company’s tax obligations. In Germany, the managingdirector of a GmbH may become personally liable for payment of social securitycontributions and administrative fines. The managing directors of a Dutch B.V. maybe personally liable, jointly and severally, for the B.V.’s unpaid corporate, socialsecurity and pension fund taxes and premiums, if the B.V.’s inability to pay thesesums resulted from “obvious mismanagement” or if the managing directors failedto give timely notice to the competent agencies.

Violation of Other Foreign Laws. In addition to corporate and tax laws, directorsmay also be liable for the company’s violation of other laws and regulations of theforeign country in which the entity is organized. For example, under Italian law,directors may become personally liable for failure to comply with data protectionlaws. In France, a director may be liable for violations of labor law and workplacehygiene and safety regulations. Under Mexican law, a director may be liable tothird parties for damages caused by the payment of dividends out of funds otherthan profits. Similarly, in Singapore, directors may be personally liable to thecompany’s creditors to the extent to which dividends paid to the shareholders(i.e., the parties to the joint venture) exceed the company’s profits.

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Liability to the Entity. In most jurisdictions directors may incur personal liabilityto the entity itself. The most common source of this liability is breach of fiduciaryduties and acting contrary to the best interest of the company. Under Argentinelaw, for example, directors may become personally liable if they undertake businessactivities that compete with the company. A director of a French S.A. who hada potential conflict of interest in a transaction (i.e., the “regulated agreement”situation) may be personally liable to the S.A. for damages if the “regulatedagreement” was not properly approved by the board of directors and by theshareholders of the S.A.

Limiting ExposurePrevention. A director’s first line of defense against liability is, of course, prevention.To avoid liability, a director of a foreign entity should be well aware of his or her dutiesto the company under applicable law and should discharge these duties with careand diligence. The director should act in good faith and avoid conflict of interest.The director should monitor the company’s activities, exercise reasonable businessjudgment in pursuing the company’s best interests and should seek professionaladvice in case of doubt. The director should be particularly careful and shouldmonitor the entity’s affairs particularly closely when the entity is in financialdifficulty.

Indemnification. Most US corporations put in place some indemnificationarrangements to protect the directors of their foreign subsidiaries and joint ventureentities from liability incurred while serving as director. In general, a director’sright to be indemnified for such liability may come from three sources: (1) articles ofincorporation, bylaws or other charter documents of the foreign entity (if permissibleunder applicable foreign law); (2) indemnification agreements between the directorand the foreign entity or the US entity that is his or her employer that ownsthe interest in the foreign entity, or both; and/or (3) the statutory right toindemnification that the individual has as an employee of the US entity that is hisor her employer that owns the interest in the foreign entity.

Indemnification provisions included in the articles of incorporation or other charterdocuments of the foreign joint venture entity do not necessarily provide a sufficientlevel of protection to the company’s directors and may be difficult to enforce insome jurisdictions. It would be more prudent for a director of a foreign jointventure entity to obtain a contractual right to indemnification by entering into an

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indemnification agreement either with the entity itself or with the US entity that ishis or her employer that owns the interest in the foreign joint venture entity, orwith both.

The laws of some jurisdictions either prohibit or severely limit the scope ofpermissible indemnification of directors of entities incorporated in those jurisdictions.For example, Austria and Germany permit indemnification of directors only forslight negligence. In Australia, a company or a related body corporate may notindemnify a director against liability that (1) is owed to the company or a relatedbody corporate; (2) is a fine or compensation order made under the CorporationsAct; or (3) arises out of conduct that is not in good faith. Australian law also limitsthe circumstances under which a company may indemnify its directors for legalcosts (although in many cases this type of indemnification is permissible).

In jurisdictions that prohibit or limit the scope of indemnification, an indemnificationprovision included in the articles of incorporation or other charter document maybe void. Similarly, an indemnification agreement between the director and theentity incorporated in such jurisdiction would be of questionable enforceability.On the other hand, a US joint venture party may be able to enter into an enforceableagreement under US law to indemnify a director of its foreign joint venture entityeven if the joint venture entity itself is prohibited from indemnifying its directors.

Although in many cases indemnification agreements offer adequate protection fromliability, there are several pitfalls of which directors should be aware. First of all,the director should establish who is the indemnitor under the agreement. In thejoint venture context, this would typically be either the foreign joint venture entityitself or the US entity that is his or her employer that owns the interest in the jointventure entity. If the agreement is with the foreign joint venture entity itself, thedirector should confirm that the agreement will not be unenforceable becauseapplicable law prohibits indemnification of directors. In addition, the directorshould make sure that the foreign joint venture entity has complied with allcorporate formalities applicable under the laws of the foreign jurisdiction withrespect to approval and execution of the indemnification agreement (e.g., boardresolution, shareholder approval and signature authority).

The identity of the indemnitor also bears on the practical aspects of indemnification:if the indemnification obligation is undertaken by the foreign entity itself, thedirector should consider whether the entity is likely to have sufficient funds to meet

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this obligation. In this regard, if a joint venture entity is underfunded, the directorwould feel more secure if the indemnitor were his or her employer that holds theinterest in the joint venture or another entity within the employer’s corporategroup that has sufficient assets to provide adequate indemnification. But even thatmay be of little practical value in the event the employer (or other indemnitor)finds itself in financial difficulty. Under these circumstances, director and officerinsurance may help (see below).

The director should review the draft indemnification agreement carefully beforesigning it. For one thing, the director should make sure that his or her rightto indemnification is not subject to a burdensome condition that could makeindemnification unfeasible. For example, if indemnification is subject to approvalby the joint venture entity’s board of directors or shareholders (i.e., the parties tothe joint venture), that approval may be difficult to obtain under some circumstances(such as when the director’s employer holds only a minority interest in the jointventure). The director should also carefully consider the substantive provisions ofthe indemnification agreement and should have a clear understanding of the scopeof liabilities that are indemnifiable under the agreement (which are often madesubject to various contractual limitations and exclusions). Of great importance isalso the director’s right to advancement of litigation expenses, without which manydirectors would not be able to fund their defense.

Director and Officer Insurance. Traditional director and officer insurance(commonly called “D&O” insurance) policies offer two types of coverage. The firstcovers individual directors and officers for losses not indemnified by the corporation;the second reimburses the corporation for the amount it spends indemnifyingdirectors and officers for their losses. A newer kind of D&O insurance not onlycovers the director or officer as the insured, but also provides protection for thecorporation itself (so-called “entity coverage”). In the joint venture context, ifD&O insurance is purchased by a joint venture party, its joint venture directorappointees should confirm that the policy covers his or her actions as director ofthat foreign joint venture entity. Most foreign jurisdictions allow a company toprocure D&O insurance, even if that jurisdiction does not permit indemnificationprovisions. For example, although U.K. law prohibits indemnification provisions inmost circumstances, it does not preclude a company from purchasing D&O insurance.

A director of a foreign entity should carefully review the terms of the policy –particularly the exclusions and endorsements contained in it. For public policy

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reasons, most D&O insurance policies contain a dishonesty exclusion. That is, theydo not cover dishonest or criminal acts by an officer or director. Another typicalexclusion concerns claims brought by regulatory agencies. Endorsements mayenhance or diminish coverage and can often be negotiated with the insurer, possiblywith an increased or reduced premium.

Statutory Indemnification of Employees. When an employee of a US corporationis asked to serve as director of the corporation’s foreign joint venture entity, servicein that capacity becomes part of his or her employment duties. To the extentthat such director’s liability is incurred within the course and scope of his or heremployment by the US corporation, the individual may be protected by the statutoryindemnification provisions of the applicable state employment law or by commonlaw principles of agency. For example, in Illinois, general principles of agency lawprovide that employees in the private sector are entitled to indemnification fromtheir employer for all losses incurred by the employee while acting in good faithwithin the scope of their employment. “Scope of employment” is understoodbroadly: an employee’s conduct is within the scope of his or her employmentwhere it is a lawful action undertaken at the direction of and for the benefit of theemployer. The employee’s right to indemnification under general agency principlesis fairly broad. However, an employee will not be indemnified for conduct that isillegal, even if performed pursuant to the express direction of the principal.

Criminal Liability of DirectorsSources of Potential LiabilityA director of a foreign entity potentially may face criminal liability in two typesof situations: (1) criminal liability arising from intentional, willful or knowingmisconduct of the individual director while in office and (2) criminal liabilityarising from the foreign entity’s acts in contravention of the applicable foreign lawwhere the director did not act intentionally, willfully or knowingly.

As a matter of common sense, most individuals realize that certain acts (e.g., fraud,forgery and theft) are clearly dishonest, improper and/or criminal. In the corporatecontext, such offenses may take the form of providing false information or makinguntrue statements to authorities or shareholders, intentional destruction of financialrecords, or other improprieties. Most directors recognize the illegality of such actsand understand that they may give rise to criminal liability.

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There are, however, less obvious sources of criminal liability, to which a director ofa foreign entity may expose himself or herself inadvertently, for example by signinga document on behalf of the entity without being aware that this causes the entityto violate local criminal laws. These “hidden” sources of criminal liability may beassociated with corporate compliance, tax or other laws of the foreign jurisdiction.

Corporate Compliance. A company’s violation of corporate compliance requirementsmay give rise to criminal liability for the directors responsible for the company’scompliance. For example, in the United Kingdom, a director may be held criminallyliable for the company’s failure to hold an annual general meeting within 15 monthsof its last annual general meeting and, if convicted, will be subject to a fine. In Japan,a director is criminally liable for an illegal distribution of dividends in the absenceof adequate distributable profit. It should be noted that it is not a defense thatthe joint venture parties authorized the act. If convicted, the director could face asignificant fine and/or imprisonment.

Tax. Criminal liability may also be imposed on directors for corporate tax violationsincluding tax evasion, failure to pay taxes, making a false entry in a tax return anddestroying records. In Ireland, for example, most revenue offenses committedby a director are punishable by imprisonment and/or a significant fine. Similarpunishment exists in the United Kingdom and the People’s Republic of China.

Other Foreign Laws. Directors may also be held criminally liable for the company’sviolations of numerous statutes of general applicability. For example, in the UnitedKingdom, a director may be held criminally liable under the Consumer ProtectionAct of 1987. The Consumer Protection Act covers offenses such as producingand/or importing defective (unsafe) products and giving misleading price indications,and violations are punishable by imprisonment and/or significant fines. Directorsmay also be criminally liable for the company’s violations of environmental protectionlaws, antitrust laws, copyright laws, patent and trademark laws and other laws. InJapan, for example, a director is criminally liable for violations of the Anti-MonopolyLaw and infringement of third parties’ industrial rights under the Copyright Code.

Past Violations. In some countries, a director may also be criminally liable for pastviolations of law by the company of which he or she becomes director. If uponelection to the board of directors, the director becomes aware of a continuing orongoing failure of the company to comply with its legal obligations, the directorcould be criminally liable if he or she failed to take corrective action.

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Limiting ExposureSome defenses to potential criminal liability exist. For example, a director whotakes all reasonable steps to secure compliance with a particular provision andendeavors to correct any irregularities of which he or she might become aware ismore likely to avoid criminal liability.

Indemnification agreements may provide for indemnification from criminal liability;however, in some jurisdictions these provisions may be considered contrary topublic policy and may be unenforceable. Most indemnification agreements excludeindemnification for liability incurred by a director through gross negligence,intentional misconduct or fraud. Similarly, D&O insurance policies typicallyexclude dishonest or criminal acts committed by a director or officer.

Director Liability in Connection with a Subsidiary’sInsolvency/BankruptcySources of Potential LiabilityThe improper or faulty management of a company before or after it finds itself infinancial difficulty represents a source of potential liability of which directors offoreign entities should be particularly aware. In general, absent mismanagement,a director is not personally liable for the company’s financial failure, particularlywhen such failure results from general market conditions. In many jurisdictions,however, a director may be exposed to potential liability if he or she fails to exercisereasonable business judgment regarding the financial status of the company and,either expressly or implicitly through inaction, authorizes the continuation ofbusiness activity for a company that is or is likely to become insolvent.

A director of a bankrupt company may incur personal liability, in general, underthe following circumstances: (1) in instances of mismanagement (defined broadlyand often by case law), if the mismanagement leads to an insufficiency of assets;(2) if the director has not ensured that the company’s taxes and social securitycontributions have been paid; (3) if the director has abused his or her position orcommitted fraud; or (4) if the director intentionally fails to commence bankruptcyproceedings within a specified period of time once the company becomes insolvent.This latter obligation warrants additional discussion.

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In most jurisdictions, a director of a company has an affirmative duty to assure thatthe company does not trade or conduct business while the company is insolvent,a situation that is typically defined as one where the company cannot cover itsliabilities with its current assets on an ongoing basis. Civil liability may also beimposed on a director of a company that becomes insolvent where the director knewor ought to have concluded that there was no reasonable prospect that the companywould avoid going into insolvent liquidation and the director failed to take everystep he or she ought to have taken to minimize the potential loss to the company’screditors. Furthermore, in many jurisdictions, a director also has an affirmativeduty to notify shareholders (i.e., the parties to the joint venture) if the companybecomes insolvent or overindebted and to initiate liquidation or bankruptcyproceedings within a specified period of time after it is determined that the companywill not be able to meet its current financial obligations on a continued basis.The timeframe for initiating these proceedings is relatively short in many countries.

The threshold requirements for determining whether voluntary liquidation orinvoluntary bankruptcy proceedings must be initiated vary from jurisdiction tojurisdiction, and a director anticipating that the company may soon meet withfinancial difficulty should seek specific advice regarding the company’s options inadvance. The decision with respect to the type of winding up procedure to pursueshould be based on analysis of accurate financial statements. Although in somejurisdictions a liquidation proceeding can be converted into a bankruptcy proceedingif a determination is made during the liquidation process that a solvent liquidationis impossible, other jurisdictions are not so flexible.

Limiting ExposureDirectors should take care to avoid “surprises” regarding the financial situation ofthe company. The timely and accurate preparation of financial accounts on a regular(i.e., monthly and quarterly) basis (in addition to annual filings) should assist thedirectors in assessing the financial condition of the company. If the company’sfinancial situation is beginning to deteriorate, it is advisable to increase the frequencyof management accounts in order to monitor the situation as closely as possible.The directors should seek timely professional advice regarding their specific dutiesin connection with the company’s possible insolvency in that particular foreignjurisdiction.

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If the company experiences financial difficulties, and the directors have determinedthat the company is, or is about to become, insolvent, they should immediatelynotify the shareholders (i.e., the parties to the joint venture) of this situation. Theshareholders may rectify the situation through an infusion of funds. Thus, in thejoint venture context, so long as the company remains funded by the joint ventureparties and is therefore able to meet its debt obligations as they fall due (therebyavoiding insolvency), directors may not need to take action to wind up the company.They should, however, remain vigilant regarding the company’s financial situationand exercise due care with regard to any asset transfers or contractual engagements,so as not to incur new liabilities or debts that could lead to charges of fraudulenttrading.

As a practical matter, a director should also keep in mind the potential costs ofliquidation in analyzing the company’s financial situation. In some cases, thedecision to cease operating should be made early, while the company still hassufficient funds to pay liquidation costs, particularly in the joint venture contextif there is any doubt that the joint venture parties will finance the liquidation.

ConclusionServing as a director of a foreign entity is not a risk-free proposition. The generalduties and responsibilities that apply to a director of a US corporation may alsoapply to a director of a foreign entity. The law of the jurisdiction in which the foreignentity is incorporated determines the potential civil and criminal sanctions that maybe imposed on a director. The scope and severity of the failure to comply withlocal law and the associated consequences can vary widely, as discussed in this briefoverview. Individuals serving as directors can take some steps towards reducingtheir liability exposure, notably by requesting indemnity agreements and confirmingthe level of D&O or entity insurance in effect. These steps may not be options inall jurisdictions, particularly in those which may consider such actions to be voidas against public policy. These steps, however, are not a substitute for diligentperformance of one’s duties as a director.

The guiding principle for any director, in addition to any available indemnification orinsurance, is to be constantly aware of the company’s business and financial situationand to confirm that all corporate formalities, tax filings and required annual reportsand filings are attended to in a consistent and timely manner.

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International Joint Ventures HandbookAppendix B – Overview of Applicable US Laws Impacting D&O Liability

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Appendix BOverview of Applicable US Laws ImpactingD&O LiabilityWhere a US party is contemplating entering into a joint venture in a foreignjurisdiction, the directors of the joint venture must be prepared to identify activitiesor transactions at the joint venture level that may create the risk of civil or criminalliability under US and local laws. Regardless of whether a US party controlsthe joint venture (through equity ownership or management control), there area number of activities and transactions at the joint venture level that can exposethe joint venture, its directors themselves and even the US party, to civil and criminalliability under US or local laws, and that can seriously damage the US party’sbusiness reputation. Some of the activities that could most seriously impact thejoint venture and the joint venture directors are:

• Bribes to local government officials to win business concessions;

• Partnering with a local company which is funded by illegal activities;

• Engaging in anti-competitive discussions with competitors; and

• Entering into agreements that contain provisions supporting boycottactivities.

In addition, acts that ratify or otherwise signal the intent of the joint venturedirectors or the US party to aid and abet or conspire to violate local laws couldexpose the joint venture, its directors or the US party itself to liability under localand US laws. For example, if the joint venture directors are present at meetingswhere bribes to government employees are discussed, or if the US party acceptsdividends from a joint venture sourced in revenues from contracts derived frombribes, both the joint venture directors and the US party could face serious liability.Moreover, if the US party continues to invest in a joint venture after havingknowledge (e.g., through its joint venture board representatives) of improper activitiesor transactions by the joint venture or the other party to the joint venture, the USparty may be deemed to have acquiesced in, ratified or been involved in the activity.

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Finally, the joint venture directors may find themselves in situations where thereis a real or potential conflict between their roles as senior executives of the USparty and their roles as directors of the joint venture. Those conflicts will require abalancing of potentially inconsistent duties.

US Laws That Could Expose the US Party, the JointVenture and its Directors to LiabilitySome US laws apply to activities and transactions that occur outside the UnitedStates, even if a US entity does not wholly own or control the non-US entity.Indeed, in appropriate circumstances, some US laws, such as the money launderinglaws, can apply if only a part of a transaction occurs in the United States – such asa wire transfer through a US bank accounts that touches the United States onlymomentarily.

The US laws of particular note are the following:

• the Foreign Corrupt Practices Act (or “FCPA”), which prohibits bribesto foreign government officials, political parties or political candidates,and imposes accounting and internal control requirements on the USparty;

• money laundering and Bank Secrecy Act reporting and recordkeepingrequirements, which prohibit transactions with funds sourced fromillegal activity;

• trade and investment sanctions, which generally restrict the ability ofUS individuals and companies to engage in any transactions withcountries such as Cuba, Iran and Sudan;

• export controls, which regulate the export and re-export of so-called“US-origin items;”

• US anti-boycott regulations, which prohibit or penalize certainactivities and agreements in connection with foreign boycotts that arenot sanctioned by the United States, such as the Arab League boycottof Israel;

• anti-competition laws; and

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• certain other criminal laws, such as mail and wire fraud, conspiracy,aiding and abetting, and other vicarious liability theories, all of whichcould be used by US authorities to prosecute the joint venture, itsdirectors or the US party itself in appropriate circumstances, forcustoms fraud, foreign tax evasion and other fraud committed againstforeign governments.

DiscussionThe following is a discussion of each of the above-listed US laws that could exposea joint venture, its directors and the US joint venture party to liability.

Improper Payments to Foreign Government Officials Any time a joint venture is dealing with government officials or employees ofgovernment-owned entities, the joint venture directors should ask appropriatequestions at board meetings and oversee the joint venture’s activities to ensure thatimproper payments are not promised, offered or made, and that all contracts areobtained on the merits and in good faith. The FCPA prohibits certain improperpayments, directly or indirectly through third parties, to foreign officials, politicalparties or political candidates, and officials or employees of public internationalorganizations, such as the European Union. These laws can apply to the joint venture,its directors and the US party itself, in appropriate circumstances, given the level ofgeneral and specific involvement in the improper payments. Thus, if a joint venturemakes improper payments, the US party could be held responsible for such payments.

Foreign officials may include not just officials themselves, but also officers andemployees of foreign-owned or controlled enterprises such as hospitals, schools,train stations or other public transportation facilities. Bribes to such officials toobtain concessions so the US party can expand its operations are likely to violatethe FCPA and local anti-bribery laws. Penalties for violations of these laws includeheavy civil and criminal fines, imprisonment and potentially very serious damageto the US party’s business reputation.

In addition, under the US securities laws, including the accounting provisions ofthe FCPA, a US party which is a US publicly-traded company must meet variousstandards as to the accuracy of financial statements and internal controls ofconsolidated joint ventures, minority interest joint ventures and joint venturesor alliances that perform certain “outsourcing” functions.

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To the extent the joint venture commits any act in the United States in furtheranceof an activity prohibited by the FCPA, such as wire transfer through US banks ofmonies used for a bribe to a government official, the joint venture would be subjectto jurisdiction under the FCPA. The FCPA also will apply to a joint venture directorwho uses faxes or telephones in furtherance of a prohibited bribe. The US partycould have direct responsibility for the FCPA violation based upon its connection tothe joint venture.

Joint venture directors should not, in their individual capacities, be liable forimproper payments made by the joint venture or joint venture parties if the jointventure directors do not have knowledge of, and are not willfully blind or deliberatelyignorant to, any improper payments by the joint venture or joint venture parties.If the joint venture directors have knowledge, that knowledge could be imputed tothe US party in appropriate circumstances. Joint venture directors also shouldconfirm that none of the joint venture parties are government officials or related toforeign government officials.

Engaging in Transactions with the Proceeds of Illegal ActivityJoint venture directors should ensure that the joint venture does business and entersinto financial transactions only with reputable business partners who are sourced infunds generated from wholly legal activities and routed through reputable bankingcenters. Under the US money laundering laws, the joint venture, its directors andthe US party can all be potentially liable for serious money laundering violationsif they enter into transactions with funds that are sourced from illegal activity –including foreign tax evasion and bribery of government officials. Penalties forviolations of these laws include civil and criminal fines, imprisonment and forfeiture.The US money laundering laws, generally speaking, prevent persons from enteringinto financial transactions where knowledge of, or being willfully blind or deliberatelyignorant to, the fact that the funds involved in the transaction are the proceeds ofunlawful activities. These laws can apply in appropriate circumstances to the jointventure, its directors and the US party, even if the relevant conduct takes placeoutside the United States or if the conduct occurs only in part in the United States,such as wire transfers to or from US banks.

Moreover, the US party itself could be deemed to have aided and abetted orconspired to participate in a money laundering violation if dividends sourced fromthe joint venture’s illegal activities are paid to the US party in the United States,

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and the joint venture directors knew or failed to ask questions in the face of redflags that the joint venture’s dividends were sourced from violations of law, or thatpayments made by the joint venture funded terrorist activity. Finally, joint venturedirectors also may have recordkeeping obligations relating to foreign joint venturebank accounts under the US Bank Secrecy Act and/or the US Patriot Act.

Regardless of actual legal exposure, however, any involvement by the joint venturein money laundering or terrorist financing is likely to cause significant damage tothe US party’s business reputation.

Entering into Agreements with Sanctioned Persons or Countries,including CubaA US joint venture party may not be involved in or facilitate offshore transactionsinvolving countries or persons that have been sanctioned by the United States. TheUnited States currently maintains country-specific trade and investment sanctionsagainst various countries, such as Burma (Myanmar), Cuba, Iran and Sudan, andindividuals and entities deemed to be foreign policy concerns, such as narcoticstraffickers or terrorists. These trade sanctions apply to US joint venture parties andto joint venture directors who are US citizens and green card holders. The tradesanctions generally would not apply to a foreign joint venture itself unless the USparty owns or controls the joint venture. More expansive rules apply in the caseof Cuba, and a US party should be especially vigilant with any activities relating toCuba. Violations of trade sanctions are punishable by civil and criminal penaltiesand imprisonment in some cases.

Examples of improper activities include a US party’s review or approval ofprohibited transactions, or purchase of capital equipment earmarked for the jointventure’s business with sanctioned countries. If the joint venture entity discussesexpansion plans that involve countries, individuals or entities that are sanctioned bythe US, the joint venture directors may be liable for US trade sanctions violations.It is likely that large sales or investment transactions contemplated by a joint venturemay require approval or guarantees by the joint venture partners. If sanctionedcountries or persons are involved, the US party may not provide its approval orguarantee, and could not specifically delegate that responsibility to others.

Joint venture directors who are US citizens or permanent resident aliens are fullysubject to the trade sanctions, even if they are overseas or on temporary assignment

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to the joint venture. All such joint venture directors should recuse themselves fromactivities or transactions with sanctioned countries or sanctioned persons that arepermissibly entered into by the joint venture.

Monitoring for Export Controls and Export License RequirementsExports or re-exports by a joint venture involving US-origin items or foreign itemswith US content generally are restricted to certain countries, such as Cuba, Iran,Sudan and Syria. In addition, such exports or re-exports might trigger certainlicensing requirements (e.g., the US party may supply computers or encryptionsoftware to the joint venture that are subject to US export license requirements).Accordingly, joint venture directors must be certain they are instructed on exportcontrols before entering into transactions on behalf of the joint venture. In addition,there are somewhat technical exceptions for de minimis levels of US content.

It is important to note that a company found to be in violation of export controlscan have its export privileges denied by the US Department of Commerce.A denial of export privileges could have very serious implications for the regularexports and re-exports from the United States of the US party’s other products.

Transactions With the Middle East Involving the Arab Boycottof IsraelThe United States prohibits and/or penalizes participation in or compliance withforeign boycotts against countries that are considered “friendly” to the United Statesand that are not the object of any form of boycott under US laws or regulations.Anti-boycott laws are particularly relevant for companies doing business in theMiddle East, where the Arab League boycott of Israel is still actively maintained,or with other countries that boycott Israel.

A US joint venture party is fully subject to the US anti-boycott rules, limited to theextent of its knowledge of or actual involvement, such as specific authorization ordirection, in the joint venture’s boycott-related acts. Boycott-related participation orcooperation by the joint venture also could have negative tax consequences for theUS party. In that regard, any boycott action taken by the joint venture, such asagreeing to enter into a contract or set up a store with terms that are favorable tothe boycott of Israel, will be subject to US anti-boycott rules. Any time the jointventure does business with Middle Eastern countries, the joint venture directors

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should ensure that all underlying documentation, including seemingly innocentor standard boilerplate terms, do not, in fact, support the Arab League boycottof Israel.

Prohibited Communications with Competitors and OtherAnti-Competitive BehaviorAnti-competitive conduct by a foreign joint venture or its directors, such asexchanging information with competitors, price fixing or acting as a monopoly,can be charged under US criminal and civil antitrust laws if there are certainharmful effects on US commerce. The joint venture, its directors and potentiallythe US party can be exposed to civil and criminal antitrust claims in this regard.

Related US Criminal LawsIn addition to the laws described above, the joint venture, its directors and the USparty can all, in appropriate circumstances, be charged by enforcement authoritieswith mail fraud and wire fraud, conspiracy or aiding and abetting as well as underother theories of vicarious liability for fraudulent and improper acts taken by thejoint venture with the knowledge and/or involvement of the joint venture directorsor the US party. Situations that can arise might include the joint venture’s involvementin failing to comply with local requirements relating to taxes, currency controls orcustoms duties.

International Joint Ventures HandbookBaker & McKenzie Offices Worldwide

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Baker & McKenzie Offices WorldwideOffice phone numbers and addresses change from time to time. Please refer towww.bakernet.com for current contact information.

ARGENTINA - BUENOS AIRESBaker & McKenzie Sociedad CivilAvenida Leandro N. Alem 1110,Piso 13, C1001AAT Buenos Aires,Argentina Telephone: +54 11 4310 2200;5776 2300 Facsimile: +54 11 4310 2299;5776 2399

AUSTRALIA - MELBOURNEBaker & McKenzie Level 39 Rialto 525 Collins Street Melbourne,Victoria 3000Telephone: +61 3 9617 4200 Facsimile: +61 3 9614 2103

AUSTRALIA - SYDNEYBaker & McKenzie Level 26, A.M.P. Centre 50 Bridge Street Sydney, N.S.W. 2000Telephone: +61 2 9225 0200 Facsimile: +61 2 9225 1595

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BELGIUM - European &Competition Law Practice Baker & McKenzie149 Avenue Louise 1050 Brussels, Belgium Telephone: +32 2 639 3611Facsimile: +32 2 639 3699

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MEXICO - JUAREZBaker & McKenzie Abogados, S.C.P.T. de la República 3304, Piso 232330 Juárez, Chihuahua, MéxicoP.O. Box 9338 El Paso,TX 79995Telephone: +52 656 629 1300 Facsimile: +52 656 629 1399

MEXICO - MEXICO CITYBaker & McKenzie S.C.Edificio Scotiabank Inverlat, Piso 12Blvd. M. Avila Camacho 1 11009 México, D.F., MéxicoTelephone: +52 55 5279 2900Facsimile: +52 55 5279 2999

MEXICO - MONTERREYBaker & McKenzie Abogados, S.C.Edificio Oficinas en el ParqueTorre I Piso 10 Blvd. Antonio L. Rodriguez 1884 Pte.64650 Monterrey, Nuevo León, México Telephone: +52 81 8399 1300 Facsimile: +52 81 8399 1399

MEXICO - TIJUANABaker & McKenzie Abogados, S.C.Blvd. Agua Caliente 10611, Piso 122420 Tijuana, B.C., MéxicoP.O. Box 1205 Chula Vista, CA 91912 Telephone: +52 664 633 4300 Facsimile: +52 664 633 4399

THE NETHERLANDS -AMSTERDAMBaker & McKenzie Amsterdam N.V.Claude Debussylaan 54 1082 MD AmsterdamP.O. Box 27201000 CS AmsterdamThe Netherlands Telephone: + 31 20 551 7555Facsimile: + 31 20 626 7949



PHILIPPINES - MANILAQuisumbing Torres12th Floor, Net One Center 26th Street Corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig, Metro Manila,Philippines 1634Postal Address:MCPO Box 1578Makati City 1299, Philippines Telephone: +63 2 819 4700 Facsimiles: +63 2 816 0080,728 7777

POLAND - WARSAWBaker & McKenzie Gruszczynski i Wspolnicy Attorneys at Law LPRondo ONZ 100-124 Warsaw, Poland Telephone: +48 22 445 3100 Facsimile: +48 22 445 3200

RUSSIA - MOSCOWBaker & McKenzie - CIS, LimitedSadovaya Plaza, 11th Floor 7 Dolgorukovskaya Street Moscow, Russia 127006Telephone: +7 495 787 2700Facsimile: +7 495 787 2701

RUSSIA - ST. PETERSBURGBaker & McKenzie - CIS, Limited57, Bolshaya Morskaya StreetSt. Petersburg, Russia 190000Telephone: +7 812 303 9000Facsimile: +7 812 325 6013

SAUDI ARABIA - RIYADHBaker & McKenzie Gulf LimitedOlayan Complex Tower II Al Ahsa Road PO Box 4288 Riyadh 11491, Saudi Arabia Telephone: +966 1 291 5561 Facsimile: +966 1 291 5571

SINGAPOREBaker & McKenzie.Wong & Leow#27 01 Millenia Tower 1 Temasek Avenue Singapore 039192 Telephone: +65 6338 1888 Facsimile: +65 6337 5100

SPAIN - BARCELONA Baker & McKenzie Barcelona S.L.Avda.Diagonal, 652Edif. D, 8th floor 08034 Barcelona, Spain Telephone: +34 93 206 0820 Facsimile: +34 93 205 4959

SPAIN - MADRIDBaker & McKenzie Madrid S.L.Paseo de la Castellana, 92 28046 Madrid, Spain Telephone: +34 91 230 4500Facsimile: +34 91 391 5149

SWEDEN - STOCKHOLMBaker & McKenzie Advokatbyrå Linnegatan 18 P.O. Box 5719 SE - 11487 Stockholm, Sweden Telephone: +46 8 5661 7700 Facsimile: +46 8 5661 7799


137Baker & McKenzie

SWITZERLAND - GENEVABaker & McKenzie GenevaChemin des Vergers 41208 Geneva, Switzerland Telephone: +41 22 707 9800 Facsimile: +41 22 707 9801

SWITZERLAND - ZURICHBaker & McKenzie ZurichZollikerstrasse 225 P.O. Box 8034 ZürichSwitzerland Telephone: +41 1 384 1414 Facsimile: +41 1 384 1284

TAIWAN - TAIPEIBaker & McKenzie15th Floor, Hung Tai Center No.168,Tun Hwa North Road Taipei,Taiwan 105 Telephone: +886 2 2712 6151 Facsimiles: +886 2 2716 9250;2712 8292

THAILAND - BANGKOKBaker & McKenzie Ltd.25th Floor, Abdulrahim Place990 Rama IV Road Bangkok 10500,ThailandTelephone: +66 2636 2000; 2636 2222 Facsimile: +66 2636 2111

UKRAINE - KYIVBaker & McKenzie - CIS, LimitedRenaissance Business Center 24 Vorovskoho St.Kyiv 01054, UkraineTelephone: +380 44 590 0101Facsimile: +380 44 590 0110

UNITED STATES - CHICAGOBaker & McKenzie LLPOne Prudential Plaza 130 East Randolph Drive Chicago, Illinois 60601, USTelephone: +1 312 861 8000Facsimiles: +1 312 861 2899; 861 8080

UNITED STATES - DALLASBaker & McKenzie LLP2300 Trammell Crow Center 2001 Ross Avenue Dallas,Texas 75201, USTelephone: +1 214 978 3000Facsimile: +1 214 978 3099

UNITED STATES - HOUSTONBaker & McKenzie LLPPennzoil Place, South Tower711 Louisiana, Suite 3400 Houston, Texas 77002-2746, USTelephone: +1 713 427 5000 Facsimile: +1 713 427 5099

UNITED STATES - MIAMI Baker & McKenzie LLPMellon Financial Centre 1111 Brickell Avenue Suite 1700 Miami, Florida 33131, USTelephone: +1 305 789 8900 Facsimile: +1 305 789 8953

UNITED STATES - NEW YORKBaker & McKenzie LLP1114 Avenue of the AmericasNew York, New York 10036, USTelephone: +1 212 626 4100Facsimile: +1 212 310 1600



UNITED STATES - PALO ALTOBaker & McKenzie LLP660 Hansen Way Palo Alto, California 94304, US Telephone: +1 650 856 2400 Facsimile: +1 650 856 9299

UNITED STATES - SAN DIEGOBaker & McKenzie LLPTwelfth Floor, 101West Broadway San Diego, California 92101, USTelephone: +1 619 236 1441;+1 800 786 1022Facsimile: +1 619 236 0429

UNITED STATES -SAN FRANCISCOBaker & McKenzie LLPTwo Embarcadero CenterTwenty-Fourth FloorSan Francisco,California 94111-3909, USTelephone: +1 415 576 3000Facsimiles: +1 415 576 3099; 576 3098

UNITED STATES -WASHINGTON, D.C.Baker & McKenzie LLP815 Connecticut Avenue, NW Washington, D.C. 20006-4078, USTelephone: +1 202 452 7000 Facsimile: +1 202 452 7074

VENEZUELA - CARACASBaker & McKenzie SCTorre Edicampo, PHAvenida Francisco de Miranda Cruce con Avenida Del Parque Urbanización Campo Alegre,Caracas 1060Postal Address: PO Box 1286 Caracas 1010-A,VenezuelaUS Mailing Address:Baker & McKenzie M-287, Jet Cargo InternationalP.O. Box 020010Miami, Florida 33102-0010, USA:Telephone: +58 212 276 5111;276 5112 Facsimiles: +58 212 264 1532;264 1637

VENEZUELA - VALENCIABaker & McKenzie SCEdificio Torre Venezuela, Piso No.4Av. Bolivar cruce con Calle 154(Misael Delgado) Urbanizacion La AlegriaPostal Address: PO Box 1155 Valencia, Estado Carabobo,Venezuela Telephone: +58 241 824 8711 Facsimile: +58 241 824 6166


139Baker & McKenzie

VIETNAM - HANOIBaker & McKenzie LLP13th Floor, Vietcombank Tower198 Tran Quang Khai StreetHoan Kiem DistrictHanoi, Socialist Republic of VietnamTelephone: +84 4 825 1428;825 1429; 825 1430 Facsimile: +84 4 825 1432

VIETNAM - HO CHI MINH CITYBaker & McKenzie LLP12th Floor, Saigon Tower 29 Le Duan Blvd.District 1, Ho Chi Minh City Socialist Republic of VietnamTelephone: +84 8 829 5585;829 5601; 829 5602 Facsimile: +84 8 829 5618


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