Elements of Cross-border Joint Venture

Setting up a joint venture between two or more companies from different countries is becoming increasingly popular in today’s globalised world. The goal of a cross-border joint venture is to combine resources, knowledge, and expertise from different regions and companies in order to create a mutually beneficial partnership and achieve shared business objectives.

In this note, we will discuss some of the more common issues that our clients have encountered when structuring a joint venture between parties based in different jurisdictions.

Structure for the joint venture

In determining the structure of the joint venture, certain considerations should be taken into account to ensure that the joint venture is legally sound and compliant with the local and international laws and regulations. Set out below are some of the key considerations in determining the form of the joint venture:

Limit liability to the joint venture itself and to the parties to the joint venture
A structure that are welcomed by finance providers and service providers
Consideration to be given to employees, in particular, whether any options or units would be granted to attract and retain employees
Clear delineation of rights and liabilities
Ability to avoid unnecessary tax, and have the flexibility to enjoy preferential tax treatments

Corporate vehicle is the generally preferred structure. However, there may be disadvantages, such as tax leakage on distribution of profits.

Key considerations

For a cross-border joint venture to succeed, it is important for both parties to clearly define their objectives, roles, and responsibilities in a detailed joint venture agreement. The agreement should cover the following:

The objectives and term of the joint venture
The formation and governance of the joint venture
Funding of the joint venture as well as the financial contributions of each party
How profits will be shared and be extracted from the joint venture
Management structure and decision-making processes
Protection of intellectual property developed by the joint venture and/or contributed by the parties to the joint venture partners
Treatment of personal data and transfer of data across the border
Exit strategies and dispute resolution processes

When considering the commercial matrix of the joint venture, the parties should also consider regulatory issues, such as:

Whether there are any restrictions (industry, scale and percentage of ownership) on foreign ownership
Anti-trust and competition restrictions
Foreign exchange controls
Investment treaties between the joint venture entity and partners of the joint venture entity
Taxation

Choice of law and forum for resolution of disputes

Generally speaking, parties would agree to use the law and forum where the joint venture is established for the resolution of disputes. However, this should not be agreed upon without considering the potential implications and seeking legal advice.

In determining the governing law, one should consider:

The preferred mode of dispute resolution (for instances, efficiency, recognition of judgments, independence)
The type of remedies available both interim and final
Language of the documents

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