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Merger or JV with foreign partner

Gregory Schomer's Profile

Our company does business with a foreign partner in Tiawan with offices in China.   We are considering a formal merger or joint venture to create a true worldwide presence which our customers find important, and continued success is dependant on our continuing to work together closely.  Does anyone with direct experience have any recommendations or experiences to share?

Answers

John Figliozzi
Title: Member
Company: Portfolio Quality Reviews LLC
(Member, Portfolio Quality Reviews LLC) |

JV usually involves a 49 - 51% or a 50-50% relationship with a local entity. This means management control and decision making authority needs to be VERY carefully defined. It will make sense to revisit a series of management issues from the past 2 - 3 years in each separate company, then negotiate how similar events will be handled going forward. Also a binding and legally defendable dispute resolution procedure needs to be defined and agreed to. An old Arabic saying is, "Never take a partner except as a last resort." A lot of wisdom here. Good luck.

Christine Russell
Title: CFO
Company: Evans Analytical Group (EAG)
(CFO, Evans Analytical Group (EAG)) |

I have constructed an arrangement like this and presented it to our Board. The best advice I have is to get a pro in the legal field to help. I recommend Lothar Determann at Baker Mackenzie in Palo Alto. He's not cheap but he's the best. Lothar [dot] determannatbakermckenzie [dot] com

Christine

Jake Kaldenbaugh
Title: Corporate Development
Company: CA Technologies, Inc.
(Corporate Development, CA Technologies, Inc.) |

When doing foreign acquisitions/mergers, make sure you hire experienced and qualified local counsel to guide you through the foreign M&A constructs, which can be very different than the U.S. experience. I recently heard a number of horror stories from some of the largest U.S. companies about their experience doing JV's and M&A in markets like India and China and they all stressed having quality local counsel.

Topic Expert
Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

You need to be particularly careful in China since it's across the globe, and you need a high level of trust with your partner. Ideally you can get references from colleagues (even the competition) in the US and other jurisdictions. Also, consider negotiating styles/techniques to ensure you get what you need, considering cultural norms. Also, do NOT do a 50%-50% agreement unless you're willing to have a stalemate. Make sure one side has a deciding vote.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Even if you have done business with the potential partner and developed a measure of trust, it would pay to hire a professional investigative firm to look into their reputation.

A joint venture presents more complexity than a merger and is prone to more conflict because business interests of the partners often diverge over time or one partner concludes that the other partner is not contributing sufficiently to the JV's success.

That's why the legal JV agreement (usually multiple agreements) become critical. Regardless of the JV's ownership split, both partner's will customarily want to retain veto power or super-majority vote on defined significant decisions, for example, capital expenditures exceeding some specified amount. Since this can lead to deadlock or stalemate situations, the JV agreement will usually include dispute resolution clauses that could ultimately lead to one partner buying out the other depending on who initiates the deadlock process and based on some buyout formula.

Often, the agreement will also specify which partner has the right to appoint which senior executives of the JV and whether this right rotates between the partners.

As to legal advisors, you need both local counsel and home country counsel. While they don't have to belong to the same law firm, it helps to use a single law firm that can provide both perspectives.

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