Joint Ventures: Legal and Practical Considerations in Latin America

A few years ago, after the markets contracted and access to finance was reduced, companies throughout Latin America began exploring alternate means to jointly participate in projects that otherwise individually could not have been carried out. We began to see a trend. Clients started creating strategic partnerships to develop businesses through Joint Ventures, to benefit from their collective resources, information and know-how. Entrepreneurs began realizing that by pursuing the aggregated value that results from partnering with companies in other fields or markets, the risk, time and cost of acquiring know-how in-house or retaining services was mitigated, yielding quick, cost effective go to market solutions for their ventures by sharing a percentage of the proceeds.

Joint Ventures are not regulated in many Latin American countries, including Costa Rica. Because of this, most practices come from day to day transactions, mainly supported on the experience of attorneys interacting with other legislations or through their education in foreign universities. Also, because these agreements are unregulated, drafting and advising has a lot to do with performing a good assessment of the transaction, the client’s interests and complementary regulations that may be applicable.

The first and most important practical consideration to enter into a Joint Venture is choosing whom to partner with. There are no easy go-to resources that provide incentives, tools or a pool of partners to those seeking to form Joint Ventures. Because of this, choosing a partner will depend heavily on the company’s network, contacts and counsel provided by advisors. This has a positive aspect to it, because when the parties have previous experience working together, its easier to perform a better assessment of the convenience to partner.

Also, partners must aggregate value to the projected buisness. Each of them should be able to provide a distinctive and important contribution that would otherwise not be easily atainable by the other party. In other words, synergy is essential.

Joint Ventures can be formed to pursue business in four distinct ways: (i) combining existing buisineses, known as consolidation; (ii) skill transfers, by which one partner acquires the know-how of another; (iii) combination, by which partners take advantage of thier mutual skills; or (iv) to create a new business altogether. Because of this, synergy can result from different qualities that partners have. For example, in one case a partnership could be beneficial to one party because the other has a certain know-how required for skill transfers. In other cases, the benefit could be that the partner has a distribution network in a new target market. Other times both partners could have know-how that, combined, allows the business to be possible.

The other key element that companies should look for in a partner is trustworthiness. Trust will grow as the business progresses, but many people don’t realize the importance of defining the terms of the partnership in a way that allows for it to be built up.

To help build trust between the parties, it is essential that the terms are clearly defined from the beginning. Documents must be negotiated and drafted transparently, addressing parameters of authority and accountability, methods of consensus for decision making and employing meeting management techniques that support authentic participation by all partners.

Transparency and objectivity will be especially important when performing a valuation of each of the party’s contributions. To achieve this, one option is to hire an expert that determines the value of each contribution. In specific cases, such as consolidation Joint Ventures, another alternative is calculating the value of each company and determining the value added as parameters.

Adequate valuations will, in turn, aid in defining how each partner will be compensated from utilities. Nonetheless, having a clear understanding of how these will be distributed is often not enough. For example, it may be important to agree on provisions regarding reinvestment of profits, setting thresholds of reinvestment and distribution. The agreements should at least provide for how reinvestment amounts will be determined by objective parameters.

Also, because Joint Ventures often don´t have individual legal personality, it is important to define how the joint administration and control of the business will be carried out. If only one of the partners will be taking care of representing the business, which decisions will require both to agree? Will there be qualified decisions? Will one partner be in charge of making technical decisions on account of its particular know-how? It will be critical that the transaction is properly assessed to determine these matters. There should be a strong equilibrium of opinions among the parties, but the value of their corresponding contributions should also be taken into account.

When Joint Ventures operate on a transnational basis, efforts must be made to conciliate the interests of multinational companies in relation to the operation and the business. Because each legislation establishes different limitations, certain business strategies are viable in some countries but not in others. Implementation time may also vary across different jurisdictions. Therefore, the coordination of these different initiatives could be an important challenge. This is where the knowledge, creativity and proactivity of counsel plays a very important role.

Another important issue is tax treatment, which should be examined in each jurisdiction. This is especially important because Joint Ventures are often not viewed as independent legal entities and may be treated differently to ordinary corporations or partnerships. For example, in Costa Rica Joint Ventures fall under the accounting rules and procedures of NIC (IFRS) 31, that regulates “Participation in Joint Businesses”, where the participations, assets, liabilities, expenses and incomes, must be disclosed, regardless the structures adopted. Costa Rican law doesn’t put a specific tax treatment for this type of agreement in place and, therefore, general tax regulations apply. The companies in a Joint Venture would assume tax burdens together and proportionally. This could work differently along other jurisdictions so the agreements should include tax treatment provisions that are consistent with each national legal system.

Finally, because Joint Ventures have a predetermined and limited term of validity, as agreed among the parties, exit strategies must be defined as part of the initial terms and conditions. This will provide for a more efficient dissolution.

Regarding disputes, in absence of legal recourses specific to Joint Ventures, a well-drafted agreement with clear rules between the partners may be useful to prevent conflicts or easily solve them if necessary. Also, the choice of arbitration vs. judicial jurisdiction may be very relevant in Latin America, where court proceedings often take years.

The main benefit of judicial jurisdiction is its lower cost. Because the government provides this service, it can be accessed with almost no costs or expenses other than attorney’s fees. On the other hand, its main drawback is time related, given that in Costa Rica a civil proceeding may take five years or more to be definitively concluded. Many Latin American countries have this same problem.

Arbitration also has its benefits and drawbacks. The process is quick and confidential. Arbitrators are specialized and will likely be very qualified. Its main drawback is the higher cost, given that arbitrator’s fees and procedural expenses can add up, although in many cases such costs are not as high as many companies believe.

In this complex scenario, it is crucial that attorneys carefully consider and draft the provisions of each Joint Venture agreement. The experience and knowledge of legal counsel will either make or break the possibility of a successful and fruitful business enterprise being formed.