Session 311 - Joint Venture and
Consortium Agreements for
International Energy Projects:
Surrendering the “Me” for the “We”
Presented by the ACC Energy
Committee
Introduction
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Introduction
• EEM, Inc. Project in Gabahna
– Joint venture (JV) agreement giving EEM 51% of the
ownership and voting power
– Intellectual Property (IP) agreement granting EEM
absolute control over all IP associated with the first
project
– JV partner signed a term sheet for a purchase and sale
agreement for the first project
– First project financing package with the Export/Import
Bank that covers all equipment EEM will make in the
U.S. that will be used for the first project
– All agreements are to be governed by New York law
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Introduction
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Introduction
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Introduction
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Introduction
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Introduction
• Tim Kinskey, Senior Corporate Counsel,
Caterpillar, Inc. (Kinskey_Tim_M@CAT.com)
• Ben Clark, Partner, Sutherland Asbill &
Brennan LLP (ben.clark@sutherland.com)
• Craig Johnson, Deputy General Counsel Energy & Transportation, Caterpillar, Inc.
(Johnson_Craig_A@cat.com)
• Bob Temple, General Counsel, Generation
mPower LLC (rktemple@babcock.com)
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Tim Kinskey
STRUCTURE
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Structure Issues
1. Why create a Joint Venture? What are the key business reasons?
2. Why does it need to be a shared equity investment or JV?
Are there alternatives to an equity JV?
3. Form of JV
4. Funding and financing
5. Scope of the JV (exclusivity and non-compete)
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Structure
Why create a Joint Venture? What are the key business reasons?
1.
2.
3.
4.
Entry into new market
Access to complementary resources: capital, technology, expertise
Sharing costs and mitigating risks
Potential tax advantages
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Structure Question
Q: You and a potential partner are considering a 50/50 JV.
Which is an advantage of an equity JV compared to a
contractual arrangement, such as an alliance?
1. Governance provisions in a JV will provide decision
making mechanisms that help the parties avoid
deadlocks and disputes,
2. Intellectual property rights are more clearly defined
in a JV than in an alliance,
3. JVs are faster to create and help the parties “go to
market” more quickly, or
4. JVs are harder to exit and both parties have natural
incentives to work together longer.
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Structure
Are there alternatives to an equity JV?
1.
2.
3.
4.
5.
A 100% purchase or sale (with or without earnout)
Supply or distribution agreement
Marketing agreement
License agreement (IP)
Secondment agreement (employees) and lease agreements
(assets)
6. Alliance agreement (combination of items 2 – 5)
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Structure
What form of JV?
1. Equity or entity JV
•
•
•
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Partnerships, Limited Liability Companies (LLCs), Corporations
The vast majority of equity JVs are LLCs (USA) or the equivalent
Equity instruments: common, preferred, options, warrants, convertible debt
51% for “control”? Accounting and SEC tests of “control”
2. Virtual or contractual JV
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Structure
Funding and financing?
1. Business plan and financial model
•
•
•
Leveraged? Degree of debt
Internal vs. external financing
Self-sustaining with dividends vs. breakeven
2. Capital contributions
• Initial
• Additional (function of Governance)
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Structure
Scope of the JV?
1.
2.
3.
4.
Geography or other markets
Exclusivity (by geography, by industry or by application)
Non-competition covenants
Antitrust implications
•
•
•
Access to competitively sensitive information, e.g., costs and pricing
Allocation of markets, non-compete and exclusivity provisions
Market power? Other anticompetitive effects, e.g., consolidation?
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Ben Clark
GOVERNANCE
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Key Governance Issues
• Important to structure governance of the joint venture (JV) carefully
to avoid deadlocks
• Local law may dictate certain minority protections or have
restrictions on foreign ownership
• How will board seats, votes, profits and risk be allocated?
• Can returns be allocated in a way that does not follow “ownership”?
• Who will appoint key management personnel?
• How will the JV take action?
• Who is the legal representative of the JV in the jurisdiction of the
venture?
• What authority do the officers have independent of the board?
• Do you need a management committee in addition to a board?
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Key Governance Issues
• Example: JV with Two Equal Partners
– JV may be managed by a board with an equal number of members appointed by
each partner, and one or more independent directors mutually selected by the
partners
– Will have an odd number of directors to avoid impasses
– Certain fundamental decisions may require the assent of both partners
• Example: JV with Two Unequal Partners
– Majority owner will want to run the business with little interference from minority
and will want to hold a majority in voting power, appointment rights, etc.
– The list of items over which the minority holder has “veto” power will be smaller.
Items the minority partner will want to retain power over include:
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Amendments to organizational documents
Sales of all or substantially all assets, mergers or consolidation
Dissolution
Issuances of equity
Affiliate contracts
Amendments to the project agreements (e.g., a key offtake or supply agreement)
– The minority partner may want to negotiate a detailed business plan to be included
in the JV agreements
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Question?
Q: You are planning to enter a JV as a 20% minority interest
holder. Your potential partner will hold an 80% equity interest
in the JV. How should you allocate JV voting rights?
1. All JV actions should require the vote of the partners
representing a majority of the outstanding equity,
2. All JV actions should be delegated to a third-party
manager,
3. The 80% partner should control day-to-day decisionmaking, but you should have a veto right over certain
material actions, or
4. It does not matter, because an 80%/20% JV would never
work.
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Governance
• Key Take-Aways:
• Before drafting, it is crucial to understand the
requirements of local law regarding ownership and
governance structures
• Working within that framework, look to allocate
responsibilities and rights in a way that appropriately
values what each partner brings to the JV and reduces
the possibility of future conflicts (i.e., avoid cramdown
controls)
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Who Is Your Partner? –
Regulatory Considerations
•
FCPA, Bribery and Corruption Issues
– A company can face significant liability under the FCPA because of the
misconduct of its joint venture or joint venture partner
– Investors in joint ventures can be liable for anti-bribery violations if they or
their agents had actual or constructive knowledge of the illegal acts, or if they
otherwise authorized, directed or controlled the illegal activity
– If a U.S. company forms a JV with a foreign company that bribed foreign
government officials (even prior to formation of the JV) in order to obtain or
retain business for the JV, the U.S. company can be held liable under the FCPA
unless it takes steps to identify and remove the tainted business from the JV
going forward
– Prior to forming the JV, partners should conduct thorough due diligence of
each other’s relationships with foreign officials; use an FCPA questionnaire
– The JV documents should contain representations and warranties regarding
anti-bribery law compliance, and an audit and investigation provision
permitting ongoing due diligence regarding the JV partners’ dealings with
foreign officials
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Who Is Your Partner?
- Regulatory Considerations
• Foreign ownership
– Understand the approvals and licenses that may be required
for foreign investment
• How long does the approval process take?
– Are there any restrictions on what a foreign party can own?
• Do you need a local JV partner?
• Are there limits on expatriation of profits?
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•
Who Is Your Partner?
Due
Diligence
Host country
– Consider the political environment: Instability; corruption; stability of
local currency
– Consider the legal environment: Ability to effectively enforce JV rights
• Assessing a JV partner
– Conduct background checks on the principals and affiliates
– What are your partner’s goals? Do the partner’s culture and practices
align with your own? How does the partner make decisions? What are
the partner’s financial resources, expertise, business relationships?
• How to address red flags
– Conversation with potential partner, keeping in mind cultural sensitivities
– Adding protective provisions to JV Agreement
• Audit and investigation rights and a requirement that the JV partner cooperate
• Indemnification for JV partner’s legal non-compliance
• Termination right if the JV partner is discovered to have made misrepresentations
regarding past improper payments or violates the FCPA
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Who Is Your Partner?
• Key Take-Aways: Due diligence is a critical first step to
creating a joint venture, particularly if you are agreeing to
an ongoing relationship with a foreign partner to do
business in a foreign country. Be aware that the routine
diligence you perform in connection with your domestic
business may not be sufficient to uncover the risks of an
international JV project.
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Negotiating Tactics
• Consider cultural differences in negotiations – progress made on
an agreement may be subject to change later
• Have an exit strategy; be willing to walk away if you cannot see a
path to resolving critical legal and business issues
• If the negotiation is not conducted in English, have fluent
speakers advising you during contract negotiation and
finalization
• Key Take-Aways: Think about your negotiation strategy in
advance and avoid pressure to get the deal done at any
cost/risk.
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Question?
Q: Which of the following is the best way to start a discussion
with a local potential JV partner regarding the risks of doing
business in a country with widespread corruption?
1. Accuse your potential partner of corruption and suggest
that you receive additional compensation in the JV
arrangement for doing business with a risky partner,
2. Request permission to conduct due diligence of your
partner and discuss ways to avoid future violations,
3. Request an indemnity for any violations of anticorruption laws by the JV and complete control over dayto-day JV operations, or
4. Ask your potential partner whether any conditions exist
that would present an anti-corruption problem for you
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Ancillary Agreements
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The parties may enter arrangements outside the JV agreement in order to develop
the JV
Examples of common ancillary agreements:
– Technology licenses and other IP agreements (Craig to discuss IP in depth in the following
section)
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What rights will the JV have to continue to license IP from an exiting partner?
What rights will the parties have to jointly developed IP?
What rights will the parties have to IP contributed to the JV by one partner?
What does local law require?
– Transition services or long-term service agreements
• One partner may provide employees or administrative services
• One partner may market the JV’s finished products to its customer network
– Related purchase and sale agreements
• One partner may be a major offtaker of the products for resale
• One partner may be a major supplier of raw materials or equipment
• Construction/EPC and other project development agreements
– Confidentiality agreements
• Defines the scope of protected, confidential information
• Allows for the exchange of sensitive information while mitigating the risk of misuse
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Ancillary Agreements
• The parties may enter arrangements outside the JV agreement
in order to develop the JV
– Consider the effect of termination/exit on these agreements.
– Does it matter that the JV is for project development but your partner will own the
finished product?
Key Take-Aways: Ancillary agreements can be just as important to
your JV’s success as its governing documents. These agreements
should be drafted with an eye towards preserving your rights
should the JV terminate, or should you or your partner want to
exit the JV.
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Craig Johnson
KEY PROVISIONS
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Intellectual Property
• Identification of IP – find all IP/potential IP
– Patent, trademark, copyright, trade secrets
• How will existing IP be contributed to the JV?
– Assignment or license
• How will contributed IP be valued?
– Contributed as equity? Limits
• Due diligence – rights to IP are complex
– Do contributors have all rights for scope needed?
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Intellectual Property
• License provisions
– Exclusive or non-exclusive, territorial or market
• Will the provisions be enforceable?
– Under local law or as a practical matter
• Who will own improvements – or new IP?
• What will process be for identification and
protection of improvements/new IP?
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Intellectual Property
• What happens to IP, improvements or new IP
on termination of JV or exit by partner?
– Is license terminable if IP or technology is core to
JV?
• Protection of IP and contributed IP
– Can IP be effectively protected in jurisdictions of
operation?
• Confidentiality obligations
– Robust and enforceable?
– Survive the termination of the JV?
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Intellectual Property
• Hypothetical: One JV Partner demands
agreement that it should have ‘absolute
control’ over all Intellectual Property (IP)
associated with the Joint Venture
– Is that the best approach – what will be the likely
reaction of the JV partner to this proposal?
– In a very general sense, what are the major types
of IP that might be most important in JV of this
type?
– What is the best tool to maintain control, while
providing flexible use of the IP?
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Competition Law
• Filing requirements:
– What law applies – local, national and regional
– Size and other factors drive filing requirement
– Responsibility for filing, costs and cooperation
• Covenants not to compete:
– An agreement between the partners not to compete
– Tension with competition law
– If supportive of legitimate purpose (pro-competitive),
then likely acceptable; if not, e.g., marketing JV that
results in geographic exclusivity, likely wrongful
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Competition Law
• Covenants not to compete (cont.):
– Factors to be considered
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Scope of non-compete provision
What length of time?
What geographic territory?
Jurisdictions in which the JV operates
Jurisdictions in which the JV is planning to operate
What business? How is it defined?
Competition law considerations may influence scope
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Employment Law
• What is the general plan to staff the JV?
– Venturers contribute/transfer? New hire?
• What are the applicable laws and regulations?
– TUPE (Transfer of Undertakings), WARN Act
– Labor law, collective agreements, works council
• Consider transfer issues
– Consents, terms of employment, non-solicitation
– Who will pay costs of severance and transfer?
– Immigration and tax law considerations
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Employment Law
• Compensation and benefits issues
– What employee compensation and benefits will
cover the joint venture employees?
• Compensation structure, retirement plans,
incentive and equity plans, health, pensions
– Will transferred employees fall under the new
plans or remain under their old plans?
– Will the joint venture need transitional services
(e.g., payroll, HR administration, benefits
administration, and so forth)?
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Employment Law
• Hypothetical: You are entering a JV with a
state-owned entity. In order to ensure
financial control, you will contribute the CFO.
– Your candidate is an experienced financial manager whose
total employment cost is $350K/year.
– A local national CFO at a comparably sized company costs
$80K/year, and the CEO of the JV, a local national from the
JV Partner will be paid 100K.
– How will you add this employee?
• Beyond salary, what other key Compensation & Benefits
considerations for this employee?
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Bob Temple
DISPUTES AND TERMINATION
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Termination: 50 Ways to Leave Your JV
• Expectations for JV duration
• Avenues for exit
– Events of default
– Actions on default (triggers and consequences)
– Transfer
– Sale or dissolution (voluntary transfer)
• Plan for member transition
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Question?
Q: Which of these are Major Defaults requiring a
quick cure period?
1. Failure to make capital contributions
2. Conviction of a crime or proven malfeasance
involving JV property
3. Allowing JV to default on obligations without
member consent
4. All of the above
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Disputes and Choice of Law
• Mechanism for dispute settlement short of
litigation
• Dispute escalation on deadlock
– Time
• Arbitration
– Legal issue or business
judgment?
– Why arbitration?
– Which rules do you use?
• Choice of law and venue
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Question?
Q: Given a choice, under the laws of which
country would you select to control your JV
governance documents?
1.
2.
3.
4.
Vietnam,
China,
Indonesia, or
Singapore
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All
CASE STUDY (see handout)
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Case Study
• EEM, Inc., a U.S. industrial manufacturer of
energy equipment
• Proposed JV with state-owned utility in Gabahna
• Bridge to Gabahna (BTG) may act as
representative and local partner for EEM
• Negotiations in Gabahna
– Contracts and negotiations can be written and held in
English, but only the Gabahnan version binding
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Case Study
a) Which are key issues Jane needs to take into
account?
b) Which internal process and policies of EEM Jane
needs to follow?
c) Which Departments does Jane need to talk to
help Jane on her strategy?
d) Which other suggestions, from a legal
perspective, or steps are needed to implement a
satisfactory strategy to develop business in
Gabahna?
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Checklist
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Structure
Governance
Choosing a JV Partner
Ancillary Agreements
Intellectual Property
Competition Law
Employment
Termination/Exit
Disputes and Choice of
Law
When in doubt, use a checklist!
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All
QUESTIONS AND ANSWERS
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