Joint Ventures in the USA

An Expert's View about Contracts in the United States

Posted on: 2 Jun 2010

Joint Ventures in the USA

By Aaron N. Wise, Attorney at Law © 2009


The Right Partner. JV’s for the U.S. market will work only if you have the right partner(s). Check out each JV candidate carefully in advance of any deal. Your U.S. lawyer can obtain valuable data for you about the candidates that you probably cannot obtain elsewhere.


Most U.S. JVs Not Permanent. Nor should you view them as permanent -- or even, in many instances, as long term arrangements. Circumstances, people and mentalities change. Try to arrange your U.S. JV and your planning so that if the JV breaks up at some point, you can continue the U.S. operation.


U.S. Corporation as JV Vehicle. Rarely should a foreign party participate directly in a U.S. JV or “cooperation agreement”. Direct participation in an “unincorporated JV” or “cooperation arrangement” will expose the foreign party to potential liability for the venture’s debts and liabilities, to lawsuits in the States, and to negative tax consequences. As a rule, from the foreign partner’s standpoint, a new U.S. “corporation” should be the JV vehicle. There may, of course, be instances in which another form of U.S. legal entity, like the limited liability company (“LLC”) would suit the purpose.


Three Typical Types of U.S. JV:

1. Distribution JV: Foreign and U.S. parties form a corporation under the laws of a U.S. state (very often, Delaware), each owning an agreed percentage (the “JV Corp”). Typically, it will be the foreign party’s products that the JV will sell, and a distributorship contract will be among the JV documents to negotiate/sign. If the U.S. side will also be selling goods or products to the JV Corp, the terms will normally be embodied in a separate agreement. Typically, the U.S. side will contribute U.S. marketing knowledge, a sales force (its own or independent agents/reps), technical knowledge about the JV products, and possibly things like administrative assistance and the use of its physical facilities. The JV Corp will sell the products to customers in its agreed territory (e.g., the entire USA, and possibly elsewhere in the Western Hemisphere).

2. Production JV: It is similar to the distribution JV except that the JV Corp will manufacture (in whole or part) and/or assemble the products emanating from the foreign party’s side (and, where applicable, those coming from the U.S. side), and resell them. The U.S. side may have a production facility which will be used to make the JV Corp’s products, or the JV Corp may buy or lease an existing one or build a new one. Manufacture may take place in the USA, or even in Canada, Mexico or elsewhere in the Western Hemisphere. Among the contract documents to conclude is a “license agreement” from the appropriate JV partner to the JV Corp allowing it to manufacture its products with the partner’s technology or other intellectual property.

3. R&D JV: A foreign and a U.S. party form a U.S. entity to engage in research and development or similar activities.


Importance of First Class JV Contract Documents. This is a must, especially for the foreign side. To the extent possible, all the transaction documents should be signed at essentially the same time.


“NB-SOT”. Rather than proceeding directly to contract drafts, it is usually advantageous to commence negotiations by preparing, honing to your and your U.S. counsel’s satisfaction, submitting to the U.S. side, and working to the signature of, “a non-binding summary of key terms” (“NB-SOT”) of the deal. That technique has many benefits for both sides.


Drafting Initiative. Repeating the same thought made several times in this booklet, you, the foreign party, should do your utmost to seize and retain the drafting initiative throughout, regarding both NB-SOTs and contract drafts. Let the U.S. side comment on your documents. The importance to you of the “drafting initiative” should not be underestimated.


Tax Planning. Proper tax planning for a U.S. JV, with the assistance of experts, is important. It may affect the JV structure negotiated and implemented.


Some Key JV Points to be Negotiated (Non-Exhaustive List): This listing of only a few examples presumes that the JV vehicle is a U.S. “corporation”.

1. Under which U.S. state’s laws will the U.S. JV corporation be formed?

2. What type(s) of shares the JV vehicle will issue and what percentages will each side have therein?

3. Capital contributions to JV vehicle of each partner; capitalization of the JV corporation generally. How will future capital increases or loans be handled if the corporation needs additional funding?

4. How will members of JV vehicle’s governing management body (“Board of Directors”) and its officers be selected and who will they be?

5. What are the functions and powers (and restrictions thereon) of each of the JV corporation’s officers?

6. What acts, binding documents, etc. of the JV corporation require the prior approval of the JV’s shareholders and/or Board of Directors? Will there be a special majority or unanimity required for certain acts and activities of the JV corporation?

7. Deadlock situations and how to deal with them contractually.

8. What will be the restrictions on transferring shares of the U.S. JV corporation? Buyout obligations? Options to purchase or sell? First refusal provisions?

9. Provisions for terminating the JV and dissolving the JV corporation.

10. All of the key provisions in any distributorship, license, employment, loan, service, employment, or other agreements between or among the JV partners and the JV. 11. Provisions dealing with how and where disputes and claims will be resolved, and what laws will apply to the JV contracts.


Input of Foreign Client. The foreign partner will have to work closely with its U.S. lawyers to put together and close a U.S. JV. That input and cooperation is vital.


U.S. Corporation with More Than 1 Shareholder. Whether or not called a JV, if there will be more than 1 shareholder in a U.S. corporation, what will be needed (at a minimum) is (i) a shareholders’ agreement between the parties; and (ii) special Bylaws of the U.S. corporation tailored to the shareholders’ agreement’s provisions. As one example: a foreign company forms a U.S. corporation. Either at the time of formation or later, it decides that a particular employee or group of employees of the U.S. corporation can buy or otherwise obtain shares in it. When that happens, it will be necessary to prepare, negotiate and sign, at the very least, a shareholders’ agreement, plus special bylaws.


Costs. It will normally cost considerably more in legal fees to create a JV than to form a wholly owned U.S. subsidiary.


Posted: 02 June 2010

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