Joint Ventures in Texas

Joint Ventures in TexasA Primer for International Partners

BY S. DOUGLAS STINEMETZ AND ERIKA C. ANDERSON

ophisticated, experienced American international investors may have experienceforming international joint ventures abroad, but the reverse has historicallybeen less common. This is changing. International investment in the United

States, and in Texas in particular, is on the rise. A host of articles advises U.S. companies on what to watch out for in forming joint

ventures abroad.1 This article focuses on the opposite perspective: what internationalpartners should know when investing and forming joint ventures in Texas.

524 Texas Bar Journal • July 2012 www.texasbar.com

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GLOBALIZATION &INTERNATIONAL LAW

www.texasbar.com/tbj Vol. 75, No. 7 • Texas Bar Journal 525

International Joint Ventures GenerallyAn international joint venture is a transnational cooperative

arrangement to achieve common business goals. The termencompasses simple sales representations, distributorship agree-ments, franchising or licensing arrangements, and more complexventures, including partial mergers, long-term corporate equityventures, collaborative research and development projects, verti-cal supply alliances, or any combination of these arrangements.

Joint ventures have inherent advantages for well-matchedpartners. Partners may share obligations and risks, allowingeach to undertake the new venture where neither would bewilling or able to do so alone. In addition, if the risks and obli-gations each partner bears are well matched to its particular tal-ents and contributions, the overall burden of a particular riskor obligation will diminish.

Even well matched co-venturers must work out a number ofpotential problems, including liability, management control,and dispute resolution regimes. Thus, formation negotiationsshould be approached with planning, flexibility, a willingnessto compromise, and, the assistance of experienced business andlegal advisers to alleviate potential problems.

Taking on a local partner as a co-venturer is often the bestway for an international partner to obtain use of the Texas part-ner’s knowledge, experience, and acumen on such topics asdealing with government authorities at multiple levels of juris-diction, raising capital locally, hiring local management person-nel, and accessing markets. A Texas co-venturer may alsoenhance the perception that the enterprise is a local operation,thereby encouraging good relations with local consumers, sup-pliers, and government.

Structuring A Joint Venture in TexasProspective co-venturers must be carefully identified based

on shared business goals, and time must be allowed to build arelationship before the actual joint venture negotiations canbegin in earnest. Time invested in this initial step will pay offlater in smoother dealings between the two parties.

Business people in Texas, as in the rest of the United States,are accustomed to documenting a transaction in a highlydetailed way from the very beginning. Those from differentlegal traditions who may be accustomed to more concise docu-mentation may find this excessive. Striking a balance betweenthese two approaches may present a significant challenge.Establishing a solid business relationship from the beginninghelps to alleviate some of this difficulty.2

Typically, the joint venture process in Texas begins with a Let-ter of Intent (LOI), followed by Definitive Agreements and duediligence. The LOI is generally a non-binding, rough outline ofthe joint venture: It identifies the parties; describes their contri-butions and ownership percentages and how profits and losseswill be shared; describes the purpose, scope, and location of theproposed venture; summarizes the management and controlstructure; and sets a timeline for final agreement. Hammeringout the LOI can help the parties determine where the stickingpoints are and where to focus their efforts going forward. Partiesshould be careful not to place so much emphasis on the terms ofan LOI that it stultifies later negotiations; they should remem-ber that this is the outline stage, not the definitive stage.

After the parties sign the LOI, they conduct due diligenceinto the nature of a prospective partner’s business, its viabilityand stature, and the viability of potential contributions to theventure. Simultaneously with due diligence, or shortly there-after, the parties continue negotiating the details of the Defini-tive Agreements based on both the terms of the LOI and theresults of due diligence.

Because the structure of a joint venture can vary significant-ly, Definitive Agreements vary in scope and purpose. Somemerely provide for the execution of other documents, such as a

Joint Ventures in TexasSTINEMETZ & ANDERSON

corporate charter and a shareholders’ agreement, after whichthe agreement no longer has any effect. Others remain bindingfor the life of the joint venture. Whatever the case, DefinitiveAgreements should always elaborate on all of the issues refer-enced in the LOI. They should give consideration to gover-nance of the venture, contributions of the parties,responsibilities of the parties, risk allocation, technology trans-fer, a force majeure clause, the governing language and law ofthe agreement, and a dispute resolution framework. Corollarydocuments, which may be attached as exhibits, might includeformation documents for new subsidiaries through which theparties enter into the venture, agreements for the provision oftechnical expertise or management services by one of the par-ties, agreements for the use of trademarks or other intellectualproperty, supply contracts, distributorship agreements, trainingagreements, and product maintenance and servicing agree-ments. Any of these agreements could be included within thetext of the joint venture agreement itself, but it may be prefer-able to document them separately.

If the parties wish to form any new business entities, eitherfor the joint venture itself or as subsidiaries through which toenter into the venture, Texas law allows a number of differentbusiness formations that limit liability, including limited liabil-ity partnerships, limited liability companies, and corporations.Each has different insurance and capitalization requirementsand comes with different tax implications. All must be proper-ly registered with the Texas Secretary of State office, along withother formalities, which will vary depending on the specificcorporate form chosen. A foreign party to a joint venture willlikely be required to register with the Texas Secretary of Stateeven if the co-venturers do not form a Texas entity. Local coun-sel can help choose and set up the type of entity best suited tothe joint venture’s goals.

Key Issues to Watch Out forThis section describes legal issues for joint ventures in Texas,

but legal issues may also arise at the other end of the venture inthe home jurisdiction. Major potential issues might includeantitrust, taxation, and trade laws. Local counsel in the investor’shome country should be consulted. Additionally, as always,local counsel in Texas can help navigate the host of complexissues outlined in this section.

U.S. Laws on Doing Business AbroadWhen entities originating outside of the United States come

to the United States to form new businesses or joint ventures,they will become subject to U.S. laws that regulate U.S. com-panies doing business abroad. For example, they will becomesubject to the Foreign Corrupt Practices Act, which mandatescertain transparency requirements and prohibits bribery of for-eign officials abroad. They will also become subject to U.S.international trade embargos, which may be quite broad.3 Forexample, current Iran sanctions prohibit U.S.-owned or -con-

trolled financial institutions from knowingly engaging in trans-actions with or benefiting the Iranian Revolutionary Guard;this prohibition includes transactions with a list of affiliates andindividual people maintained by the U.S. Treasury.

Multiple Levels of JurisdictionMultiple levels of government regulate activities in the Unit-

ed States; in some cases separate and overlapping federal andstate regulations apply to the same action. Reporting require-ments and enforcement mechanisms for federal and state enti-ties are entirely separate, but may frequently overlap. WithinTexas, in addition to statewide regulation, there are county andcity level regulations and reporting requirements. Because ofthis complexity, knowledge of what level of government regu-lates what actions and where to report what information will bean important contribution of the venture’s Texas partner.

TaxationAll businesses in Texas are subject to federal and state taxes.

Federal income taxes apply to businesses and to individuals.Texas collects a franchise tax from businesses, with some limit-ed exceptions too complex to detail here, and unemploymenttaxes, for which the company must obtain an identificationnumber. Individuals are not subject to Texas income tax. Ifyour company will own income-producing property in Texas,Texas collects property taxes at the county level.

Credit and exemption schemes for both federal and statetaxes can significantly reduce tax exposure. At the state level,many of these are part of the extensive incentives programs dis-cussed later in this article.

Reporting RequirementsThough many reporting requirements apply universally,

some are specific to companies with foreign investors. These arecomplex and, unfortunately, neither found in any centralizedplace, nor made to a single agency. This section is intended togive a brief introduction to some of these, not a comprehensivereview.

Asset AcquisitionsSome reporting requirements are triggered by the size of for-

eign investment or involvement. To name just a few examples:Business enterprises with 10 percent or greater foreign owner-ship must file reports with the U.S. Department of Commerce.Businesses at least 25 percent foreign-owned and foreign cor-porations doing business in the United States must disclose cer-tain transactions to the U.S. Internal Revenue Service. TheU.S. Bureau of Economic Analysis conducts periodic surveys offoreign ownership of U.S. firms. Foreign entities must filereports on the acquisition or transfer of agricultural land if itinvolves more than 10 acres or produces agricultural productsof $1,000 or more per year. Requirements under the Exon-Flo-rio Amendment are discussed later in this article.



Antitrust laws, applicable to all companies, also trigger sig-nificant reporting requirements. The federal Hart-Scott-RodinoAntitrust Improvements Act requires larger companies attempt-ing to merge to notify the Federal Trade Commission and theU.S. Department of Justice’s Antitrust Division for approvaland review prior to consummating a merger. One of thoseagencies takes jurisdiction over the merger and may imposeconditions on it if it is found to have antitrust implications.The antitrust division of the Office of the Texas Attorney Gen-eral enforces Texas’ own entirely separate antitrust laws.

Reporting Related to EmployeesThough no law requires it, American employers typically

provide employer-administered retirement plans and healthinsurance to full-time employees, and they will expect it.

A number of state and federal laws closely regulate provision ofemployee benefits. Two of the most important and extensive arethe federal Employee Retirement Income Security Act (ERISA),which regulates employer-provided retirement plans, and the fed-eral Health Insurance Portability and Accountability Act(HIPAA), which protects the privacy of employees’ health infor-mation. The reporting requirements under ERISA and HIPAAare quite complex and may require specialized legal help. At the

state level, Texas requires employers to report certain informationon new hires to the State Directory of New Hires.

There are also reporting requirements unique to foreignemployees. For example, businesses usually require permitsfrom the U.S. Department of Labor to employ foreign workers,though some types of visas do not require it.

Permitting and LicensingThere is no general business license in Texas, but specific

permits and licenses may be required depending upon the typeof business the entity engages in. Many agencies issue permitsand licenses, often in ways that are not obvious from theagency’s name. For instance, the Texas Railroad Commissionissues permits and licenses to operators for drilling, amongother things. The Texas Governor’s Office maintains a well-organized, searchable list online: www.texas.gov/en/discover/Pages/topic.aspx?topicid=%2Flicenses%2Fpermits.

Real Estate TransactionsAs in all states, in Texas all transactions involving the sale of

real estate must be in writing. Once made, purchases must beproperly recorded with the county title records office to be pro-tected if challenged. In addition, as discussed earlier in this arti-



cle, foreign entities must report the purchase of large sales ofagricultural land to the federal government.

Texas real estate law also has some unique features, particu-larly with respect to treatment of property owned by marriedcouples. Married couples’ property is treated as belonging tothe couple as a unit, not to individual spouses, with limitedexceptions. Therefore, usually both spouses must sign the doc-uments to transact business with marital property, no matterwhose name appears on the title documents.

Visas Visas are handled exclusively by the federal government.

Individuals apply for business visas for short visits at their localconsulates. To obtain an employment visa for a prospective for-eign employee, the employer first files an application with theU.S. Citizenship and Immigration Services on the individual’sbehalf. Once the application is approved, the individual isauthorized to apply for a visa. (See p. 535 for more on visas.)

This simple description of the process obscures its complex-ity. Attachments to the employer’s application depend on thejob the individual is wanted for. If the job requires a collegedegree, additional paperwork and a good faith effort to recruitan American for the position are required. If the job is for anintracompany transferee, specific requirements depend on thetransferee’s position in the company.

Visas to the United States are notoriously difficult to obtain.Expense and delays inherent in the process may need to be fac-tored into the venture’s risk profile.

Barriers to Entry and Risk Barriers to International Investment

Though the United States and Texas are generally open tointernational investment, there are some legal limitations andbarriers. Some laws limit foreign investment in certain indus-tries. For example, vessels or aircraft more than 25 percent for-eign-owned cannot carry cargo or passengers between U.S.locations; foreign investors cannot hold mineral extraction leas-es on federally owned land; and foreign corporations cannothold certain types of broadcast licenses.4

Other laws subject certain international transactions toreview. The Exon-Florio Amendment gives the Committee onForeign Investment in the United States (CFIUS) authority toreview transactions that could result in foreign control of U.S.businesses to determine their effects on national security, par-ticularly if it concerns “critical infrastructure.” Unlike in somecountries, there is no dollar amount or specifically identifiedset of industries that triggers review. Nor is “national security”anywhere defined. Parties can voluntarily submit transactionsto CFIUS, or CFIUS may initiate on its own. If CFIUS findsa national security risk, it can impose conditions on the trans-action, or refer it to the president, who has authority to sus-pend or prohibit it. CFIUS clears the vast majority oftransactions it reviews without imposing any conditions.5

Other laws raise barriers to entry into certain sectors, some-times in ways that are protective of U.S. business interests andsometimes in the name of national security. To name oneexample of each, the Shipping Act of 1916 requires ships inintercoastal waters to sail under a U.S. flag and the NuclearRegulatory Commission may not issue nuclear reactor operat-ing licenses to foreign-owned or -controlled entities. Broadlyspeaking, these laws do not wholly prevent international invest-ment in these sectors, but they do require it to be carefullystructured.6

Unpredictable Electoral PoliticsElectoral politics in the United States can be volatile and

unpredictable. The 2010 election results are illustrative. Publicopinion swung strongly to the right of where it had been justtwo years earlier in 2008, resulting in significant changes incongressional bodies. In Congress, 63 (out of 435 representa-tives total) sitting Democrats in the House and five (out of 100senators total) sitting Democrats in the Senate lost their seats toRepublicans. In Texas, 21 (out of 150 representatives total) sit-ting Democrats in the House lost their seats to Republicans.7

This swing in electoral outcomes brought with it a swing inlegislation, much of it affecting businesses, particularly in thearea of tax policy. The sudden, and extreme, nature of politicaloscillations like this offers some risk to investors.

Expensive JusticeAmericans often tout their legal system as an eminently fair

one, characterized by the rule of law and a lack of corruption.But the American judicial system is not without its drawbacks.Americans in general are litigious and frequently use the courtsfor dispute resolution. Investors from countries where this is notthe norm should be aware and prepare accordingly, factoring lit-igation and legal bills into risk assessments and cost projections.

Discovery rules are much broader in America than is typicalelsewhere. Discovery is limited only by relevance to the disputeand privilege rules. Investors should be aware that much thatmight be protected in other jurisdictions is subject to discoveryin American courts. The depth and breadth of discovery alsoadds significantly to both the expense of lawsuits and to thetime necessary to conclude them.

Litigious States and Environmental RegulationIndividual states within the United States have the power to

sue the federal government over federal laws and policies. Forexample, during the current administration under PresidentBarack Obama, the Texas Commission on EnvironmentalQuality (TCEQ) has taken an aggressive, litigious stanceagainst some environmental regulations promulgated by theEnvironmental Protection Agency (EPA). Much of the fervorwith which these lawsuits between TCEQ and EPA are beingpursued has to do with the oscillations in electoral politics andopinion discussed above.



State versus federal litigation is a source of risk and uncer-tainty. The outcomes of litigation between a state and the fed-eral government are highly unpredictable. Further, becausemultiple states often sue over the same regulation in multiplecourts, outcomes can be uneven nationally until or unless theU.S. Supreme Court definitively settles an issue. In the mean-while, businesses may have a difficult time determining whatthe applicable regulations are.

PublicityStrategies to control publicity, both nationally and locally,

are important. Some international deals have been noisily scut-tled because of negative publicity. For example, highly publicCFIUS scrutiny and the Congressional reaction to it, may havebeen part of the reason Chinese National Offshore Oil Corpo-ration withdrew its UNOCAL bid in 2005.

IncentivesDiscussing only the risks and barriers to entry gives too bleak

a picture of investment opportunities in Texas. In addition to agenerally friendly investment climate, there are a number ofincentive programs available for international investment inTexas from both state and federal governments, including sig-nificant tax abatements, loan programs, and direct grants.8

ConclusionInternational investment and joint ventures in Texas are on

the rise and opportunities for both abound. In order to be suc-cessful, partners should be carefully selected, ventures shouldbe carefully structured, and international partners should beaware of their obligations to both state and federal govern-ments and have strategies to counteract political risks. Wherethese factors are taken into consideration, venture partners willbe better able to take advantage of and profit from the availableopportunities for investment than either would alone.

Notes1. See generally, Transnational Joint Ventures, Business Laws, Inc. (66), Vols. 1 and

2, 1999.2. For a thorough discussion, see S. Douglas Stinemetz, International Joint Ventures:

A Practical Guide to Legal and Business Considerations, Transnational Joint Ven-tures (66 Supp. 11) at 1.103–4, Business Laws, Inc., March 1999.

3. The Treasury Department maintains a website on current sanctions regimes:http://www.treasury.gov/resource-center/sanctions/Pages/default.aspx.

4. For more detailed information, see Government Accountability Office, ForeignInvestment: Laws and Policies Regulating Foreign Investment in 10 Countries,GAO-08-320, February 2008.

5. Remarks by Deputy Secretary Neal S. Wolin at the Singapore Exchange, May 19,2011, available at http://www.treasury.gov/press-center/press-releases/Pages/tg1186.aspx.

6. See John E. Matthews, Foreign Investment in U.S. Nuclear Generating Assets: Mit-igation of Barriers Presents Opportunity, Proceedings of the Nuclear Inter JuraCongress of the International Nuclear Law Association (2009), available athttp://www.morganlewis.com/pubs/6C580B13-F442-4755-8837AD56DB82CEBC_Publication.pdf.

7. Election 2010, The New York Times, available at http://elections.nytimes.com/2010/results/house.

8. See Texas Office of the Governor, Foreign Investment in Texas: The Industries andCountries Leading the Growth, Economic Development and Tourism Report2011, available at, http://www.texaswideopenforbusiness.com/cms-assets/docu-ments/46578-825243.fdi-report.pdf. The U.S. Department of Commerce has awebsite dedicated to incentives, http://selectusa.commerce.gov/.

S. Douglas Stinemetzis the founding member and presiding partner in the Stinemetz Law Firm,P.L.L.C. in Houston. He has more than 21 years of global transactional experience,specifically in the international oil industry.

Erika C. Andersonis an associate of the Stinemetz Law Firm, P.L.L.C. in Houston. While in lawschool, she was an intern for Senior Judge Richard Goldberg on the Court of Inter-national Trade.



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Documents

Joint Ventures in Texas