Addleshaw Goddard’s International Arbitration team in Dubai has recently resolved a long-running dispute between a leading brand and its joint venture partner for the GCC.  The experience provides a cautionary tale for retail joint ventures in foreign jurisdictions.

Here Paul Hughes, from Addleshaw Goddard's Dubai office, offers some guidance for a successful joint venture.

Across the Middle East and North Africa, and many other foreign jurisdictions, it is often mandatory to take on a local partner or sponsor in order to trade within that territory. Retailers and leading brands new to a region often form joint ventures (JVs) with a local partner in order to benefit from the partner’s local know-how and on-ground experience.

With so much invested in a JV relationship, it is crucial to ensure everything is handled correctly. The following steps might help you avoid protracted and costly disputes.

Complying with local laws

·         Underlying documentation

No matter the governing law and jurisdiction provisions of the shareholders’ or JV agreement, ensure that they do not conflict with mandatory local laws. Ultimate enforcement of the agreement will most likely take place in the domicile jurisdiction of the JV company, so shareholders’ agreements should be drafted with local provisions in mind.

·         Director duties

Directors appointed by the brand to the JV’s board must act in accordance with their duties to the company under local law. While your appointed directors are free to adapt your brand’s overarching strategy and take advantage of resources and know-how, any actions taken should be in the best interest of the JV company.

The courts in the GCC view the payment of dividends as an essential part of any local company and so care should be taken if deciding to reinvest profits rather than distribute them as dividends to local shareholders.

Transparency is key: Deciding to not declare a dividend should not be made simply by way of board resolution (without proper discussion), particularly if your brand’s appointed directors can push decisions through by majority (which is often the case).

Running the JV

·         Purchases

Caution should be exercised when establishing the buying policy of the JV.  The directors implementing the purchasing policy must act in the best interests of the company particularly as such transactions are unlikely to be viewed as arm's length purchases.  

·         Marketing

Ensure that marketing expenditure relates solely to products over which the JV has exclusive distribution rights. If, for example, a separate category of your products is to be distributed by a separate exclusive distributor in the region, the JV should avoid incurring costs in advertising those products.

·         Employment matters / visas

Ensure that your employees are properly registered with the relevant ministry.  It can be convenient for staff to work across various stores in a particular region, but it should be clear to the relevant ministry of labour which entity employs which particular individual and where they are based.

If an employee is to work out of the premises of the JV but is not employed by the JV, consider implementing a services agreement between the two companies to formalise the individual's duties and salary.

The process should be transparent and always in the best interests of the local JV company.

·         Alternative arrangements

If your brand wishes to avoid potential arguments with your partner over control of the company, consider an agreement whereby the local partner takes a percentage of turnover, as opposed to a share of profits.

The local partner receives a share from the JV and is in a position to offer its services and assistance locally, but there is no confusion about how the JV is to be run. This avoids the local partner being concerned with the bottom line or distribution of dividends.

Termination mechanisms

·         Call options

Be wary of what termination mechanisms are enforceable in the local territory of the JV entity. Shareholders’ agreements will often contain call and put options. If issuing a call notice, the mechanism should be followed to the letter. Even then, specific performance (i.e. an order compelling a shareholder to sell its shares) is notoriously difficult to obtain in many GCC jurisdictions, so the ability to compel a reluctant partner to transfer shares cannot be guaranteed.

Conclusion

Given the potential pitfalls of entering into and exiting foreign JVs, all efforts should be made to maintain cordial relations with your JV partner.  By taking care to preserve an amicable commercial relationship you can avoid lengthy and costly disputes where, ultimately, it may be difficult to compel your partner to transfer its shares to you.