How Joint Venture Groups Work
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The Reason for a Joint Venture
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A joint venture begins by determining the reason for it. Companies may decide to team up, or enter a joint venture to pool expertise for research and development purposes. Expanding production capacity, improving sourcing of raw material and supplies, increasing the customer base and risk-sharing in a speculative investment are other reasons for a joint venture.
Setting the Stage
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Before starting a joint venture, you need to identify your partners, based on the reason you find a joint venture attractive. For instance, if you decide to enter a research-and-development joint venture, you should seek partners with the right expertise in the desired research and development field. Selecting the right lawyers is the next step. Lawyers play an important role in researching legal issues and preparing legal documents of the joint venture. Lawyers should plan a road map for the joint venture dealing with legal and tax structure of the joint venture, key commercial issues, valuation of each party's contribution and regulatory approvals. Information exchange is a key feature of all joint ventures. Therefore, at an early stage, a confidentiality agreement should be signed.
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Deciding on the Legal Form
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Some important issues that should be considered in deciding the legal form are liability exposure, taxation, national regulations in multinational agreements and the amount of leeway the legal form offers to partners. Choosing a legal form involves a trade-off between these considerations. For instance, joint ventures usually take three forms: contracts between joint venture partners, partnerships and corporate forms. Corporations are taxed, whereas partnerships enjoy pass-through taxation. That is, there is no corporate tax, and revenues are taxed when passed to shareholder. Contractual arrangements are the most flexible and can be crafted according to the preferences of the joint venture partners. However, corporations have certain statutory requirements, such as filing annual accounts and returns, but are more suitable for situations where there is a need for a permanent business entity.
Establishing a Governance Mechanism
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An effective governance and management mechanism is vital to the success of the joint venture. Partners should work out the exact form of the management structure based on the task at hand and their preferences. Four issues should be determined:
1) Joint venture governing body: As soon as possible, a governing body comprised of representatives of joint venture partners should be appointed to develop the strategic direction of the alliance. The composition of the body, its decision-making procedure and authority are discussed and agreed upon by joint venture partners.
2) Role of joint venture partners in decision-making: The decisions that will be reserved for joint venture partners should be clarified. It is important to delineate control and approval mechanisms that the joint venture partners want to have over the governing body.
3) Operational management: A team of mangers will be given the task of running the day-to-day business of the joint venture. The composition, role and their authority should be decided upon by the joint venture partners.
4) Dispute resolution: It is important to devise a dispute-resolution mechanism, such as arbitration, to resolve any problems among joint venture partners.
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