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THERE IS AT LEAST ONE THING

WORSE THAN FIGHTING WITH ALLIES


- AND THAT IS TO FIGHT WITHOUT
THEM.
- SIR WINSTON
CHURCHILL
1

JOINT-VENTURE: DEFINITION
A JOINT-VENTURE IS A COMMONLY OWNED
COMPANY WHERE A SMALL NUMBER OF PARTNERS
(TWO OR MORE) SHARE THE CAPITAL OF THE FIRM.
IT BELONGS TO THE FAMILY OF ALLIANCES
STRATEGIC AND NON STRATEGIC. STRATEGIC
ALLIANCES BEING CHARACTERIZED BY THE FACT
THAT THEY GATHER COMPETITOR COMPANIES.
THE MAIN REASONS WHY MANAGERS CLAIM TO BE
INTERESTED IN JOINT-VENTURES ARE THE ACCESS
TO NEW MARKETS AND TO NEW RESOURCES.
(Janger, 1980)

JOINT VENTURE ENABLES SHARING


OF MEANS & COMPETENCE
FINANCIAL CONTRIBUTIONS
KNOWLEDGE OF LOCAL MARKET AND
AND OF LOCAL BUSINESS PRACTICES
COMMERCIAL CONTACTS AND NETWORKS
KNOW-HOW AND TECHNOLOGIES
QUALIFIED AND/OR CHEAP WORKFORCE
RAW MATERIALS: FACILITATED ACCESS
CONTRIBUTION OF TRADEMARKS

MAIN ATTRIBUTES OF A
JOINT VENTURE
STRENGTH OF JOINT VENTURE IS ITS
FLEXIBILITY;
THIS ALSO MAKES IT HARD TO
DEFINE AND HARD TO TRACK
NUMBER OF JOINT VENTURES;
FLEXIBILITY LENDS ITSELF WELL TO
CROSS-BORDER TRANSACTIONS.

TYPES OF JOINT VENTURE


JOINTLY CONTROLLED
OPERATION
JOINTLY CONTROLLED ASSETS
JOINTLY CONTROLLED
ENTITIES
PUBLIC PRIVATE PARTNERSHIP

WHY MAKE A JOINT-VENTURE

ACCORDING TO CONTRACTOR AND LORANGE - 1987


REDUCTION OF RISK FOR EACH PARTNER,
ECONOMIES OF SCALE,
TECHNOLOGY EXCHANGES,
COMPETITIVE ADVANTAGE,
AVOIDING HEAVY GOVERNMENTAL
REGULATIONS,
FACILITATING INITIAL INTERNATIONAL
EXPANSION,
ADVANTAGE OF A NEARLY VERTICAL
INTEGRATION

NEED FOR SETTING UP A JOINT


VENTURE : INTERNAL REASONS

BUILDING ON COMPANYS STRENGTH


SPREADING COSTS & RISKS
ACCESS TO FINANCIAL RESOURCES
ECONOMIES OF SCALE & ADVANTAGE OF SIZE

AN OPPORTUNITY TO SHARE R&D EXPENSES OR TO


ACCESS NEW TECHNOLOGY;
TO FACILITATE MARKET ACCESS IN A NEW
TERRITORY;

ACCESS TO INNOVATIVE MANAGEMENT


PRACTICES

NEED FOR SETTING UP A JOINT


VENTURE : COMPETITIVE GOALS
INFLUENCING MARKET STRUCTURE
TO GAIN ACCESS TO MORE COMPETITIVE
MANUFACTURING COSTS;

SPEED TO MARKET
SYNERGIES
TO ADVANCE NEW REGULATED PRODUCTS
THROUGH LOCAL REGULATORY AGENCIES;
AS A DEFENSIVE MECHANISM AGAINST
COMPETITION

DIVERSIFICATION

BEFORE ENTERING A JOINT


VENTURE
THE PARTNERS SHOULD BE CLEAR UPON ITS
RESPECTIVE STRATEGIC NECESSITY
SHOULD BE UNAMBIGUOUS AS TO HOW THE J.V
WILL BE MANAGED INCLUDING THE ROLE &
RESPONSIBILTY OF EACH PARTNER
TAKE MEASURES TO ENSURE COMPATIBILITY OF
WORK CULTURE
PARTNERS SHOULD WORK ON A SYSTEM BASED
ON TRANSPERANCY & TRUST
PARTNERS SHOULD BE IN A POSITION TO INFUSE
GROWING CAPITAL NEEDS OF J.V

REQUIREMENTS OF A SUCCESFUL
JOINT VENTURE
EACH PARTNERS BRINGS IN SOMETHING OF VALUE
TO JOINT VENTURE ENTITY
THERE SHOULD BE PROVISION IN THE AGGREMENT
FOR TERMINATION & BUY OUT BY OTHER PARTNER
KEY EXECUTIVE MUST BE ASSIGNED TO IMPLEMENT
JOINT VENTURE
A NEGOTIATING COMMITTE MUT BE CREATED BY
EACH OF THE PARNERS FOR NEGOTIATING & TAKING
DECSION
IT IS PREFERED TO HAVE INDEPENDENT ADVISER OR
CONSULTANT ON EITHER SIDE TO BACK UP THE
RESPECTIVE NEGOTIATING TEAM

JOINT VENTURE A MARRIAGE OF


INTEREST: BASIS OF SELECTION
TECHNICAL COMPETENCES
PREVIOUS RELATIONSHIPS
REPUTATION
NEGOTIATION SKILLS
FINANCIAL SITUATION
MANAGEMENT QUALITY &
CAPACITY

JOINT-VENTURE A MEDIUM
TERM GOAL
THE JOINT-VENTURE HAS A LIFE CYCLE
THE JOINT-VENTURE IS TRANSFORMED INTO SUBSIDIARY
MERGER & ACQUISITION
PURCHASE OF THE JOINT-VENTURE BY THE LOCAL
PARTNER
DISSOLUTION OF THE JOINT-VENTURE
DURATION LIMITED SINCE THE CREATION OF THE JOINTVENTURE
- R&D JOINT-VENTURE
- PROJECT JOINT-VENTURE

STEPS IN NEGOTIATION OF A JOINT


VENTURE AGREEMENT
PREPARATORY TALKS AND SIGNATURE OF A DRAFT
AGREEMENT OR MEMORANDUM OF UNDERSTANDING.

COMMITMENT OF A NEGOTIATION EXCLUSIVITY FOR A


SPECIFIC PERIOD
SIGNATURE OF A CONFIDENTIALITY AGREEMENT FOR
NON DIVULGATION AND NON USAGE OF THE RECEIVED
INFORMATION
ELABORATION OF A BUSINESS PLAN
ADJUST J.V LICENSING OR FRANCHISING PROJECT AFTER
FINALIZATION OF THE BUSINESS PLAN.
FINALIZATION OF JOINT-VENTURE AGREEMENT.

TRANSACTION ISSUES IN JOINT


VENTURE
LEGAL

DUE DILIGENCE
FINALIZATION OF FOLLOWING
TRANSACTIONS DOCUMENTS
SUBSCRIPTION AGREEMENT
SHAREHOLDERS AGREEMENT

TRANSACTION ISSUES RELATED TO


SUBSCRIPTION AGREEMENTS
RIGHT

TO SUBSCRIBE BASED ON
RELIANCE UPON VARIOUS REPS AND
WARRANTIES
PROMINENT ELEMENTS

TITLE W.R.T. TRANSFERRED SHARES

STANDING OF COMPANY

ADVERSE JUDICIAL ORDERS

RELATED PARTY TRANSACTIONS

DUE AUTHORIZATION AND VALID


EXECUTION OF AGREEMENT

TRANSACTION ISSUES RELATED TO


SUBSCRIPTION AGREEMENTS(CONTD)

FULL DISCLOSURE OF LIABILITIES


STATUS OF PROPRIETARY ASSETS LIKE
IP, REAL ESTATE
MATERIAL CONTRACTS AND
OBLIGATIONS
FINANCIAL STATEMENTS MUST REVEAL
TRUE AND FAIR PICTURE
LABOUR DUES
ENVIRONMENTAL COMPLIANCES
DISCLOSURES IN LISTED COMPANIESINSIDER TRADING REGULATIONS

TRANSACTION ISSUES RELATED TO


SUBSCRIPTION AGREEMENTS
CLOSING

RELATED ISSUES

CONDITIONS
PRECEDENTS
TO
CLOSING & APPROVALS OF GOVT. &
SHAREHOLDERS

INDEMNITY

AGGREGATE LIABILITY
POST CLOSING ADJUSTMENTS
REPS AND WARRANTIES SURVIVAL
VS. CLAIMS SURVIVAL
TERMINATION

TRANSACTION ISSUES RELATED TO


SHAREHOLDERS AGREEMENTS
EFFECTIVENESS

OF SHAREHOLDERS

AGGREEMENT
MANAGEMENT CONTROL

BOARD CONTROL

SHAREHOLDERS MEETING CONTROL


QUORUM REQUIREMENTS

AFFIRMATIVE LIST

TRANSACTION ISSUES RELATED TO


SHAREHOLDERS AGREEMENTS
TRANSFERABILITY RESTRICTIONS
PUBLIC COMPANIES VS. PRIVATE
RIGHT OF FIRST REFUSAL
TAG ALONG RIGHTS
DRAG ALONG RIGHTS
PUT AND CALL OPTIONS
TRANSFER RESTRICTIONS FALL AT IPO
LIQUIDATION PREFERENCE
NON- COMPETE PROVISIONS ON
PROMOTER
TERMINATION- IF MINORITY HOLDING

TRANSACTION ISSUE : DUE


DILIGENCE
APPROVALS

AND PERMISSIONS
MATERIAL AGREEMENTS
INDEBTEDNESS AND LENDER
RESTRICTIONS
INSURANCE
LITIGATION
HUMAN RESOURCES AND IP

TRADEMARK
LICENCE
ENGINEERINGPATENT
CONSORTIUM
DISTRIBUTION
CONTRACT LICENCE
(COMMON AGREEMENTS
MARKETING)
COMMON
COMMON
PURCHASE
SUBCONTRACTING
PRODUCTION

COMMON
RESEARCH
RESEARCH
CONTRACT

THE ELEVEN MODES OF JOINT


VENTURE/COOPERATION
AGREEMENTS: ILLUSTRATION OF THEIR
ANCHOR POINTS

WAYS
SUPPLYING
OF... DESIGNING

PRODUCING

SOURCE: S. URBAN, S. VENDEMINI, CESAG, STRASBOURG

MARKETING
DELIVERING

KNOW-HOW TRANSFER
CONTRACT

ALTERNATIVE STRATEGIES FOR JOINT VENTURE

Spectrum of Cooperative Strategy Alternatives:


Full Ownership
Control

Partial Ownership
and Contractual
Control

Contractual Control
Only

Mergers (or
acquisitions)

Ownership Joint
Ventures

True or Contractual
joint ventures

Internal Ventures (and


spin-offs to full
business unit status)

Minority equity
investments

Research &
Development
agreements
Cross-licensing or
cross-distribution
arrangements
Joint bidding activities

22

EXAMPLES OF JOINT VENTURES


INVOLVING COMPLEMENTARY
ASSETS

Examples of Joint Ventures Involving Complementary Assets:


Partner strength

+ Partner strength

=Joint Objective

Pepsico marketing clout


for canned beverages

Lipton recognized tea


brand and customer
franchise

To sell canned iced tea


beverages jointly

KFC established brand and Mitsubishi real estate and To establish a KFC chain in
store format, and
site-selection skills in
Japan
operations skills
Japan
Siemens presence in
range of
telecommunications
markets worldwide and
cable-manufacturing
technology

Corning technological
strength in optical fibers
and glass

To create a fiber-opticcable business

Ericsson technological
strength in public
telecommunications
networks

Hewlett-Packard
computers software and
access to electronics
channels

To create and market


network management
systems

23

INDIAN JOINT VENTURES


ABROAD:I.J.V
ONE OF THE LARGEST SOURCES OF PRIVATE
EQUITY TO THIRD WORLD COUNTRIES
IJVs WERE TO ACQUIRE LARGER ASSETS IN HOST
COUNTRIES & CREATE EXPORT MARKET
FIRST INSTANCE OF IJV ABROAD WAS THEN
LARGEST TEXTILE MILL IN ETHIOPIA SET UP BY
THE BIRLAS IN 1964
POST LIBERALISATION LARGE NO. OF IJVS ARE
BEING PROMOTED THE LATEST BEING RELIANCE
FORAY OF MORE THAN $3 BILLION IN SHALE GAS
EXPLOITATION RIGHTS IN USA

FUTURE OF JOINT VENTURE IN INDIA


NO. OF JOINT VENTURES WILL INCREASE
MORE & MORE COMPANIES IN INDIA ARE ADOPTING
J.V APPROACH AS PART OF THEIR STRATEGY
FOREIGN COMPANIES BY COMBINING THEIR
TECHNOLOGICAL FINANCIAL & INNOVATING
MANAGEMENT PRACTICES CAN BENEFIT BY TAKING
ADVANTAGE OF GROWING MARKET IN INDIA
CLARITY IN GOVERNMENT POLICY ON FORIGN
DIRECT INVESMENT & ENABLING INDUSTRIAL
ENVIRONMENT ENCOURAGES HUGE GROWTH IN
THIS SGMENT

FUNDING CONSIDERATIONS
IN JOINT VENTURES
ALWAYS KEEP AND OPEN MIND AND RETAIN FLEXIBILITY
FOR NEW FUNDING STRUCTURES OVER TIME
SENIOR DEBT
SHOULD BE LIMITED RECOURSE TO ASSETS OF SPV OR
GROUP
AVOID/RESTRICT SHAREHOLDER GUARANTEES
REFINANCING CONSIDERATIONS: WHEN WILL FUNDS
NEED TO BE REPAID AND OUT OF WHAT SOURCE
DIRECT AGREEMENTS WITH CONTRACTOR/LOCAL
AUTHORITY
LOCAL AUTHORITY TERMINATION AND STEP-IN RIGHTS

LEGAL FRAMEWORK FOR


DOMESTIC & FOREIGN
INVESTMENT

FOREIGN DIRECT INVESTMENT POLICY OF INDIA


ACQUISITION OF SHARES OF INDIAN COMPANIES BY A
FOREIGN COMPANY
PORTFOLIO INVESTMENT BY FOREIGN INSTITUTIONAL
INVESTORS.
GUIDELINE FOR FOREIGN TECHNOLOGY TRANSFER
ISSUANCE OF GDR , ADR &FCCB BY INDIAN
COMPANIES
FOREIGN INVESTMENT IN PREFERENCE SHARES OF
INDIAN COMPANIES
IMPORTANT REGULATORY AUTHORITES FOR FORGEIN
INVESTMENTS IN INDIA

FOREIGN DIRECT INVESTMENT


(FDI) POLICY OF INDIA
1. AUTOMATIC ROUTE
2. APPROVAL ROUTE(FIPB)

ACQUISITION OF SHARES OF INDIAN


COMPANY BY A FOREIGN COMPANY
ACQUISITIONS MAY BE MADE OF AN EXISTING
INDIAN COMPANY WHICH MAY BE EITHER A
PRIVATE OR A PUBLIC COMPANY.
ACQUISITION OF SHARES OF A PUBLIC LISTED
COMPANY IS SUBJECT TO THE GUIDELINES OF
THE SECURITIES EXCHANGE BOARD OF INDIA
(SEBI)
FOREIGN INVESTORS LOOKING AT ACQUIRING
EQUITY IN AN EXISTING INDIAN COMPANY
THROUGH STOCK ACQUISITIONS CAN DO SO
UNDER THE AUTOMATIC ROUTE.

INVESTMENT BY FOREIGN
INSTITUTIONAL INVESTORS (FII)
AN FII MUST BE REGISTERED WITH SEBI AND MUST COMPLY
WITH CERTAIN INVESTMENT LIMITS. THEY MAY PURCHASE
SHARES AND/OR CONVERTIBLE DEBENTURES OF AN INDIAN
COMPANY UNDER THE PORTFOLIO INVESTMENT SCHEME.
THE SHARES/CONVERTIBLE DEBENTURES OF AN INDIAN
COMPANY MUST BE PURCHASED THROUGH REGISTERED
BROKERS ON RECOGNIZED STOCK EXCHANGES IN INDIA.
FIIS ARE ALSO PERMITTED TO PURCHASE SHARES OR
CONVERTIBLE DEBENTURES OF AN INDIAN COMPANY
THROUGH PRIVATE PLACEMENT/ARRANGEMENT.
FOREIGN PENSION FUNDS, MUTUAL FUNDS, INVESTMENT
TRUSTS,
ASSET
MANAGEMENT
COMPANIES,
NOMINEE
COMPANIES AND INCORPORATED/INSTITUTIONAL PORTFOLIO
MANAGERS OR THEIR POWER OF ATTORNEY HOLDERS MAY
INVEST IN INDIA AS FIIS.

GUIDELINES FOR FOREIGN TECHNOLOGY


TRANSFER
FOREIGN TECHNOLOGY INDUCTION IS ENCOURAGED BY
THE GOVERNMENT BOTH THROUGH FDI AND THROUGH
FOREIGN TECHNOLOGY COLLABORATION AGREEMENTS.
NO APPROVALS ARE REQUIRED IN RESPECT TO ALL THOSE
FOREIGN TECHNOLOGY AGREEMENTS WHICH INVOLVE:
A LUMP SUM PAYMENT OF UP TO USD 2 MILLION
ROYALTY PAYABLE UP TO 5% ON NET DOMESTIC SALES
AND 8% ON EXPORTS, SUBJECT TO A TOTAL PAYMENT OF
8% ON SALES, WITHOUT ANY RESTRICTION ON THE
DURATION OF ROYALTY PAYMENTS.
NOTE - IT IS PERMISSIBLE FOR AN INDIAN COMPANY TO
ISSUE EQUITY SHARES AGAINST LUMPSUM FEE AND
ROYALTY IN CONVERTIBLE FOREIGN CURRENCY

GUIDELINES ON ISSUANCE OF GDR, ADR


& FCCB BY INDIAN COMPANY
INDIAN COMPANIES LISTED ON THE STOCK
EXCHANGE ARE ALLOWED TO RAISE CAPITAL
THROUGH GDRS/ADRS/FCCBS.
FOREIGN INVESTMENT THROUGH
GDRS/ADRS/FCCBS IS ALSO TREATED AS FDI.
ISSUE OF GDRS/ADRS DOES NOT REQUIRE
ANY PRIOR APPROVALS EXCEPT WHERE THE
FDI AFTER SUCH ISSUE WOULD EXCEED THE
SECTORAL CAPS, IN WHICH CASE PRIOR
APPROVAL OF FIPB WOULD BE REQUIRED.
ISSUE OF FCCBS UPTO USD 500 MILLION
ALSO DOES NOT REQUIRE ANY PRIOR
APPROVALS

FOREIGN INVESTMENT THROUGH


ISSUE OF PREFERENCE SHARES
ISSUE OF PREFERENCE SHARES IS PERMISSIBLE
ONLY AS RUPEE DENOMINATED INSTRUMENTS.
ALL PREFERENCE SHARES HAVE TO REDEEMED
OUT OF
ACCUMULATED PROFITS/ FRESH
CAPITAL WITHIN A PERIOD OF 20 YEARS AS PER
INDIAN COMPANY LAW.
PREFERENCE SHARES, CARRYING A CONVERSION
OPTION, MUST COMPLY WITH SECTORAL CAPS
ON FOREIGN EQUITY. IF THE PREFERENCE
SHARES DO NOT HAVE CONVERSION OPTION,
THEY FALL OUTSIDE THE FDI CAP.

REGULATORY AUTHORITIES FOR


FOREIGN INVESTMENT IN INDIA
SECRETARIAT FOR INDUSTRIAL ASSISTANCE (SIA)
FOREIGN INVESTMENT PROMOTION BOARD (FIPB)
THE FOREIGN INVESTMENT IMPLEMENTATION
AUTHORITY (FIIA)
RESERVE BANK OF INDIA (RBI)
REGISTRAR OF COMPANIES (ROC)
SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI)
CENTRAL BOARD OF EXCISE AND CUSTOMS (CBEC)
CENTRAL BOARD OF DIRECT TAXES (CBDT)
AUTHORITY FOR ADVANCE RULINGS (AAR)
INVESTMENT COMMISSION (IC)

FORMS OF FOREIGN ENTERPRISES


PERMITTED IN INDIA
JOINT VENTURE COMPANY
FOREIGN COMPANIES CAN SET UP THEIR OPERATIONS
IN INDIA BY FORGING STRATEGIC ALLIANCES WITH
INDIAN PARTNERS. A JOINT VENTURE IS ALSO THE
PREFERRED ROUTE FOR FOREIGN INVESTORS WHO
WISH TO INVEST IN ANY SECTOR WHERE 100%
FOREIGN DIRECT INVESTMENT IS NOT PERMITTED.
WHOLLY OWNED SUBSIDIARY COMPANY
FOREIGN COMPANIES CAN SET UP WHOLLY-OWNED
SUBSIDIARY IN THE FORM OF A PRIVATE LIMITED
COMPANY IN SECTORS WHERE 100% FOREIGN DIRECT
INVESTMENT IS PERMITTED UNDER THE FDI POLICY.

PERMISSIBLE FORMS OF
ENTERPRISES OF FOREGN
COMPANIES IN INDIA (CONTD)

BRANCH OFFICE
A BRANCH OFFICE IS BASICALLY AN EXTENDED
ARM OF THE FOREIGN COMPANY AND CAN
UNDERTAKE
EXPORT/IMPORT
OF
GOODS,
CONSULTANCY, RESEARCH, COORDINATION WITH
LOCAL BUYERS AND SELLERS AND PROVIDE
TECHNICAL SUPPORT FOR PRODUCTS SOLD IN
INDIA, DEVELOPMENT OF SOFTWARE AND
OPERATIONS RELATED TO AIRLINE/SHIPPING
BUSINESS. HOWEVER, A BRANCH OFFICE IS NOT
ALLOWED TO UNDERTAKE MANUFACTURING
ACTIVITIES EXCEPT RESEARCH WORK. PRIOR
APPROVAL OF RESERVE BANK OF INDIA IS
REQUIRED TO SET UP A BRANCH OFFICE.

PERMISSIBLE FORMS OF
ENTERPRISES OF FOREGN
COMPANIES IN INDIA (CONTD)
LIAISON OFFICE
THE ROLE OF SUCH OFFICES IS LIMITED TO COLLECTING
INFORMATION ABOUT THE POSSIBLE MARKET AND PROVIDING
INFORMATION ABOUT THE COMPANY AND ITS PRODUCTS TO
PROSPECTIVE INDIAN CUSTOMERS.A LIAISON OFFICE IS NOT
ALLOWED TO UNDERTAKE ANY BUSINESS ACTIVITY OTHER
THAN LIAISON ACTIVITIES IN INDIA, AND THEREFORE CANNOT
EARN ANY INCOME IN INDIA.
PROJECT OFFICE
FOREIGN COMPANIES PLANNING TO EXECUTE SPECIFIC
PROJECTS IN INDIA CAN SET UP A PROJECT OFFICE FOR THIS
PURPOSE. CONDITIONS LAID DOWN BY RBI NEED TO BE
FULFILLED. THE FOREIGN ENTITY ONLY HAS TO FURNISH A
REPORT TO THE RBI GIVING THE PARTICULARS OF THE
PROJECT/CONTRACT.

IAS 31 OVERVIEW
OBJECTIVE AND SCOPE
JOINT VENTURES
JOINTLY CONTROLLED OPERATIONS
AND JOINTLY CONTROLLED ASSETS
JOINTLY CONTROLLED ENTITIES
DISCLOSURE

38

IAS 31 OBJECTIVE AND


SCOPE

JOINT VENTURE - A CONTRACTUAL ARRANGEMENT WHERE TWO OR MORE


PARTIES SHARE IN AN ECONOMIC ACTIVITY OVER WHICH THEY HAVE JOINT
CONTROL

JOINT CONTROL - REGARDLESS OF ACTUAL OWNERSHIP RIGHTS, THE


STRATEGIC FINANCIAL AND OPERATING DECISIONS, BY CONTRACT, REQUIRE
UNANIMOUS CONSENT OF THE VENTURERS
CONTROL IN THIS IFRS HAS THE SAME MEANING AS IN OTHER RELATED IFRSS

VENTURER - AN ENTITY THAT HAS JOINT CONTROL OVER A JOINT VENTURE

INVESTOR IN A JOINT VENTURE - A PARTY TO THE VENTURE WITHOUT


JOINT CONTROL

EXCEPTIONS TO IAS 31
VENTURERS INTERESTS IN JOINTLY CONTROLLED ENTITIES HELD BY VENTURE
CAPITAL ORGANIZATIONS OR MUTUAL FUNDS, UNIT TRUSTS, AND SIMILAR
ORGANIZATIONS THAT ARE ACCOUNTED FOR AT FVTPL

IAS 31 JOINT VENTURES

VARIETY OF FORMS - JOINTLY CONTROLLED OPERATIONS, ASSETS, OR


ENTITIES

JOINT CONTROL BY AT LEAST TWO PARTIES MUST BE CONTRACTUALLY


ESTABLISHED
MAY BE SET OUT IN THE ARTICLES OF INCORPORATION OR BYLAWS OF THE
JOINT VENTURE
LESS FORMALLY THROUGH DOCUMENTATION OF MEETINGS BETWEEN THE
VENTURERS

CONTRACTUAL AGREEMENT:

USUALLY IN WRITING
SETS OUT THE GOVERNANCE STRUCTURE OF THE JOINT VENTURE
THE CAPITAL TO BE SUPPLIED BY EACH VENTURER
HOW THE OUTPUT, INCOME, AND EXPENSES WILL BE SHARED
THE PURPOSE AND DURATION OF THE VENTURE

IAS 31 JOINTLY CONTROLLED


OPERATIONS AND JOINTLY
CONTROLLED ASSETS

JOINTLY CONTROLLED OPERATIONS

NO SEPARATE ENTITY ESTABLISHED TO CONDUCT JOINT ACTIVITIES


A VENTURER ENTERS INTO AN AGREEMENT WITH ONE OR MORE VENTURERS TO
PRODUCE, MARKET, AND DISTRIBUTE A SPECIFIC PRODUCT
EACH VENTURER PROVIDES ITS SPECIFIC OPERATING EXPERTISE
USED TO TAKE ADVANTAGE OF THE RESOURCES AND ABILITIES OF THE INDIVIDUAL
VENTURERS
EACH MAY AGREE TO USE THEIR OWN ASSETS, INCUR THEIR OWN EXPENSES AND
LIABILITIES, AND FINANCE THEIR OWN REQUIREMENTS

JOINT VENTURE AGREEMENT


SETS OUT HOW REVENUE FROM THE SALE OF THE PRODUCT WORKED ON
TOGETHER IS SHARED
HOW SHAREABLE COSTS ARE TO BE ALLOCATED TO VENTURERS

RECOGNIZED IN THE VENTURERS FINANCIAL STATEMENTS


(A) THE ASSETS THAT IT CONTROLS AND THE LIABILITIES IT INCURS
(B) THE EXPENSES INCURRED AND SHARE OF INCOME EARNED FROM SALE OF GOODS
OR SERVICES BY JOINT VENTURE

THE VENTURER PREPARES NO INVESTMENT-RELATED ADJUSTMENTS

IAS 31 JOINTLY CONTROLLED OPERATIONS


AND JOINTLY CONTROLLED ASSETS

JOINTLY CONTROLLED ASSETS


EACH PARTY TO AGREEMENT TAKES A SHARE OF THE OUTPUT FROM THE ASSET
AND PAYS AN AGREED SHARE OF COSTS INCURRED TO OPERATE IT
EACH VENTURER HAS CONTROL OVER ITS SHARE OF FUTURE ECONOMIC BENEFITS
THROUGH ITS SHARE OF THE ASSET
NO LEGAL OR OTHER ENTITY IS FORMED SEPARATELY FROM THE VENTURERS
THEMSELVES

ACCOUNTING FOR THIS FORM OF JOINT VENTURE IS CONSISTENT WITH ITS ECONOMIC
SUBSTANCE AND USUALLY THE LEGAL FORM OF THE JOINT VENTURE

RECOGNIZED IN THE VENTURERS FINANCIAL STATEMENTS


(A) ITS SHARE OF SPECIFIC JOINTLY CONTROLLED ASSETS AND OF LIABILITIES
INCURRED JOINTLY WITH OTHER VENTURERS
(B) LIABILITIES INCURRED ON ITS OWN
(C) INCOME FROM THE SALE OR USE OF ITS SHARE OF THE OUTPUT OF THE
VENTURE ALONG WITH ITS SHARE OF EXPENSES INCURRED BY THE
VENTURE
(D) EXPENSES IT HAS INCURRED RELATIVE TO ITS INTEREST IN THE VENTURE

IAS 31 JOINTLY CONTROLLED


ENTITIES
JOINTLY CONTROLLED ENTITIES
MAY BE A CORPORATION, A PARTNERSHIP, OR OTHER FORM OF
ORGANIZATION
SEPARATE ENTITY CONTROLS ASSETS OF THE JOINT VENTURE,
INCURS LIABILITIES AND EXPENSES, AND EARNS INCOME
EACH VENTURER USUALLY HAS AN OWNERSHIP INTEREST IN THE
VENTURE AND IS ENTITLED TO A SHARE OF ITS PROFITS OR
OUTPUT
WHEN ORGANIZED, THE INDIVIDUAL VENTURERS CONTRIBUTE
CASH OR OTHER ASSETS IN RETURN FOR AN OWNERSHIP
INTEREST
CONTRIBUTIONS ARE RECOGNIZED BY EACH VENTURER AS AN
INVESTMENT IN THE JOINT VENTURE

JOINTLY CONTROLLED ENTITY RECORDS RECEIPT OF


ASSETS CONTRIBUTED TO IT AND PREPARES AND
PRESENTS FINANCIAL STATEMENTS ON THE RESULTS OF
ITS OPERATIONS AND FINANCIAL POSITION

IAS 31 JOINTLY CONTROLLED ENTITIES

IAS 31 JOINTLY CONTROLLED ENTITIES


VENTURERS ACCOUNTING
CHOICE OF 2 METHODS TO ACCOUNT FOR ITS INVESTMENT
PROPORTIONATE CONSOLIDATION (THE PREFERRED APPROACH)
EQUITY METHOD

ENTITIES THAT MEET ONE OF THE FOLLOWING THREE CONDITIONS ARE


EXCLUDED FROM APPLYING ONE OF THE TWO METHODS:
1. INTEREST IN THE JOINTLY CONTROLLED ENTITY IS CLASSIFIED AS HELD
FOR SALE UNDER IFRS 5
2. VENTURER MEETS EXCEPTION IN IAS 27.10 THAT QUALIFIES PARENT WITH
AN INTEREST IN A JOINTLY CONTROLLED ENTITY NOT TO PRESENT
CONSOLIDATED FINANCIAL STATEMENTS
3. ALL OF THE FOLLOWING APPLY:
(A) VENTURER IS A WHOLLY OWNED SUBSIDIARY OR PARTIALLY OWNED
SUBSIDIARY WHOSE OTHER OWNERS HAVE BEEN INFORMED AND DO
NOT OBJECT TO THE VENTURER NOT APPLYING THE PROPORTIONATE
CONSOLIDATION OR EQUITY METHOD
(B) VENTURER DOES NOT HAVE PUBLICLY TRADED DEBT OR EQUITY
INSTRUMENTS
(C) THE VENTURERS ULTIMATE OR INTERMEDIATE PARENT PRODUCES
CONSOLIDATED FINANCIAL STATEMENTS FOR PUBLIC USE THAT COMPLY
45
WITH IFRSS

IAS 31 JOINTLY CONTROLLED ENTITIES

PUBLIC PRIVATE PARTNERSHIP


THROUGH JOINT VENTURE : A
GUIDANCE
A JV INVOLVES RISK SHARING.
SHOULD NOT BE SEEN AS A DELIVERY MODEL TO
TRANSFER RISK TO THE PRIVATE SECTOR
IF RISK TRANSFER RATHER THAN RISK SHARING IS
SOUGHT, USE CONTRACTUAL MECHANISM
JVS ARE USUALLY ESTABLISHED BECAUSE THE PARTIES
HAVE COMPLEMENTARY OBJECTIVES
J.V TO BE TESTED THROUGH THE BUSINESS DEV. AND
COMPETITIVE PROCUREMENT PROCESSES. IF THIS
ALIGNMENT OF INTERESTS IS NOT PRESENT, A JV IS
UNLIKELY TO BE THE BEST STRUCTURE TO USE.

PUBLIC PRIVATE PARTNERSHIP


THROUGH J.V : A GUIDANCE
JOINT VENTURE
VEHICLE
SHARING RISKS
JOINT MANAGEMENT OF
RISK
SHARING BENEFITS
COMPLEMENTARY
OBJECTIVES
ALIGNMENT OF
INTEREST

CONTRACT JV
CLEARLY DEFINED
OUTPUTS
LIMITED SCOPE
NO POTENTIAL FOR
GROWTH OR
DIVERSIFICATION
RISK IS TRANSFERRED
WANT TO CRYSTALLISE A
CASH SUM

PUBLIC PRIVATE PARTNERSHIP


THROUGH J.V : A GUIDANCE
JOINT VENTURE VEHICLE OPTIONS :
COMPANY LIMITED BY SHARES
COMPANY LIMITED BY GUARANTEE (MAY
ALSO BE A CHARITY)
LIMITED LIABILITY PARTNERSHIP
LIMITED PARTNERSHIP
GENERAL PARTNERSHIP
INDUSTRIAL AND PROVIDENT SOCIETY
COMMUNITY INTEREST COMPANY
HYBRID

PUBLIC PRIVATE PARTNERSHIP THROUGH


JOINT VENTURE : A GUIDANCE
CONTRACT J.V
CHARACTERISTICS
CAN LOOK VERY SIMILAR TO
ANY OTHER JV STRUCTURE,
BUT WITHOUT THE VEHICLE

CONTRACT J.V
PROS AND CONS
TAX TRANSPARENT

CAN BE SIMPLE

CANNOT RAISE DEBT AND


GRANT SECURITY

NO SUPPORTING BODY OF
LAW THEREFORE ALL
MATTERS NEED TO BE
CLEARLY SET OUT

NEED TO BE
COMFORTABLE WITH
BALANCE SHEET OF
COUNTERPARTY

PUBLIC PRIVATE PARTNERSHIP


THROUGH J.V : INITIAL CONCEPTUAL
FRAMEWORK GOVT/PSU
INVESTMENT/CAPITAL
GOVT/PSU

CONTRACT/
LAND
INTERESTS
J.V VEHICLE

EXTERNAL FUNDING

RIVATE SECTOR PARTNER

SUPPLY CHAIN

OTHER ENTITIES

PUBLIC PRIVATE PARTNERSHIP


THROUGH J.V : ALTERNATE FRAMEWORK
PRIVATE SECTOR PARTNER

GOVT/PSU

LIMITED
COMPANY

SPV 1

SPV 2

PSP = Private sector partner


SPV = Special purposes
vehicle

SPV 3

PUBLIC PRIVATE PARTNERSHIP THROUGH J.V : A PUBLIC LIMITED CO.


FRAMEWORK

CHARACTERISTICS

PROS AND CONS

GOVERNANCE IN
SHAREHOLDERS
AGREEMENT AND ARTICLES
OF ASSOCIATION

SIMPLE GOVERNANCE
STRUCTURE

INVESTORS OWN VOTING


SHARES

ABLE TO RAISE THIRD PARTY


DEBT AND GRANT SECURITY

RUN BY BOARD OF
DIRECTORS

CREATES TAX INEFFICIENCY

SUBJECT TO COMPANIES ACT


2006

UNIVERSALLY ACCEPTED

ALLOWS EXIT AND THIRD


PARTY INVESTMENT

PUBLIC PRIVATE PARTNERSHIP


THROUGH JOINT VENTURE : CHECK LIST
BUSINESS CASE
COMMERCIAL ENTITY?

POWERS, APPROVALS, CONSENTS


PROCUREMENT, STATE AID, ETC.

ACCOUNTING, GOVERNANCE, ETC.

GOVERNANCE DOCUMENTS

CONTRACT

SINCE 2000.

(ANDERSON & SEDATOLE, 06)


Decline:
9/11; SOX;
economic
conditions

GOVERNANCE: ALLIANCES VS.


JOINT VENURES

CASE STUDIES

RELIANCE INFOCOM- FLAG

FLAG BANKRUPT BUT WITH SOUND


ASSET BASE
FLAG MERGED WITH PRIVATE LIMITED
SUBSIDIARY OF RELIANCE INFOCOM
PIVOTALS COMPETING BID
RELIANCE NEUTRALIZED THROUGH
VOTING AGREEMENT WITH HARBERT
AND TRIAGE.

CASE STUDIES
BHARTI- ROTHSCHILD

50-50 JV TO EXPLOIT INADEQUATE


EXPLOITATION OF AGRICULTURAL SECTOR
DIVERSIFICATION EXERCISE PROMPTED BY
FAVORABLE TAX AND DUTY REGIMES
BY AVAILABILITY OF SURPLUS FUNDS
HR TO SPARE FROM WIDE SCALE OUTSOURCING
OF OWN ACTIVITIES.

CONFINED TO BACK-END OF FOOD


RETAILING BECAUSE OF FDI LIMITATIONS.

US INDUSTRIAL R&D BY SIZE OF ENTERPRISE

COMPANY SIZE
<1000
EMPLOYEES

1981

1989

1999

2001

4.4%

9.2%

22.5%

24.7%

1,000 4,999

6.1%

7.6%

13.6%

13.5%

5,000 9,999

5.8%

5.5%

9.0%

8.8%

10,000 24,999

13.1%

10.0%

13.6%

13.6%

25,000+

70.7%

67.7%

41.3%

39.4%

SOURCE: OPEN BUSINESS MODELS: HOW TO THRIVE IN THE NEW INNOVATION LANDSC
BY HENRY CHESBROUGH (HARVARD BUSINESS SCHOOL PRESS, 2006), PAGE 22.

P&G PHARMA PARTNERING PHILOSOPHY


THE REAL TEST OF A SUCCESSFUL
ALLIANCE NEGOTIATION IS NOT A
SIGNED CONTRACT
WITH ALL DESIRED TERMS AGREED IN
FULL
IT IS WHETHER THE COMPANIES
SHARE A COMMON VISION, FEEL LIKE
THE DEAL IS FAIR, ARE
CONTRACTUALLY
MOTIVATED TO DO WHATS RIGHT,
AND CAN WORK TOGETHER OVER
THE NEGOTIATE
LONG TERM!
FOR IMPLEMENTATION

P&G PHARMAS STRATEGIC


MODEL
ACQUIRE, DEVELOP & MARKET(CONNECT &
DEVELOP)
STRATEGIC CHOICE TO EXCLUSIVELY
PARTNER, LICENSE OR ACQUIRE ALL OF OUR
NEW DRUG CANDIDATES
HOW? OUR NEW DRUGS WILL COME FROM A
NETWORK OF ACADEMIA, BIOTECH AND
PHARMACEUTICAL INDUSTRY RELATIONSHIPS
RESTRUCTURED OUR R&D AND COMMERCIAL
ORGANIZATIONS TO EXCEL AT IDENTIFYING,
EVALUATING, NEGOTIATING AND MANAGING
LONG-TERM, MUTUALLY BENEFICIAL
PARTNERSHIPS.

P&G PHARMAS STRATEGIC MODEL


THE BEST OF BOTH WORLDS
MARKETING
EXPERTISE AND
UNIQUE INSIGHTS
OF THE WORLDS
LARGEST
CONSUMER
COMPANY
PERSONAL TOUCH
OF A SMALL
PHARMACEUTICAL
COMPANY WITH
DEEP EXPERIENCE
AND PROVEN

YOU & P&GTHINK OF THE POSSIB

P&G PHARMAS STRATEGIC


MODEL
OUR NEW R&D
STRUCTURE
(JULY
ACQUIRE,
DEVELOP
& MARKET
2006)

WE ELIMINATED OUR DISCOVERY


ORGANIZATION (300 PEOPLE) AND MOST OF
THEIR LABORATORIES

WE RETAINED OUR COMPLETE DEVELOPMEN


ORGANIZATION (650 PEOPLE).
WE ESTABLISHED A SEARCH & EVALUATE
ORGANIZATION (35 SCIENTISTS) WHO HAVE
RESPONSIBILITY FOR HELPING FIND AND
SCREEN LICENSING OPPORTUNITIES

PROBLEMS OF JOINT VENTURE

VALUATION PROBLEM
TRANSPERANCY
CONFLICT RESOLUTION
DIVISION OF MANAGEMENT RESPONSIBILTY
CHANGES IN OWNERSHIP SHARES
DIVIDEND POLICY
DEGREE OF INDEPENDENCE TO MANAGEMENT
MARKETING & STAFFING ISSUES
CULTURAL PROBLEM

REASONS FOR FAILURE IN JOINT


VENTURE
INADEQUATE PLANNING PRIOR TO J.V FORMATION
THE HOPED FOR TECHNOLOGY NEVER ARRIVED
PARTNERS MARKET ARE DISAPPEARING
PEOPLE WITH EXPERTISE IN ONE COMPANY REFUSED TO
SHARE KNOWLEDGE WITH THEIR COUNTERPARTS.
AGREEMENT COULD NOT BE REACHED ON APPROACHES TO
ATTAIN THE BASIC OBJECTIVES OF THE JOINT VENTURE
MANAGERS FROM EACH PARTNER COMPANY DO NOT MANAGE
TO WORK WITH ONE ANOTHER IN THE JOINT-VENTURE,
PARENT COMPANIES ARE UNABLE TO SHARE CONTROL OR
COMPROMISE ON DIFFICULT ISSUES
MANAGERS OF THE JOINT-VENTURE DO NOT MANAGE TO
WORK WITH THOSE OF PARENT COMPANIES.

EXAMPLES OF FAILED JOINT


VENTURES

LUFTHANSA & MODI GROUP


TATA IBM
KINETIC HONDA
LML PIAGGIO
DAEWOO PROCTER GAMBLE

EXTRA
SLIDES

LAWS GOVERNING BUSINESS IN


INDIA
THE COMPANIES ACT, 1956
ARBITRATION AND
RECONCILIATION ACT, 1996
THE COMPETITION ACT, 2002
THE FOREIGN EXCHANGE
MANAGEMENT ACT, 1999
INCOME TAX ACT, 1961
CENTRAL SALES TAX, 1956
CENTRAL EXCISE ACT, 1944
INFORMATION TECHNOLOGY
ACT, 2000
COPYRIGHT ACT, 1957
TRADEMARKS ACT, 1999

GEOGRAPHICAL
INDICATIONS OF GOODS
ACT, 1999
INDIAN PATENTS ACT, 1970
DESIGNS ACT, 2000
INDUSTRIAL DISPUTES
ACT, 1947
WORKMEN COMPENSATION
ACT, 1956
EPF & MP ACT 1952
CONSUMER PROTECTION
ACT, 1956

TAX REGIME OF INDIA


DIRECT TAX
CORPORATE TAX DOMESTIC COMPANY 33.66%
FOREIGN COMPANY 41.82%
DIVIDEND TAX COMPANY 16.995% (W.E.F. APR 1,
2007)
MONEY MARKET MUTUAL FUND 25%
MINIMUM ALTERNATE TAX
CAPITAL GAINS
SECURITIES TRANSACTION TAX
TAXATION OF KNOW HOW FEES IN THE HANDS OF
FOREIGN COMPANIES ROYALTIES/TECHNICAL FEES
PAYABLE TO NON-RESIDENTS ARE TAXED ON NET BASIS.

TAX REGIME OF INDIA


DIRECT TAX(CONTD)
FRINGE BENEFIT TAX (FBT)
- ESOPS BROUGHT UNDER FBT (W.E.F. APR 1,
2007)
BANKING CASH TRANSACTIONS TAX 0.1% TO
APPLY FOR WITHDRAWALS OVER INR 50,000
DOUBLE TAX AVOIDANCE AGREEMENTS (DTAAS)
OTHER DIRECT TAX WEALTH TAX
IMPORTANT CONCEPT TRANSFER PRICING AND
DETERMINATION OF ARMS LENGTH PRICE (ALP)

TAX REGIME OF INDIA


INDIRECT TAX
CUSTOMS DUTY
CENVAT (EXCISE
DUTY)
SALES TAX
VALUE ADDED TAX
SERVICE TAX
TURNOVER TAX

PURCHASE TAX
EDUCATION CESS
OCTROI /ENTRY
TAX
STAMP DUTY
R&D CESS
WORKS CONTRACT
TAX

ADVANTAGES OF JOINT
VENTURE

A WILL TO BUILD COMMERCIAL STRATEGIES:


SETTING UP
OF DISTRIBUTIONS NETWORKS.
A WILL TO DEVELOP ONES CAPACITIES.
TECHNOLOGICAL REASONS: KNOW-HOW
ACQUISITION.
POSSIBILITY TO REACH ECONOMIES OF SCALE:
REDUCTION OF COSTS
DESIRE TO DIVERSIFY ONES PRODUCT/SERVICE
RANGE
RESEARCHING AN ACCELERATION EFFECT FROM
INTERNATIONAL DEVELOPMENT
STATUTORY REASONS IMPOSED BY THE HOST
COUNTRY

DEFINITIONS
DIFFERENT EXPRESSIONS:
JOINT VENTURE;
STRATEGIC ALLIANCE;
TRUE OR COMMERCIAL JOINT
VENTURE;
PARTNERING AGREEMENT.

73

KEY CHARACTERISTICS OF A
JOINT VENTURE
A CONTRIBUTION BY THE PARTIES OF MONEY,
PROPERTY, EFFORT, KNOWLEDGE, SKILL AND
OTHER ASSETS TO A COMMON UNDERTAKING;
A JOINT PROPERTY INTEREST IN THE SUBJECT
MATTER OF THE VENTURE;
A RIGHT OF MUTUAL CONTROL OR
MANAGEMENT OF THE ENTERPRISE;
EXPECTATION OF PROFIT, OR THE PRESENCE OF
A VENTURE AS IT IS SOMETIMES CALLED;
A RIGHT TO PARTICIPATE IN THE PROFITS; AND
MOST USUALLY, LIMITATION OF THE OBJECTIVE
TO A SINGLE PROJECT.
74

MOTIVATIONS FOR JOINT VENTURE


AN INDIVIDUAL PARTNERSHIP OR A CORPORATION MAY
CONSIDER A JOINT VENTURE FOR A VARIETY OF REASONS:

A NEED TO ESTABLISH MARKET PENETRATION;


AN OPPORTUNITY TO SHARE R&D EXPENSES OR TO
ACCESS NEW TECHNOLOGY;
TO GAIN ECONOMIES OF SCALE;
TO GAIN ACCESS TO MORE COMPETITIVE
MANUFACTURING COSTS;
TO FACILITATE MARKET ACCESS IN A NEW TERRITORY;
TO GAIN ACCESS TO SKILLS;
TO ADVANCE NEW REGULATED PRODUCTS THROUGH
LOCAL REGULATORY AGENCIES;
AS A DEFENSIVE MECHANISM AGAINST COMPETITION.
75

BUILDING OF THE
INTERNATIONAL STRATEGY
UNDERSTAND THE NATURE OF THE COMPETITION
AT INTERNATIONAL SCALE

SELECT TARGET COUNTRIES

CHOOSE THE
APPROPRIATE ENTRY
MODES FOR EACH
COUNTRY

CHOOSE THE PLACE


WHERE VALUE CHAIN
COMPONENTS WILL
BE SET UP
ADAPT THE
ORGANIZATION

USING THE ATTRACTIVENESS ASSET


MATRIX FOR THE CHOICE OF THE
COUNTRY

BY THE
COMPANY
OF THE ASSETS
WHICH ARE
NECESSARY
FOR THE
TARGETED
MARKET

AVERAGE

CONTROL

WEAK

DEGREE OF

STRONG

STRONG

AVERAGE

WEAK

STRATEGIC
MARKETS

TACTICAL
MARKETS

PRESENCE MODES AND


COMPLEXITY OF THE SOLUTIONS
DEGREE OF
DEGREE OF
RISK
FINANCIAL INVOLVEMENT

PRESENCE
MODES

DEGREE OF
SYMBIOSIS / PARTNER

DEGREE OF
CONTROL

MANAGERIAL KNOW-HOW USED


SOURCE: JR 96

HOW TO MEASURE THE


SUCCESS
OF A JOINT-VENTURE?
(1/2)
DETERMINING THE DEGREE OF SUCCESS
OF A JOINT-VENTURE IS DIFFICULT,
AS EACH PARTNER HAS ITS OWN PERCEPTION
OF PERFORMANCE CRITERIA.

THE PERFORMANCE OF A JOINT-VENTURE


CAN ONLY BE MEASURED BY THE
SIMULTANEOUS SATISFACTION OF EACH
PARTNER, WHATEVER ITS EXPECTATIONS
MIGHT BE.

SCHAAN AND NAVARRE, 1988

HOW TO MEASURE THE


SUCCESS
OF A JOINT-VENTURE? (2/2)
3

BECAUSE IT IS THE EASIER TO MEASURE, THE


MOST RECOGNIZED CRITERIA IS THE DURATION
OF THE JOINT-VENTURE. IT REPRESENTS A
GOOD SIGN OF ITS STABILITY.

HERBERT AND MORRIS, 1988

HOW TO MEASURE THE


SUCCESS
OF A JOINT-VENTURE? (2/2)
3

BECAUSE IT IS THE EASIER TO MEASURE, THE


MOST RECOGNIZED CRITERIA IS THE DURATION
OF THE JOINT-VENTURE. IT REPRESENTS A
GOOD SIGN OF ITS STABILITY.
HERBERT AND MORRIS, 1988

MEASURING THE PERCEIVED SATISFACTION,


FLEXIBILITY, LEARNING LEVEL, AND THE PARENTAL
CONTROL CAN ALSO BE USED TO EVALUATE THE
PERFORMANCE OF A JOINT-VENTURE.
LYLES AND BAIRD, 1994

MERCK (USA) : JOINT VENTURES


ASTRAZENECA LP (NEXIUM, PRILOSEC)
$1.9 BILLION PLUS $391.5 MILLION IN PREFERENTIAL RETURN

J&J (DEV. & MARKET NON-PRESCRIPTION MEDICINES IN


US)
$445.8 MILLION

AVENTIS PASTEUR (DEV. & MARKET VACCINES IN EUR)


$669.0 MILLION

MERIAL (JV W/ AVENTIS; PHARMA/VACCINES FOR


ANIMALS)
$1.84 BILLION

SCHERING-PLOUGH (CHOLESTEROL MGMT


ZETIA/EZETROL)
$469.4 MILLION

BRISTOL MYERS SQUIB(USA)


SUCCESSFUL PAST
PARTNERSHIPS
SANOFI-SYNTHELABO
CO-DEVELOPED AVAPRO AND PLAVIX

OTSUKA PHARMACEUTICAL
CO-DEVELOPED ABILIFY

IMCLONE SYSTEMS
CO-DEVELOPED ERBITUX

BRISTOL MYERS SQUIB(USA) :


CURRENT STRATEGIC PARTNERSHIPS
MERCK & CO.
CO-DEVELOPING AND CO-PROMOTING
MURAGLITAZAR
CORGENTECH
CO-DEVELOPING E2F DECOY
FLAMEL TECHNOLOGIES S.A.
CO-DEVELOPING BASULIN
SOLVAY PHARMACEUTICALS
CO-DEVELOPING SLV319
PIERRE FABRE MDICAMENT S.A.
CO-DEVELOPING JAVLOR

MERCK(USA) : JOINT VENTURES II


BRISTOL MYERS SQUIBB (APR. 04)
JOINTLY DEVELOP CLINICAL AND
MARKETING STRATEGY FOR A DIABETES
DRUG (MURAGLITAZAR ~PHASE III)
DEVELOPMENT AND
COMMERCIALIZATION COSTS TO BE
SHARED EQUALLY
H. LUNDBECK A/S (FEB. 04)
EXCLUSIVE DEVELOPMENT AND
COMMERCIALIZATION OF A SLEEP
DISORDER DRUG (GABOXADOL ~PHASE

P&G Pharmas Strategic Model


Why will it work?

Strategically focused on 3 therapeutic areas where the patient plays an activ


role in managing their health

Musculoskeletal

Osteoporosis, Rheumatoid Arthritis and Osteoarthritis

Gastrointestinal

Ulcerative Colitis, Crohns disease, IBS and GERD

Womens Health

Overactive Bladder, Incontinence, Menopausal symptoms

* Corporate interest: hair growth and skin aging

Recent dealsP&G and Nastech


Feb 2006

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Recent dealsP&G and Ablynx


April 2006

Recent dealsP&G & ARYx


July 2006

Trends in IOR use


Anderson & Sedatole (2003): US firms 1985-2000

Sector distributions

Anderson & Sedatole (2003)

Growth in
service;
manufacturing
declines

Emerging economies: BRIC 1986-2005


I&C: mainly
manufacturing
Manufacturing
declines;
growth in
service

IORs types Dutch firms 06 (N=439)

Number of different IORS


21% has
no IORs

18% is
involved in
3 types

Automatic fill
function?

closing thoughts
the law is there to be used
form should follow function
focus on your objectives from the beginning
be prepared to see the landscape change
keep an open mind to all options
contractual flexibility
a JV vehicle can be made to look like a
contract
a contract can have characteristics of a joint
venture vehicle
40895963

II. Business case for Joint Ventures

(Contd)

Crucial to understand business


objectives of
client, because the structure of the
deal is sui
generis and does not typically follow
any preestablished format.

96

III. Letter of Intent - Key elements

Main goals of LOI:


ensure that all parties agree on general parameters of
the project;
avoid any free looks (especially given strategic fit of
parties);
create binding confidentiality and exclusivity
obligations.

97

III. Letter of Intent - Key elements

(Contd)

In the context of an international joint venture, a


letter of intent might include the following:
1. the object or goals of the proposed venture;
2. the geographic limitations and duration of the project;
3. the legal structure;
4. the management structure including representation of parties
on boards of directors or operating committee;
5. the contribution of the parties relating to material, capital,
know-how, facilities, labour, training, allocation of revenue
and profits, etc.;

98

III. Letter of Intent - Key elements

(Contd)

6. required internal approvals such as boards of directors


and shareholders;
7. required external approval such as regulatory bodies
and third party consents;
8. exclusivity and confidentiality covenants which may
allow for due diligence, access and control of
documents;
9. requirements for public announcements;
10. timetable;

99

III. Letter of Intent - Key elements

(Contd)

11. a general outline of the definitive joint venture


agreement as well as who is to prepare the first draft
and specify dates for execution and approval;
12. a requirement of good faith negotiations;
13. disclaimer clause, i.e. the non-binding nature of
document except for specified clauses
(i.e. Confidentiality and expense);
14. termination, drop dead dates;
15. the responsibility for expenses incurred.

100

IV. Possible structures &


Structural issues

The structure that is selected will be a function of a


number of factors including:
1. the nature of the project. Does it require short-term or
passive participation or does it involve complex business
relations spanning a lengthy period of time?
2. the nature of the participants, in particular, their financial
strength and the resources they bring to the project;
3. is the project a short-term or long-term investment?
4. protection from third-party liability;
5. tax planning;
6. flexibility and whether the chosen entity is recognized in
different jurisdictions.

101

IV. Possible structures &


Structural issues

(Contd)

Structural alternatives:
1. Corporation
2. Partnership: (A) general partnership
(B) limited partnership
(C) undeclared partnership
3. Co-ownership
4. True or Commercial Joint Venture

102

IV. Possible structures &


Structural issues

(Contd)

1. Corporation:
established legal framework;
Shareholders Agreement key;
limited liability;
tax losses trapped (especially relevant for a start-up);
easier to get external financing.

103

IV. Possible structures &


Structural issues

(Contd)

2(A) General Partnership:


established legal framework;
tax losses can be used by partners;
more difficult to get financing;
joint liability of partners;
no limited liability;
no dual-level taxation, unlike corporations.

104

IV. Possible structures &


Structural issues

(Contd)

2(A) General Partnership - Taxes:


The attractiveness of a partnership as a vehicle for a
strategic alliance or joint venture is that it is the partners,
rather than the partnership, that are subject to taxation.
Thus, it is fiscally transparent and avoids the dual level of
taxation that applies to a corporation and its shareholders.
It also avoids trapping any anticipated start-up losses in a
corporate vehicle which may not make the best use of
such losses.

105

IV. Possible structures &


Structural issues

(Contd)

2(A) General Partnership - Liability:


Each partner is jointly liable for all the debts and
obligations of the partnership incurred while they are a
partner. All partners are also jointly and severally
responsible for the loss or injury suffered by a third party
as a result of the wrongful act or omission of any partner
acting either in the ordinary course of business or within
the scope of their apparent authority.

106

IV. Possible structures &


Structural issues

(Contd)

2(A) General Partnership - Transfers:


Where the strategic alliance or joint venture contemplates
that a specific property of a participant will be held in
connection with the alliance and the arrangement in law
constitutes a partnership, the participant will be deemed to
dispose of the entire interest in the property to the
partnership. This disposition will occur at fair market
value, unless the transaction is eligible for a rollover
election. Similarly, when a participant withdraws from the
alliance or joint venture, or the alliance or joint venture
terminates, the entire interest in the property will be
deemed to be disposed of at fair market value unless a
rollover is available.

107

IV. Possible structures &


Structural issues

(Contd)

2(B) Limited Partnership:

can have limited liability (for limited partner) while keeping


tax advantages of partnership;
limited partner cannot participate in management
(Delaware exception);
deductible losses of limited partner subject to at risk
rules.

108

IV. Possible structures &


Structural issues

(Contd)

2(B) Limited Partnership:


Since the general partner must have unlimited liability, the
general partnership is often structured as a thinly
capitalized single purpose corporation with few assets, a
nominal entitlement to receive a share of the profits of the
limited partnership and a nominal interest in the limited
partnerships assets.

109

IV. Possible structures &


Structural issues

(Contd)

2(B) Limited Partnership:


There are jurisdictions, such as Delaware, which permit
significant involvement by a limited partner in a limited
partnership without threatening such limited partners limited
liability status. It is therefore possible to form a limited
partnership under Delaware law consisting of corporations
formed under other legislation with favourable attributes (for
example, under New-Brunswick corporate law, there is no
resident Canadian director requirements and there is the ability
to waive financial assistance restrictions) and subsequently to
register such limited partnership under extra-provincial
legislation (e.g. Ontario Limited Partnership Act).

110

IV. Possible structures &


Structural issues

(Contd)

3. Co-ownership:

Not very versatile. Often used for real-estate or mining joint


ventures;

Highly codified in Qubec.

111

IV. Possible structures &


Structural issues

(Contd)

4. Contractual or True Joint Venture:

no distinct legal entity is created;

careful to distinguish it from partnership to avoid joint


liability of partners.

112

IV. Possible structures &


Structural issues

(Contd)

In structuring a Contractual or true joint venture, it is


necessary to examine the critical elements of a partnership and
determine how the joint venture can be structured so as to avoid
these elements:
1. a partnership is concerned with carrying on a business whereas a
joint venture is usually restricted to a specific project. It is the
requisite continuity of the partnership which distinguishes a
partnership from a joint venture;
2. the agreement should provide the parties with an opportunity to
deal with its undivided interest in the venture with greater
latitude;
3. a contractual or true joint venture agreement should state that
the parties do not intend to form a partnership.

113

IV. Possible structures &


Structural issues

(Contd)

4. The agreement should not provide for a calculation of profit or loss


at the partnership level in the distribution of such profit or loss
to the parties but should provide for the allocation of gross
revenues and expenses to each of the joint venturers.

114

IV. Possible structures &


Structural issues

(Contd)

New (Post-ENRON) Accounting Rules on Variable Interest


Entities:
What types of arrangements are affected?
joint ventures, partnerships or equity method investees, where the
voting interests are not proportionate to the economic interests;
A VIE is an entity in which:
the equity is not sufficient to permit that entity to finance its
activities without external support; or
equity investors lack either voting control, an obligation to absorb
expected losses, or the right to receive expected residual returns.

115

IV. Possible structures &


Structural issues

(Contd)

The guideline requires enterprises to identify VIEs in which they


have an interest, determine whether they are the primary
beneficiary of such entities and, if so, to consolidate them in
their financial statements.
A primary beneficiary is an enterprise that will absorb a majority
of a VIEs expected losses, receive a majority of its expected
residual returns, or both. A primary beneficiary or other entity
having a significant variable interest in a VIE will provide
disclosure to enable the users of financial statements to
understand and evaluate that interest.

116

V. Drafting issues
(General)
The following issues deserve particular
consideration in a joint venture context:
1. Continuous agreement (parties need to
continue to live together);
2. Financing (default provisions);
3. Non-compete / fiduciary obligations;
4. Intellectual property rights (including
improvements);
5. Transfer restrictions;
6. Termination.

117

V. Drafting issues
(General)

(Contd)

3. Non Compete / fiduciary obligations


The Supreme Court of Canada decision in LAC Minerals Ltd. v.
International Corona Resources Limited established that parties
to a joint venture may owe a duty of confidentiality to their coventurers.
Joint Venturers also have fiduciary obligations including
prohibitions against self-dealing, competing with the joint
venture and making secret profits, all of which are commonly
wrapped up in the phrase good faith and loyalty.
This makes it very important to define that competitive activities
are permissible.

118

V. Drafting issues
(General)

(Contd)

4. Intellectual Property Rights (including improvements)


Among other things, the agreement should specify the extent to
which:
rights to the original technology are to be reassigned or licensed
back to the original owner;
rights, if any, to such original technology are to be cross-licensed
between partners or licensed or sublicensed to the joint venture
entity if it continues in its existence;
rights to jointly developed technology are to be licensed
sublicensed to each of he partners by the joint venture entity; or
which of the parties in entitled to improvements and
developments in the technology.

119

V. Drafting issues
(General)

(Contd)

5. Transfer Restrictions:
One party may want to be able to terminate the deal if the
other is taken over by or sells its rights in its technology to a
company considered unfriendly. The agreement should allow
parties who feel threatened by new owners to bail out of the
arrangement, particularly if the new owner is a direct
competitor.

120

V. Drafting issues
(General)

(Contd)

6. Termination:
It has been estimated that over half of joint ventures and
strategic alliances last less than 10 years, with one particular
study estimating that 70% of all joint ventures and strategic
alliances terminate within three and one-half years.

121

V. Drafting issues
(General)

(Contd)

The following is a list of possible triggering events


which could begin the dissolution of a joint venture:
1. a breach by the other party of any of the provisions of the joint
venture agreement in any respect and the continuance of such
breach for a certain period after one party has given notice in
writing to the other party demanding the correction thereof;
2. the bankruptcy, insolvency, reorganization or an admission by a
party of its inability to pay its debts generally as they become due;
3. a change in control or the beneficial ownership of 50% or more of
the voting securities or interests in the other party or in any person
directly or indirectly controlling the other party without the consent
of the joint venturing party;

122

V. Drafting issues
(General)

(Contd)

4. in the case of a technology joint venture, the failure of the


joint venture company or of the other party to respect the
quality control standards or norms or the maintenance and
after-sale services standards of the party providing the
technological expertise;
5. a hardship or change in circumstances clause; and
6. as of a certain date after the start of the joint venture, the
inability for one party to receive dividends or returns from
the joint venture in each fiscal year in an amount sufficient
to constitute a certain agreed minimum return on
investment.

123

VI. Drafting clauses


(International Joint Venture)
There are other features of a joint venture agreement which are
more important or indeed unique to international joint ventures
and these include the following:
1. political risk may require some form of political risk insurance
and/or local partner (Export Development Canada);
2. tax considerations including the maximization of locally recognized
tax deductible items and the repatriation of profits;
3. U.S. extra-territorial legislation (e.g.: Helms-Burton Act in relation
to trade with Cuba, other U.S. legislation restricts trade with
countries such as Iran, Iraq, Lybia, the Balkan Region, Syria,
Zimbabwe, Myanmar, North Korea, Sudan, Liberia);

124

VI. Drafting clauses


(International Joint Venture)

(Contd)

4. Canadas Corruption of Foreign Officials Act;


5. dispute resolution mechanism;
6. choice of applicable law;
7. source of financing;
8. language of the agreement and communication;
9. foreign ownership restrictions;
10. protection of intellectual property rights.

125

VI. Drafting clauses


(International Joint Venture)

(Contd)

3. U.S. Extra-Territorial Legislation:


To the extent the joint venture is with a US co-venturer,
whether in the US or elsewhere, consideration should be
given to the wide range of responsibilities imposed on
nonUS corporations by the extra-territorial application of US
law.
For example, the entering into in the US or with a
US co-venturer of some form of corporate joint venture
may
bring the Canadian parent company within the ambit of
US
legislation.
126

VI. Drafting clauses


(International Joint Venture)

(Contd)

6. Choice of Applicable Law:


Extracts form draft opinion of local counsel in the Middle-East::
There is currently no established system of precedent that would be
binding on the Courts within . If it was ought to enforce any of the
Documents in the Courts, the said Courts may take account of the
terms of the Civil Code and the Commercial Code.
In the light of this, it is difficult to forecast with any degree or certainty
how
any of the Documents would be interpreted and applied by the Courts if
proceedings were commenced before it; much would depend upon the
facts of a particular case, the ambiguity (or absence thereof) of the terms
of the document in question, and the then current legislation. We advise
that if the Documents were ever considered by the Courts, a number of
the
issues that might be raised therein might be considered for the first time.

127

VI. Drafting clauses


(International Joint Venture)

(Contd)

6. Choice of Applicable Law:

certain issues may only be resolved under specific laws (such


as corporate matters related to the joint venture entity will be
subject to the laws of the jurisdiction of incorporation);

proving chosen law in the foreign court may be difficult and


costly;

even if the court is willing to apply the laws of another


jurisdiction as a general matter, it may still require that the
parties choice of law is not entirely arbitrary;

local laws of general application will always apply to the joint


venture.

128

VI. Drafting clauses


(International Joint Venture)

(Contd)

6. Choice of Applicable Law:


e.g.: Peoples Republic of China
There are 2 types of joint venture investment vehicles which can be
utilized
by foreigners in the PRC: Sino-Foreign Equity Joint Ventures or Sino
Foreign Cooperative Joint Ventures established under the Sino-Foreign
Cooperative Joint Venture Law of 1988. Cooperative joint ventures may
be
organized either with limited liability or in a partnership type structure.
PRC
regulations do also provide for joint stock companies, but it is one of
the
joint venture vehicles which is most used.

several European and Asian countries also have legislative


framework dealing with Joint Ventures specifically.

129

VI. Drafting clauses


(International Joint Venture)

(Contd)

7. Sources of Financing:
Sources of financing for a joint venture project in a developing
country can
come from the World Bank Group (consisting mainly of the World
Bank
and the International Finance Corporation); regional development
banks,
such as the European Bank for Reconstruction and Development,
the
Asian Development Bank, the African Development Bank and the
InterAmerican Development Bank; country-oriented development
banks, such
as, the Eximbank in the U.S. and Export Development
Corporation in
Canada; or privately owned development institutions such as
PICA, in Asia
and the ADELA Group, in Latin America.
130

VI. Drafting clauses


(International Joint Venture)

(Contd)

10. Protection of Intellectual


Property Rights
In the context of an international technology joint
venture,
aside from the typical due diligence and the
reputation /
relationship due diligence discussed above, it would
also be
prudent to examine the intellectual property
protection of
technology rights in the country of the proposed
partner and
where the joint venture is going to carry on business,
to
131

FOREIGN DIRECT
INVESTMENT POLICY OF
INDIA
1. AUTOMATIC ROUTE
2. APPROVAL ROUTE(FIPB)

GUIDELINES ON ISSUANCE OF GDR,


ADR & FCCB BY INDIAN COMPANIES
INDIAN COMPANIES LISTED ON THE STOCK
EXCHANGE ARE ALLOWED TO RAISE CAPITAL
THROUGH GDRS/ADRS/FCCBS.
FOREIGN INVESTMENT THROUGH
GDRS/ADRS/FCCBS IS ALSO TREATED AS FDI.
ISSUE OF GDRS/ADRS DOES NOT REQUIRE
ANY PRIOR APPROVALS EXCEPT WHERE THE
FDI AFTER SUCH ISSUE WOULD EXCEED THE
SECTORAL CAPS, IN WHICH CASE PRIOR
APPROVAL OF FIPB WOULD BE REQUIRED.
ISSUE OF FCCBS UPTO USD 500 MILLION ALSO
DOES NOT REQUIRE ANY PRIOR APPROVALS