A joint venture may sound like a good idea; however, it is essential to put the building blocks in place before diving into documentation that formalizes the joint venture relationship. Consider these issues before you sign on the dotted line.
STRUCTURE The parties to a joint venture need to first establish the form/structure that the JV will take. It could be a corporate entity, a partnership or a contractual arrangement. The choice will be dictated by a number of factors, including foreign ownership restrictions, applicable law, the activity to be undertaken by the JV, potential liability of the JV parties, tax issues, cost and the level of flexibility required by the JV parties.
FUNDING It is crucial for parties to establish funding obligations at the outset, and decide the form that the initial and ongoing contributions will take. Will contributions be in cash or non-cash assets? Debt or equity? Will all parties have to contribute toward future finance needs? What would happen if one of the parties is unable to meet its funding obligations? At what point will the parties consider external finance?
CONTROL The parties will need to determine the stake that each party holds and whether the economic ownership and voting rights are the same. In addition, they will need to agree on the management structure of the JV including right to appoint directors, constitution of management team and their powers, board and shareholder level matters, minority rights (if any), and the manner in which disagreements (deadlock) are resolved.
EXIT STRATEGY The parties should discuss exit strategy options early on, including the scenarios in which a party would be forced to exit (eg as a result of a material breach). Options could include a sale to the other JV party (by way of a “call” or “put” option), a sale to a strategic buyer (perhaps a ‘drag’ or ‘tag’ along) or an IPO. It may also be in a situation where the parties cannot agree on a fundamental business issue, leading to a deadlock.
PRACTICAL ISSUES IN THE UAE There are a number of practicalities to consider in the UAE such as setting up the JV ‘onshore’ or in a free zone (this will depend on a number of factors), time required to establish the JV, obtaining authenticated documents from overseas (if a JV partner is outside the UAE) and ensuring that proper advice is obtained on the policies and procedures to be followed.
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