Petroleum Equipment Supplier Association 2010 Legal Seminar Foreign Joint Ventures for Local Content Pablo Ferrante Brad Eastman Partner, Mayer Brown LLP Associate General Counsel, Cameron September 28, 2010 Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Introduction – Reasons to Enter Into A Foreign Joint Venture for Local Content • Certain jurisdictions require international equipment suppliers to have a local partner (i.e., Malaysia, Oman, etc.). • Demonstrates a commitment on the part of the international equipment supplier to develop local resources, which often is an important marketing point for national oil companies. • Provides an international equipment supplier with instant knowledge and experience of local business practices. • Local partners can often source employees much more efficiently, and in certain jurisdictions, can make sure that an international equipment supplier maintains friendly relations with all of the interested constituencies. • Local partners can often assist with immigration issues for expatriate workers and can assist with customs clearance. 2
Issues to Consider – Capitalization • JVs capitalization normally includes a combination of (i) cash, (ii) in-kind contributions (goods, intellectual property, services) and (iii) loans. • Important to agree on initial contribution and also on additional subsequent contributions. – These need to be consistent with the long term business objectives of the JV. • In-kind contributions require agreement between the parties as to the value and -often- third party valuations in order to become part of the registered capital of the JV. – Requirements vary in each jurisdiction. – Need to review US and local tax considerations when contributing equipment from the US (e.g. rigs). – When contributing assets, make sure to follow up on local law requirements for perfecting title over the JV. 3
Issues to Consider – Capitalization (cont.) • Local partner will normally contribute access to local market --- and its fair share of the required capital? Consider: – Loans from international partner. • Local partner does not receive dividends or receive limited dividends until loan is paid. • Collateral (rights in the JV, personal guarantee from local partner, other). – Instead of contributing the equipment to the JV, arrange for the leasing of the equipment from the international partner (works better in JVs for the provision of services) – Maintain inventory under separate local company. 4
Issues to Consider – Board Structure • How does the international partner maintain control when the local partner owns 50% or more equity? Several mechanisms: – Board representation with supermajority approval for certain decisions. – Board representation with vote from the directors appointed by the international partner required for most important decisions. – Supermajority shareholder approval for certain major decisions. – Right to control contributed assets: • Lease Contract; Supply Contract; Technology License Contract; etc. 5
Issues to Consider – Board Structure (cont.) • Major decisions to which these rights might apply include: amendments to governing documents – accepting new members to the JV – changes in the business plan or line of business – budget approval and capital expenditures – approval of financial statements – entering into transaction above certain limits – incurring debt above a certain limit – appointment/removal of key managers – granting powers of attorney – related-party transactions, including modification and amendments to ancillary agreements – appointment/removal of auditors and legal advisors – formation of subsidiaries or other JVs – dissolution, bankruptcy – 6
Issues to Consider – Management • One party management, shared management --- or a combination thereof. – Both of the parties would normally appoint officers and other key executives to the company – number and positions are negotiated. – Usually the party with the know-how to operate the JV appoints the CEO. However, the local party may negotiate to have an independent CEO. – The number of such appointees may be in proportion to the contributions of the parties to the JV. – Positions could be shared based on the expertise of each partner (international partner General Manager, CFO; local partner Production Manager, Human Resources). – Management and the CEO should be incentivized to make the JV succeed. – To avoid mixed loyalties –and to comply with local labor laws- management should be on the payroll of the JV, not either of the parties. • Make sure to review any expat agreements with local labor counsel. 7
Issues to Consider – Related Parties Transactions • Transactions between the JV and one of the parties are the essence of the JV – Supply Contract; – Technology License Contract; – Distribution Contract; – Service Agreement; • Key agreements should be negotiated upfront, included as ancillary agreements, and made a condition for funding under the JV agreement. • How to deal with price changes and renewals? 8
Issues to Consider – Related Parties Transactions (cont.) • Mechanisms for preventing abuse: – Require related-party contracts to have terms no more favorable than contracts with non-related parties – arm’s-length basis. – Deem entering or amending such contracts a “major decision” of the JV and subject to the approval of all of the parties. – Require that all such contracts are reported to the board regularly. – Grant the JV/other parties rights to audit performance and payments under the contract. – When possible, consider awarding contracts through a bidding process (perhaps with a determination by the board that the related- party contract is in the best economic interests of the JV). – Make sure to maintain proper documentation to respond to tax audits. 9
Issues to Consider – Parent Company Guarantees/Performance Bonds. • Even if the guarantee is posted by both parties, the international partner is usually more credit-worthy and therefore more exposed. • No easy answer –the additional exposure is the cost of getting the contract for the JV. Performance bonds or letters of credit by the JV might be too expensive. • International partner more inclined to grant parent guarantees when it is in control of the JV. • Considerer charging the JV for the guarantee and obtaining indemnification obligations supported with collateral from the JV. • Might not mean much in practice. 10
Issues to Consider – Parent Company Guarantees/Performance Bonds (cont.) • When possible, consider including limits and liability caps in the guarantee, and make it a guarantee of “collection” (for which the creditor must exhaust remedies against the obligor before going against the guarantor) and not of “performance” (which creates an absolute obligation of guarantor immediately upon default of the obligor). 11
Issues to Consider – Termination/Dissolution of the JV. • Termination and dissolution issues should be addressed in advance. • Termination might occur due to (i) agreement of the parties, (ii) project completion, (iii) expiration of term, (iv) deadlocks, (v) breach by one of the parties, (vi) bankruptcy or other causes of dissolution provided under local law, and (vii) other – such as termination of the ancillary agreements, etc. • It is common to provide for a “purchase or sell option” pursuant to which partner A can force partner B to either sell partner B’s interest to partner A at the offered price, or buy partner A’s interest at that same price. • Other common provisions: Right of First Refusal – Right of First Offer – Tag Along Right – Drag Along Right – • These provisions rarely work as intended under local law --- advise from local counsel is critical. 12
Issues to Consider – Applicable Law and Dispute Resolution. • The agreement between the parties should be governed under the laws of a neutral country with a developed body of law. – Latin America: Texas and New York – Africa: UK • Arbitration is generally preferred over litigation because: – Perceived as more neutral – Resulting awards enforceable in more than 140 countries under the New York Convention (not the same for foreign judgments) – Private, can be made confidential – Procedures tailored to needs of parties – Probably not less expensive than litigation • Keep the arbitration clause simple; selection of a site with proven record of judicial support of arbitration is critical. – LCIA, ICC, AAA 13
Other Issues to Consider • Due Diligence – FCPA compliance is critical • Intellectual Property Protection • Tax Planning and Structure • Local Foreign Exchange • Transfer Pricing Issues • Local Customs Regulations • Local Labor and Employment Considerations/Immigration • US/EU Export Controls 14
Recommend
More recommend
