By David Quigg, John Horner and Dan Baker of the M&A Corporate Team at Quigg Partners
Popular But Legally ChallengingJoint ventures and strategic alliances continue to be in vogue in New Zealand and worldwide. As legal advisors in the area of mergers and acquisitions, it is important to keep up to date with the trends and changes. The legal thicket highlighted by the collapse of the CITIC and Fletcher Forests joint venture and the problems encountered by Force Corporation with their Argentina joint venture show that, on occasion the "legal paperwork" is incredibly important. You may remember that Carter Holt took a number of years to unravel its Chilean joint venture once the parties fell out.
Coalition Government: High Profile ExampleThe Coalition Government is the best high profile example of a strategic alliance. First we had the National/NZ First prescriptive strategic alliance that did not last long and now we have the more interesting strategic alliance of Labour and the Alliance in a joint venture (ie. both have "Board" representatives - a la Cabinet) and the less formal strategic alliance with the Green Party.
Long History In New ZealandKey industries in the New Zealand economy have involved joint ventures. Examples of joint ventures and strategic alliances in New Zealand follow:
Maui / Kapuni Gas Fields (oil and gas) Clear Communications (telecommunications) Lincoln University and Heinz Watties (food technology) Ericsson Synergy (mobile internet) Sky Television (pay television) Polytechnics International New Zealand/University of Melbourne/Filipino partner consortium (education) Northland Port Co and Adsteam Marine (water front) Wrightson/Feltex/East Coast Wool Co-op consortium (wool industry) Contact and EME and the Peaker Power project in Australia (electricity) Wrightson and Genesis Research (agriculture) Stream Information (electricity industry) Joint Ventures/Strategic Alliances Two of a Number of Choices:Companies looking to grow have a variety of choices including:
Takeover. Merger or acquisition. Organic growth. Joint venture or strategic alliance. Why Joint Ventures/Strategic Alliances are so PopularWhy is it that joint ventures/strategic alliances are becoming more and more popular? Some of the reasons that a joint venture or strategic alliance is the preferred choice are:
Sharing of risk (eg oil and gas / telecommunications). Access to technology/markets/skill (food/agriculture/electricity). Ability to determine an appropriate means of exiting the investment from the outset. Ability to share another businesses strategic advantages while remaining focussed on the core business. Air New Zealand ExampleThe recent history of Air New Zealand is a scenario worth considering. The purchase of Lufthansa or United Airlines has never been, and is unlikely ever to be, a realistic growth option for any New Zealand airline and the risk of acquiring a large entity in the industry was unfortunately highlighted by the problems of Ansett Australia.
But the same cannot be said for the Star Alliance. The strategic alliance between the fifteen airlines around the globe has been, and continues to be, an important string to the bow of Air New Zealand. To share customer referrals, air point loyalty/recognition, marketing and other resources with the likes of Lufthansa and United without the massive capital outlay and without the associated risk of an acquisition has undoubtedly benefited the airline and its shareholders.
A significant disincentive to Air New Zealand in a proposed purchase by Qantas would surely be the complication and necessary switch in alliances from the Star Alliance to the One World alliance. This would have created a significant strategic problem for Air New Zealand.
Ericsson Synergy ExampleIn the IT sector the joint venture between Ericsson and Synergy International to develop mobile internet products illustrates how medium sized New Zealand companies can utilise the benefits of a well established multinational to pursue product ventures which combine the best of both entities for mutual benefit. Joint ventures can assist to open the global market to New Zealand businesses with specialised expertise given Ericsson access to our "kiwi ingenuity".
Different Structures For Joint VenturesWhile the popularity of joint ventures and strategic alliances continues to increase the complexity and range of alternatives for various different circumstances requires advisers to be alert to the various structures. These include:
An incorporated company. Partnership. Trading trust. Something less formal, such as:
A strategic alliance. Collaboration agreement. Teaming agreement, all joint ventures have one thing in common: that is, the fundamental aspect of an "ongoing relationship". Common Analogy To Marriage: Ongoing RelationshipMultiparty agreements are difficult enough where the transaction is a "one off", but where the relationship between the parties is "ongoing" the issues and approach require a tactful and considered approach.
That is not to say the parties to a joint venture are unlikely to have conflicting objectives. Rather, in our experience, the opposite is nearly always the case. Which is why structuring a successful joint venture requires openness and frankness from the start in order to maximise the chances of success. The negotiation of the terms of such a joint venture agreement must proceed with the negotiators bearing one thing at the forefront of their mind; that is, the fundamental aspect of an "ongoing relationship".
TIP: A "pre-nuptial" agreement and exit strategy is a commercially sensible negotiating issue. A Different Negotiating Style: Co-operative More Than AdversarialAcquisition and takeover negotiations typically involve the negotiators starting from their respective positions as Vendor or Purchaser. Depending on the relative bargaining power and ability to negotiate the parties usually meet in an agreement after the exchange of a number of drafts, somewhere between the two different approaches.
In a joint venture negotiation the parties should, and usually do, start much closer together. In the interests of the joint venture conflicting objectives of respective parties are best considered second in priority to the mutually held objectives of the new entity.
The ongoing relationship is the fundamental difference.
Your Role As LawyerDue to the fundamental difference to the negotiating style required for a joint venture or strategic alliance a lawyer advising a party to a joint venture should consider their role in light of the best interests of the venture. Where either party (usually through their advisers) attempts to "screw the scrum" in their favour during negotiations the ill feeling which can result could well jeopardise the ongoing relationship. As an advisor in such proceedings the approach taken should be considerably "softer", at all times bearing in mind the "ongoing relationship" beyond the course of the negotiations and the common desire of the parties to work together for mutual benefit. The "hard nosed" approach that may work successfully for a client in negotiations for a one off acquisition can, and does, often backfire.
TIP: Adopt a co-operative approach rather than an adversarial one in negotiating joint venture and strategic alliance agreements. Increased Commercial Chance for Success: 50:50 or Control?In our experience joint ventures are more likely to succeed where the respective interests in a two party joint venture are 50:50. A possible explanation of this is where each party has an equal amount to gain and lose in through the joint venture the partners tend to be more committed to mutual success. Where there is a minority stakeholder there maybe a risk that the smaller "player" seeks to be disruptive should the relationship breakdown.
All joint ventures require commitment from both parties to ensure ongoing viability and the overriding propensity to compromise one's individual objectives for the benefit of the venture as a whole. To this end independent management of the joint venture is most desirable from a commercial perspective. Independent management enables joint ventures to evolve and change their scope in response to change.
As recently illustrated with Renault and Nissan what can originate as a strategic alliance can evolve into a joint venture as the relationship grows and proves successful for both parties. For parties who are uncertain as to the extent of their commitment a progression such as this is an option worth considering.
TIP: Recognise the benefits of a 50:50 joint venture and provide the means by which the venture can function effectively without either party having control. Difference Between Joint Ventures and Strategic AlliancesThe effective difference between a joint venture and a strategic alliance is in the formality or permanence of the arrangement. Often a strategic alliance is no more than an agreement between parties to do certain things for mutual benefit. Participants in a strategic alliance will not normally contribute any capital or equity to the venture but often resources or costs are agreed to be shared for mutual strategic purposes. A joint venture will usually give rise to a separate entity with a "life of its own" and can often be managed independently from the businesses of the participants.
Key Issues In A Joint VentureThe key issues in any joint venture will often include the following:
Structure. Means of funding now and in the future. Joint venture management and governance. Matters requiring special approval. Contracts between the joint venture and the participants. Budgeting and financial reports. Means and methods of transferring shares/interests. Deadlocks between the parties. Defaults by parties. Mandatory sale events. Restraints on competition. Post termination restrictions. As an advisor to joint venture or strategic alliance participants a lawyer should be in a position to advise on alternatives of the above listed issues. Certain provisions will suit some industries/relationships more than others. An experienced advisor can advise on means of avoiding traps and developing shareholder agreements which promote the mutual interests of the parties and to minimise the effect of any conflicting interests to a commercially acceptable level. The above list is far from exhaustive and a growing area of importance revolves around use and access of intellectual property and information technology during and after the venture.
Key Issues In A Strategic AllianceAlong with issues considered in a joint venture parties entering a strategic alliance will usually consider one or more of the following:
Sharing of personnel or secondment of employees. Shared development of product or services. Shared marketing or distribution of products or services. Sharing of specific resource base (eg. Computer system). Joint marketing or "stapled" marketing. Sharing specific information. Certain restrictions in respect of competition and areas of product. As illustrated by the Renault/Nissan strategic alliance cum joint venture, where parties find that a strategic alliance has been a rewarding experience it will often be a trial joint venture before entering a more comprehensive and formal joint venture.
TIP: Where clients are unsure about the prospects of a joint venture consider a strategic alliance for a set period as a trial. Exit Strategies: Essential ConsiderationPerhaps the most essential aspect of any joint venture or strategic alliance is the ways and means of exiting the venture. Few participants can predict with any great certainty their position in future years. Priorities change, as do business objectives and strategic direction. In our experience the exit means is often important because the client wishes to enter into another joint venture or strategic alliance which the client believes is more promising. For this reason alone it is essential that parties to a joint venture or strategic alliance carefully consider and determine a fair process of exit for either party from the outset, at a time where both parties are amiable and constructive. Although a client may complain in respect of the legal costs involved in protracted disentanglement, in our experience the real cost is in the down-time of management which can result in lost opportunities elsewhere.
Depending on the relative commercial strengths of the participants the possible exit mechanisms include:
Winding up/dissolution. Russian roulette. Shoot out. Trade sale. Various auctions (OK corral/blindfold shoot out/telebingo). Specific term joint ventures (say 7 years). Pre-emptive rights. Put and call option. Carry along and/or drag along rights. Takeover code contracts. Public float/IPO. TIP: Know the possible alternatives so your client can make the judgement call for the best exit strategy for them Standard Pre-emptives: Not an Automatic SolutionThe various options should be closely considered by parties rather than what is perceived to be the "default" position of including "standard pre-emptive rights". For a start we suggest that there is no such creature as "standard pre-emptive rights" as pre-emptive provisions can differ significantly in their structural approach and emphasis. Careful consideration should be given to excluding pre-emptive rights altogether as in our experience they inevitably cause a loss of value for the seller, particularly where the seller is a minority. Recent experience with pre-emptives which are justified to "preserve the relationship" can be counter-productive once the relationship is strained and the pre-emptive makes obtaining any "price tension" on a sale very difficult. They are obviously more favourable if you are the purchaser. As a lawyer you need to assist clients to consider the alternatives (positive/negative factors) and it will then often be a judgement call by the client as to what mechanism best suits their commercial objectives and priorities.
TIP: Consider excluding pre-emptives from a shareholders agreement where an alternative exit mechanism is acceptable to both parties ConclusionJoint ventures and strategic alliances continue to be a popular means of growth for many businesses from vastly different industries. The risks associated can be many and varied but through constructive and expert advice the ongoing relationship can have sturdy and certain foundations in the relevant documentation. Legal assistance should consider both sides of the deal to ensure the joint venture or strategic alliance accentuates the mutual interests of the parties and effectively manages the conflicting interests.
This article also appeared in The New Zealand Law Journal April 2002. Information on Quigg Partners can be accessed at our web site:
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