This is part 4 of a series that builds on “7 Keys to International Joint Ventures.” The series will give you tools to help decide whether a joint venture is right for your business project, find the right partner, and negotiate a joint venture agreement that positions your partnership for success.

Imagine you’ve built a joint venture (JV) in a developing country on the strength of a relationship between your CEO and a local industrialist. The JV exports to a neighboring country, but your company decides to expand there itself, cutting out the JV. Your partner wasn’t happy that you took this opportunity, but didn’t start a fight. The incident blew over with nothing written down.

Two years later, your partner dies suddenly. His son, who your team saw – and treated – as a lightweight, is now in charge. “Junior” doesn’t like the JV and won’t support it. You start negotiating a buy-out at a modest valuation with a minority discount.

Then Junior mentions the corporate opportunity. Not an outright threat, just a subtle comment about how unfairly you treated his father. Your lawyers say he could have a claim, and a lawsuit would tie up ownership and decision-making for a long time.

At this point, you surely wish your team had not underestimated Junior, had anticipated the inevitable generational change when writing the JV contract, and had paid a bit more attention to the buy-sell mechanism. You might wish that you had confronted the corporate opportunity issue and hammered out an agreement when the partner was friendly, which probably would have cost far less than the premium you are about to pay.

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Change is constant in all business. Change in joint ventures, across borders, languages, and cultures, brings extra uncertainty and impact.

Imagine: Your longtime JV partner suddenly wants a dividend. Now.

Surprise!

You had agreed to keep profits in the business for expansion. And dividends don’t fit into your tax planning, which your partner knows.

Why the sudden change?

There are many possible causes: from the ordinary – the partner’s investors want more cash flow or an affiliated business is in trouble, to the unknown – your partner is about to breach a covenant in a loan agreement you never knew about, to the personal — its owner is planning an expensive wedding for his daughter.

Even if the contract clearly says that there will be no dividends without your consent, you may face a relationship crisis if you refuse.

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Change is especially difficult if your partner has troubles in its own business. At best your partner’s attention will be diverted from the JV, and more unpleasant outcomes are common. A partner who worked informally for years may look to the letter of your contract, or informal workarounds may now be used to claim you can’t insist on your contract rights. Your partner may stop performing functions on which the JV depends. And if it becomes insolvent, complexity and stress multiply — local bankruptcy law may be very different from the rules at home.

A state-owned partner might be privatized; a privately-held partner might go public.

Leadership succession at the partner can bring dramatic change. People you’ve worked with for years may be out and the new boss may not care about understandings you once had. Your people may face a challenge in educating the partner’s new team.

Any of these changes can dramatically increase or decrease your partner’s desire for liquidity, and can affect the overall dynamic, and ultimate success, of your JV relationship.

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Some changes bring opportunities for you and your JV, while others bring obstacles. You should build your JV contract with change in mind to give your organization the strength and depth to deal with it at a moment’s notice. Be sure you consider how the following could affect your JV:

  • Possible changes in control of the partner, including changes caused by bankruptcy or other legal proceedings.
  • Management and ownership succession and corporate reorganizations – for both partners.
  • Buy-sell provisions and transfer restrictions, including testing a variety of possible scenarios before you start drafting or negotiating.

Once the JV is in place, remember:

  • Be decent to the people in the partner’s organization. You never know who will run the company, who will be promoted and be put onto the JV board.
  • Before you resolve an issue with your partner informally, think through how the situation will appear if control of the partner changes, and whether it would be better to get it in writing.
  • Have your own person on the ground with the JV, and be sure that person is savvy and senior enough to understand what’s going on at the partner and in the JV.

You can’t anticipate every change; but, with awareness and disciplined planning, you can be ready to deal effectively with changes that will surely come along.

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© George Creal