Joint Ventures

2021

Contributing editors
Kai Bitter, Kristen A Elia and Emily Tanji

© Law Business Research 2020

Publisher
Tom Barnes

Joint Ventures
[email protected]

Subscriptions
Claire Bagnall

2021
[email protected]

Senior business development manager

Adam Sargent
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Published by
Law Business Research Ltd Contributing editors
Meridian House, 34-35 Farringdon Street
London, EC4A 4HL, UK Kai Bitter, Kristen A Elia and Emily Tanji
The information provided in this publication Frost Brown Todd LLC
is general and may not apply in a specific
situation. Legal advice should always
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does receipt of it constitute, a lawyer– Lexology Getting The Deal Through is delighted to publish the fourth edition of Joint Ventures,
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authors accept no responsibility for any Lexology Getting The Deal Through provides international expert analysis in key areas of
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September and October 2020. Be advised Throughout this edition, and following the unique Lexology Getting The Deal Through format,
that this is a developing area. the same key questions are answered by leading practitioners in each of the jurisdictions featured.
Our coverage this year includes new chapters on Russia, South Korea and Taiwan.
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 Contents

Argentina3 South Africa 49

Pablo Garcia Morillo and Maria Laura Bolatti Cristófaro Rudolph du Plessis
Marval O'Farrell Mairal Herbert Smith Freehills LLP

China11 South Korea 56

Yuan Wang Heesung Ahn, Jaemyung Kim, Young Min Lee and Jeremiah Phillips
DeHeng Law Offices Kim & Chang

India18 Switzerland63
Rahul Chadha, Neeraj Prakash and Syed Yusuf Hasan Daniel Hayek and Mark Meili
Chadha & Co Prager Dreifuss

Japan26 Taiwan69
Nobuo Nakata Susan Lo and Yvonne Hsieh
Hibiya-Nakata Lee and Li Attorneys at Law

Netherlands32 Thailand74
Rens MR Berrevoets, Suzanne S Beijersbergen and Apinya Sarntikasem and Jirapong Sriwat
Tim B Schreuders Nishimura & Asahi
Heussen BV
Ukraine81
Saudi Arabia 40 Alexander Weigelt and Volodymyr Yakubovskyy
Nicolas Bremer NOBLES
Alexander & Partner Rechtsanwälte
United States 88
Kai Bitter, Kristen A Elia and Emily Tanji
Frost Brown Todd LLC

2 Joint Ventures 2021

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 United States
Kai Bitter, Kristen A Elia and Emily Tanji
Frost Brown Todd LLC

FORM regulations may prohibit the disclosure of certain information to the

foreign joint venture party and its representatives. There can also be
Types of joint venture differences in industry-specific regulations, such as those stipulated by
1 What are the key types of joint venture in your jurisdiction? Is the Federal Communications Commission regarding foreign ownership
the ‘joint venture’ recognised as a distinct legal concept? of common carrier and other licences under the Communications Act
of 1934. Another key area is the review by the Committee on Foreign
Delaware is one of the few states that specifically addresses joint Investment in the United States, which may review the impact of
ventures in its corporate code. It refers to joint ventures as corpora- certain joint ventures with foreign joint venture parties on matters of
tions with two stockholders each holding 50 per cent of the stock national security.
therein. Typically, though, the term ‘joint venture’ is used more broadly
to describe a business venture established for a specific purpose by Ultimate beneficial ownership
usually two (and sometimes more) independent parties that want to 4 What requirements are there to disclose the ultimate
combine their technology, research and development capabilities, beneficial ownership of a joint venture entity?
distribution channels, market access, financing or other resources.
The basis for these collaborations can be contractual, often in the form Most states do not require the ultimate beneficial owners to be disclosed
of complex commercial arrangements that go well beyond customary upon formation of the entity joint venture. Exceptions apply when
supply and service agreements, also referred to as strategic alliances. the beneficial owners manage the business, as many governmental
Alternatively, the parties may collaborate in a jointly owned entity that agencies require the disclosure of the directors and officers of a corpo-
is either specially formed for the joint venture or results from an invest- ration and managers of an LLC. Additionally, the Bureau of Economic
ment by one joint venture party into the other. Analysis of the US Department of Commerce (BEA) mandates disclo-
sure of foreign investment, which disclosure requires certain beneficial
Common sectors owners, generally foreign persons that own 10 per cent or more of the
2 In what sectors are joint ventures most commonly used in voting securities in a US business enterprise, to be identified. However,
your jurisdiction? the data collected by the BEA is not made available to other govern-
ment agencies but is instead used solely for analytical and statistical
In the United States, joint ventures are used across a broad array of purposes to track foreign direct investment and international trade.
sectors. Increasingly, they have been used in the automotive, energy, oil
and gas, healthcare, technology and biotechnology industries. There are SETTING UP AND OPERATING A JOINT VENTURE
no geographic or industry-specific restrictions limiting joint ventures.
The parties’ choice to enter a contractual joint venture or form an entity Structure
joint venture is largely driven by their overall business objectives rather 5 Are there any particular drivers in your jurisdiction that will
than the sector in which the parties operate; the parties’ objectives may determine how a joint venture is structured?
include the desire to jointly develop IP or to enter new markets with a
partner already familiar with that particular market. The choice between an entity joint venture and a contractual joint
venture largely depends on the parties’ contributions and objectives.
PARTIES For example, contractual joint ventures usually do not provide for jointly
owned assets, whereas entity joint ventures are legally separate from
Rules for foreign parties their owners, own their assets, and provide for a well-developed govern-
3 Are there rules that relate specifically to foreign joint venture ance structure. For entity joint ventures, both corporations and limited
parties? liability companies (LLCs) provide their owners with a liability shield
and other protections, including fiduciary duties for directors, officers,
Neither the corporate and limited liability company (LLC) laws that apply managers and potentially the owners themselves, and certain proce-
to entity joint ventures nor the commercial rules or common law that dural requirements before the entity joint venture can be dissolved.
apply to contractual joint ventures distinguish between domestic and For joint ventures with foreign joint venture parties, the LLC may lead
foreign joint venture parties. However, there can be significant differ- to adverse tax consequences, so the corporation may be the better
ences: from a tax perspective, choosing the entity form of a corporation entity form. But with any entity form, the joint venture parties typically
(and not an LLC) for a joint venture avoids pass-through tax treatment have great freedom in structuring their relationship as most require-
and thus shields the foreign joint venture party from US federal income ments under corporate and LLC laws are not mandatory and thus only
taxation and related income tax filing requirements. Export control apply if the parties do not agree otherwise. Given that LLCs provide

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essentially the same benefits as general and limited partnerships from duties). But, otherwise, the joint venture parties have great flexibility in
a structuring and tax perspective, but also limit their owners’ liability, structuring their relationship.
general and limited partnerships have become almost irrelevant for
joint venture purposes. Party interaction
9 How may the joint venture parties interact with the joint
Tax considerations venture entity? Are there any restrictions?
6 When establishing a joint venture, what tax considerations
arise for the joint venture parties and the joint venture entity? If the joint venture is in the form of a corporation, state laws govern the
How can tax charges be lawfully mitigated? role of each corporate actor: shareholders are the owners of the corpo-
ration and elect the members of its board of directors at the annual
The tax considerations that arise for entity joint ventures depend on shareholders’ meeting. Apart from appointing the board, the powers of
the form of entity chosen. For domestic joint venture parties, LLCs tend the shareholders are quite limited because the board is not subject to
to be the most tax-efficient entity form as it provides for partnership the shareholders’ directions. It is the board that sets the strategy and
taxation, so that profits and losses generally flow through to the joint budget and appoints the officers, whose role is to execute the board’s
venture parties. Forming the joint venture as a corporation may create decisions and run the day-to-day business. Each joint venture party typi-
tax inefficiencies: the income of the corporation is generally subject to cally designates a certain number of individuals to the board. These
taxation at the level of the corporation and also at the level of the joint individuals are subject to fiduciary duties, which in particular require
venture parties when distributed, and the dividends received deduction them to act in the best interests of the joint venture.
only partially deducts the double taxation. Also, a joint venture party If the joint venture is formed as an LLC, the joint venture is
cannot consolidate its taxes with the corporate joint venture unless it governed by its members or by managers appointed by the members.
owns 80 per cent or more of the joint venture, and losses incurred by Often, the joint venture parties will set up a governance structure that
the joint venture are therefore trapped at the joint venture level. resembles that of a corporation, by providing for a board and officers.
Foreign joint venture parties should pay particular attention to The persons acting on behalf of the joint venture owe fiduciary duties of
permanent establishment rules and tax treaties with the United States loyalty and care to the LLC and its members. State laws typically allow
when assessing US tax liability. There are also special considerations in the joint venture parties to modify the fiduciary duties of the persons
determining the tax filing requirements of foreign joint venture parties: managing or operating the entity joint venture, provided, however, that
if an entity joint venture is taxed as a partnership (which is the default many states impose minimum requirements from which the parties may
for LLCs), the taxes will pass through the entity joint venture to the not deviate.
foreign joint venture party, and the foreign joint venture party becomes The governing documents of an entity joint venture typically
a US taxpayer. This can be avoided by having the LLC elect to be treated provide for various actions that require the prior approval by the board
as a corporation for tax purposes. However, some non-US countries do or owners. Such actions usually include material changes to the joint
not accept the hybrid nature of the LLC and tax it as a partnership, even venture’s business, issuance of additional ownership interests or
if it chooses to be taxed as a corporation in the United States. To avoid admission of additional joint venture parties, taking on debt, appointing
complications and potential tax inefficiencies, joint ventures with foreign auditors, entering into related party transactions and other key matters.
joint venture parties are therefore often formed as a corporation. These actions may also be subject to different approval thresholds (ie,
supermajority or unanimity).
Asset contribution restriction The governing documents should also provide for inspection rights
7 Are there any restrictions on the contribution of assets to a and regular reporting to the joint venture parties and require the joint
joint venture entity? venture parties to treat such information confidentially.

There are no restrictions on contribution of assets. Apart from cash, the Exercising control
joint venture agreement may provide for the contribution of tangible 10 How may the joint venture parties exercise control over the
personal property (eg, production equipment) or intangible assets (eg, joint venture entity’s decision-making?
intellectual property). The joint venture parties may even agree to only
contribute (future) services, provided, however, that for corporate joint For entity joint ventures, the joint venture parties’ governance rights
ventures, a contribution may be taxable if more than 20 per cent of the are based on the corporate or LLC laws of the state in which the joint
stock in the joint venture is issued solely for services. venture is formed. State laws typically provide a minority investor with
some minimum level of protections, but allow investors to deviate
Interaction between constitution and agreement substantially from the statutory rules to modify these minority rights.
8 What is the interaction between the constitution of the joint Apart from these statutory protections, the joint venture parties typi-
venture entity and the agreement between the joint venture cally address the governance structure in the shareholder or operating
parties? agreement. Generally, key negotiation points are board representa-
tion, approval requirements for material transactions and veto rights,
The formation of an entity joint venture in the form of a corporation inspection rights regarding the books and records of the joint venture,
or an LLC typically only requires the filing of very generic and limited and preemptive rights regarding any future equity issuances. As an
information. The agreements that typically govern the joint venture (the extraordinary remedy to enforce these rights, minority shareholders
shareholder agreement for corporations and the operating agreement and LLC members may protect their rights and impact the joint
for LLCs) are not filed publicly. These agreements may not contradict venture’s decision-making through derivative actions. A derivative
the formation documents, but contradictions are rare since formation action is a mechanism under state law by which a joint venture party as
documents only provide very limited information. To a limited extent, a shareholder of a corporation or member of an LLC, on behalf of and for
applicable corporate or LLC laws will stipulate mandatory requirements the benefit of the entity joint venture, can take legal action against the
that take precedence over any agreement between the joint venture members and managers of LLCs and directors and officers of corpora-
parties (eg, many states do not permit a complete waiver of the fiduciary tions that may have harmed the entity joint venture.

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Governance issues Nominee directors

11 What are the most common governance issues that arise in 12 With an incorporated joint venture, what controls exist in your
connection with joint ventures? How are these dealt with? jurisdiction in relation to nominee directors? How should a
nominee director balance the potentially conflicting interests of
Successful management and operation of a joint venture is a difficult the joint venture company and the appointing shareholder?
undertaking. Many joint ventures require continuous support, including
funding, from the joint venture parties, at least during the initial years. State laws and the governing documents of entity joint ventures set
Often, the joint venture parties (or their nominees to the board) had not forth the roles, duties and powers of directors and officers. The board
worked with each other before the joint venture was formed and thus of directors is the main governing body of a corporation (and of LLCs
struggle to collaborate effectively. This level of interdependency usually if the operating agreement so provides). The board meets regularly to
necessitates a governing body that sets the strategy and budget and set the strategy, approve the budget and oversee the officers, who are
provides for transparency. With or without such a governing body, many responsible for carrying out the board’s policies and making the day-to-
joint ventures encounter a variety of governance issues: the objectives day decisions. Directors and officers generally owe fiduciary duties to the
of the joint venture parties are or become incompatible or a joint venture joint venture and the joint venture parties, which prohibit a director or
party might try to micromanage the joint venture’s management. A officer from acting in only one joint venture party’s interests. If there is
joint venture party’s compliance requirements might use up significant a conflict of interest, the director is typically required to disclose such
resources of the joint venture, which is particularly problematic when a conflict and obtain approval from a disinterested majority of directors or
publicly traded company wants to collaborate with a start-up business. by shareholders’ vote. To prevent these foreseeable conflicts of interest,
Or the joint venture parties might disagree on the use of available cash- joint venture parties often modify or even waive the fiduciary duties of
flow (ie, distributing it to the joint venture parties versus reinvesting it the directors and officers in the joint venture agreement (to the extent to
into the joint venture for future growth). To reduce the risk of frustrated which fiduciary duties can be waived, which varies by state).
expectations and misalignment, the joint venture parties must ensure
that the joint venture agreement properly reflects their objectives, Competition law
stipulates approval and reporting requirements for the joint venture 13 What competition law considerations are engaged by the
management’s authority and responsibility, and outlines the level of formation and operation of the joint venture? Is approval
desired and necessary involvement of the joint venture parties. needed?
But even with a well-developed joint venture agreement, disagree-
ments cannot always be avoided. The joint venture agreement therefore For any joint ventures (ie, whether the joint venture parties combine
needs to provide for an adequate dispute resolution mechanism to all their resources and efforts in a particular area (comprehensive joint
ensure that the joint venture can overcome such disagreements. These venture) or continue to compete with the joint venture and each other
mechanisms often include an escalation process where the governing (partial joint venture)), the principal antitrust concern is about the degree
body of the joint venture can require senior management from both of market concentration created by the joint venture. A partial joint
joint venture parties to become involved to resolve a disagreement. If venture, however, creates additional concerns from an antitrust perspec-
that fails, the joint venture agreement typically provides for arbitration tive, mainly with respect to the sharing of competitive information, the
(sometimes preceded by mediation), which many investors prefer over coordination among the joint venture and the joint venture parties and
litigation in US courts. price fixing. The federal and state antitrust laws apply to both entity joint
A deadlock of the joint ventures’ management or ownership is a ventures and contractual joint ventures. Antitrust risks heighten where
common problem for joint ventures. In 50/50 entity joint ventures, all joint venture parties dominate in their particular markets, where joint
decisions beyond the day-to-day require unanimous approval by the venture parties are competitors and are sharing competitively sensitive
joint venture parties (or their designees to the board). In joint ventures information, or where joint ventures eliminate competition between joint
with a majority joint venture party, the minority party typically demands venture parties and their combined market share is greater than 20 per
significant supermajority requirements or veto rights for its protec- cent. In the context of a merger, depending on the size of the parties and
tion. In either instance, if the joint venture parties are unable to agree transaction, the Hart-Scott-Rodino Antitrust Improvements Act of 1976
on a matter critical to the joint venture’s business, the joint venture may require pre-merger notification to the Federal Trade Commission
becomes deadlocked, which – if not resolved quickly – causes many and Department of Justice. The National Cooperative Research and
joint ventures to fail. For these instances, the governing documents Production Act of 1993 provides particularly favourable antitrust treat-
of entity joint ventures often provide for buy/sell rights. These rights ment to joint ventures established for joint research and development
allow each joint venture party to buy or sell its ownership interests in activities as long as they comply with its various restrictions.
the event that the parties are unable to resolve a deadlock. A common
buy/sell provision is known as Russian Roulette, which allows a joint Provision of services
venture party to name a price at which the other joint venture party may 14 What are the key considerations in your jurisdiction in
either buy the offering joint venture party’s ownership interest or sell structuring the provision of services to the joint venture entity
its own. Contractual joint ventures, on the other hand, often provide for by joint venture parties?
termination rights that allow either joint venture party to exit the joint
venture if it is unable to carry on the business for which it was formed. For entity joint ventures, a party may provide services either at a charge
or as a contribution to the joint venture. A joint venture party’s services
are often critical to the success of the joint venture and thus require
extensive negotiations. Any services agreement entered into between the
joint venture and a joint venture party subsequent to the formation of the
joint venture constitutes a related party transaction and is thus subject to
the conflicts of interest rules of the relevant jurisdiction in which the joint
venture is formed. These rules usually require related party transactions
to be on arm’s-length terms. To avoid this conflict, the joint venture parties

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could waive all fiduciary duties, including the duty of loyalty. From an anti- Contractual joint ventures will stipulate each party’s perfor-
trust perspective, the joint venture parties, if they are competitors, need to mance obligations, which might include financial or other contributions
be careful about not disclosing any cost information when providing these (including services) to each other, often in return for a portion of the
services. For contractual joint ventures, the joint venture parties typically venture’s profits.
do not need to observe the usual standards of fairness, as courts gener-
ally do not scrutinise the fairness of arm’s-length transactions. Capital injection restrictions
18 Are there any legal or regulatory restrictions on the injection
Employment rights of capital into, or the distribution of profits or the extraction of
15 What impact do statutory employment rights have in joint cash by other means from, the joint venture entity?
ventures?
For corporate joint ventures with par value shares, the contributions
An employee seconded by a joint venture party to the joint venture may must at least equal the nominal value of the shares. Corporate joint
retain his or her employment relationship with the joint venture party ventures may also be formed with no par value shares. For those, and
and, at the same time, enter into an employment relationship with the for limited liability companies (LLCs), the consideration to be contributed
joint venture. If the two employers operate in different jurisdictions by the joint venture parties either needs to be stipulated in the governing
(even different US states), the employee will likely benefit from statu- documents or determined by the board of directors or managers.
tory protections in both jurisdictions (eg, protections against dismissal Cash is usually extracted from joint ventures through dividends,
and restrictions on noncompetition obligations). If the joint venture interest or royalty payments, management fees, or other service fees.
party and the joint venture provide different benefits to their respective Corporate laws typically limit dividends to the surplus or net profits of a
employees, the employee may be able to argue that he or she is entitled corporation. LLC laws typically provide that the effect of any distribution
to the more favourable benefits. Also, the seconding joint venture party may not cause the liabilities of the LLC to exceed the fair market value
may remain vicariously liable for the acts of the employee (and the joint of its assets. Tax considerations often influence the method of extracting
venture agreement should provide for indemnification of the seconding cash, particularly for joint ventures with foreign joint venture parties that
joint venture party as long as the employee acts within the scope of his or are subject to transfer pricing requirements.
her employment for the joint venture).
Tax considerations
Intellectual property rights 19 What tax considerations should be taken into account in the
16 How are intellectual property rights generally dealt with on the operation of the joint venture?
creation, operation and termination of a joint venture in your
jurisdiction? An entity joint venture in the form of an LLC is typically more tax efficient
and flexible than a corporation, as the LLC is treated as a partnership for
The contribution of intellectual property to a joint venture is often a tax purposes. However, because the owners of an LLC are taxed on their
key reason for the joint venture’s formation. Also, the sharing of R&D share of the joint venture’s income, they may have to pay taxes even if
resources to develop IP is another reason for which joint ventures are there is no distribution (phantom income). Therefore, the joint venture
often formed. IP contributed to or developed by the joint venture is typi- typically distributes at a minimum an amount equal to the joint venture
cally an asset of the joint venture. Upon its dissolution, the IP will be sold parties’ tax liability. Also, foreign joint venture parties will be subject to
together with the joint venture’s other assets, unless the joint venture US federal income taxes and related income tax filing requirements.
parties agree otherwise. To avoid the loss of the IP in this instance, many If, on the other hand, the joint venture is formed as a corporation,
joint venture parties only license their IP to the joint venture, so as to the (domestic or foreign) joint venture parties are only taxed if the joint
retain ownership if the joint venture fails. For contractual joint ventures, venture pays a dividend. However, a joint venture party cannot consoli-
IP ownership needs to be addressed in the joint venture agreement and is date its taxes with the corporate joint venture unless it owns 80 per cent
otherwise based on US intellectual property laws. or more of the joint venture, and losses incurred by the joint venture are
therefore trapped at the joint venture level.
FUNDING THE JOINT VENTURE
Accounting and reporting issues
Typical funding 20 Are there any noteworthy accounting or reporting issues for
17 How are joint ventures generally funded in your jurisdiction? the joint venture parties regarding their investment in the
Are there any particular requirements relating to funding and joint venture?
security packages?
The most noteworthy accounting and reporting issues apply to joint
There are no specific requirements for funding joint ventures. Entity joint ventures with foreign joint venture parties.
ventures can be formed by cash contributions, contributions in kind, the Typically, the owners (‘members’) of an LLC have great flexibility
promise of future contributions and the contribution of services, including in determining how to allocate profits and losses between them. The
future services. Typically, joint venture parties contribute capital to the most significant accounting and reporting issue that a potential foreign
joint venture in exchange for shares or units in the entity joint venture. joint venture party should be aware of is that an LLC, or its withholding
These contributions create the parties’ basis in the joint venture for tax member, is required to pay a withholding tax on the effectively connected
purposes and may impact the way the entity joint venture issues distribu- taxable income that is allocable to its foreign members. The rate of taxes
tions to the joint venture parties. The parties may also contribute capital the LLC is required to withhold will depend on whether the foreign
through loans made to the entity joint venture. These loans will often member is itself a corporation. The withholding tax rate for effectively
contain standard credit terms, including default provisions, calculation of connected income allocable to non-corporate foreign members is 37 per
interest and maturity dates. In lieu of repayment of these loans, the joint cent, and 21 per cent for corporate foreign members.
venture’s operating documents may allow the loaning party to convert the Additionally, foreign investors investing in US entities, whether
loan into additional equity in the joint venture. directly or indirectly, are required to file a report with the US Commerce

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Department’s Bureau of Economic Analysis. Reporting requirements are For entity joint ventures, there may be bankruptcy or regulatory
triggered by the acquisition of 10 per cent or more of the voting interests laws that exclude certain exit options or types of equity transfers.
in a US entity, whether those interests were acquired through investing For contractual joint ventures, the alliance between the contracting
in an existing US business; acquiring an existing US business; forming parties is not intended to last forever. Also, because general contract
a new entity; acquiring a US business that merged into an existing rules apply to the joint venture agreement, the joint venture parties may
US affiliate of a foreign entity; expanding an existing US affiliate of a include a wide variety of termination or exit procedures. The joint venture
foreign entity. parties will typically stipulate a termination date and may include provi-
sions allowing each party to terminate the agreement early (ie, upon the
DEADLOCK, EXIT AND TERMINATION insolvency of a party, if one party materially breaches the agreement, or
if the joint venture cannot effectively carry out the purpose for which it
Deadlock provisions was formed, if the parties become deadlocked).
21 What deadlock provisions are commonly included in joint
venture agreements in your jurisdiction? Tax considerations following termination
23 What are the tax considerations on termination of the joint
There are a wide variety of deadlock provisions used by joint venture venture?
parties. Typically, the deadlock provision escalates a dispute by involving
senior management of both joint venture parties or independent board The tax considerations on the termination of the joint venture will
members of the joint venture, following by mediation, arbitration or depend on the method of termination. In the liquidation and winding up
both. As a last resort for joint venture entities that are unable to resolve of the joint venture, parties typically receive cash and property.
their deadlock, deadlock provisions may provide for the exit of one of As general matter, if the joint venture is taxed as a partnership,
the joint venture parties by selling its ownership interest to the other there is no tax to the joint venture or the joint venture parties on the
joint venture party or a forced sale of the entity joint venture, at least for distribution of assets. The joint venture parties take a basis in the assets
certain fundamental disagreements specified in the joint venture agree- distributed to them equal to the basis they had in the joint venture.
ment. A popular mechanism for an exit is the Russian Roulette provision, The rules get more complicated if a joint venture party has a negative
which allows each joint venture party to name a price at which the other capital account. In that case the joint venture party will recognise gain
joint venture party can sell its ownership interest to the offering joint equal to the negative balance in its capital account. Added complexity
venture party or buy the offering joint venture party’s ownership interest arises if a joint venture party does not receive its appropriate share of
(with the relevant purchase price being proportionate to the ownership assets that produce ordinary income when sold, which typically does
interest that is being sold). If all else fails, the joint venture agreement not happen. If the joint venture is a C corporation (ie, subject to tax at
typically provides for the dissolution of the entity joint venture upon the both the corporate and shareholder levels), it will be taxed on the distri-
joint venture parties’ approval. Contractual joint ventures usually provide bution of appreciated assets in the process of winding up its business.
for an escalation procedure that involves senior management, followed Additionally, the corporation’s shareholders will recognise gain on their
by mediation, arbitration or both, and often permit each joint venture shares when they receive liquidating distributions; this results in double
party to terminate the joint venture if the deadlock cannot be resolved. taxation for the shareholders.

Exit provisions DISPUTES

22 What exit provisions are commonly included? Does the law
restrict any forms of mandatory transfer provision or any Choice of law and resolution methods
basis of calculation? 24 In your jurisdiction, are there constraints on the choice of
law or the method of dispute resolution provided for in joint
Broadly speaking, there are two categories of exit plans for entity joint venture agreements?
venture parties. The first is a joint venture party’s sale of its interests
in the venture. The governing documents of most joint venture entities For entity joint ventures, the joint venture parties can decide freely
allow for a sale of a joint venture party’s interest to the joint venture or in which state they form the joint venture as a corporation or limited
the other joint venture party. But they often prohibit the sale to a third liability company (LLC), and the corporate or LLC laws of such state
party or at least stipulate a right of first refusal, as joint venture parties will apply to the joint venture. Parties entering into a contractual joint
typically want to be able to control with whom they partner in the joint venture are also generally free to choose the law that applies to the joint
venture. Additionally, the governing documents of an entity joint venture venture, provided that courts may decide not to enforce such governing
may grant parties tag-along rights or drag-along rights. The drag-along law provision if neither the joint venture nor its parties have any connec-
mechanism protects the majority by forcing the minority to sell its tion to the state whose law was chosen.
ownership interest if the majority secures a buyer for its own interests,
thereby facilitating the sale of the entire entity. Tag-along rights flip this Mandatorily applicable local law
scenario and protect the minority by allowing it to require the majority to 25 What mandatory provisions of local law will apply
include the minority in a sale. irrespective of the choice of governing law?
The second category is the sale or termination of the joint venture
as a whole. The parties may choose to sell the entity to a third party, For joint venture entities, the corporate or LLC code of the entity’s state
issue an IPO or dissolve the entity joint venture. The governing docu- of formation will apply to its operations. Compared to many other juris-
ments may provide for a liquidation preference upon a dissolution so dictions, corporate and LLC laws throughout the United States grant the
that certain assets that were contributed by a joint venture party when parties a great deal of flexibility in structuring the corporation or LLC.
the joint venture was formed (eg, intellectual property) is returned to the Although the entity’s governing documents can largely dictate its struc-
contributing joint venture party. Dissolution is not usually favoured, for ture and rules for operations, certain mandatory provisions of the state’s
the process of determining which assets belong to which joint venture corporate or LLC code cannot be waived. One important example of this
party can be contentious. is a state’s fiduciary duty requirements. Many states allow the parties to

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strictly curb, or entirely do away with, certain fiduciary duty obligations, Liabilities
but some states (including Delaware) prohibit the joint venture entity 28 How can joint venture parties have liabilities to each other
from waiving the fiduciary duty of good faith and fair dealing. beyond what is expressly agreed in the joint venture
In the case of both contractual and entity joint ventures, although agreement?
a court in one jurisdiction will apply the laws of another jurisdiction, as
specified in the parties’ choice of law clause, that court will still apply its The joint venture parties can incur obligations to each other in several
own procedural rules. Similarly, it will apply its own laws determining ways. In some instances, the law treats a joint venture much like a part-
what qualifies as procedural and what qualifies as substantive law. nership (ie, certain cases have applied the partnership rules of joint and
Furthermore, local laws, such as licensing, zoning and registration, will several liability to a joint venture), and with that can come the general
also apply in regard to the joint venture’s operations. principles of partnership and agency law. Within the scope of the joint
venture’s operations, certain states may treat one joint venture party as
Remedy restrictions principal for itself and as agent for the other party and can thus find that
26 Are there any restrictions on the remedies a tribunal one party’s actions bind the other. Because of this, the parties should be
can grant that would have a bearing on the arbitration of mindful in drafting the entity joint venture’s organisational documents
joint venture disputes? Are there any restrictions on the to limit the scope of each party’s authority and clarify that the parties
arbitration of shareholder claims? are not each other’s agents.
With joint venture entities, majority owners and nominee direc-
There are no statutes restricting the remedies a tribunal may grant in tors to the board of directors have fiduciary duties to the corporation.
a joint venture dispute. The joint venture parties themselves, however, In certain states, majority joint venture owners owe limited duties (typi-
often restrict the remedies they may seek against each other. For cally in the context of a sale of the entity joint venture) to the minority
example, joint venture parties often waive indirect and consequential owner. Directors and officers generally owe fiduciary duties to and must
damages as well as lost profits (and instead rely on the exit or termi- act in the best interests of the joint venture and the joint venture parties,
nation provisions). Restrictions typically do not prohibit, or specifically and may not act only in one joint venture party’s interests. Directors and
allow for the parties to seek injunctive relief, often a more effective officers may be held liable to the corporation for acting under a conflict
remedy, as it is both easier and quicker to receive and courts have broad of interests to the detriment of the joint venture.
latitude to craft efficient solutions. With contractual joint ventures, general contract principles apply,
including the implied duty of good faith and fair dealing that all contrac-
Minority investor protection tual parties owe to each other. This duty typically arises when one party
27 Are there any statutory protections for minority investors that to a contract has a discretionary right to do something and exercises
would apply to joint ventures? that right in bad faith, to the detriment of the other party. In addition,
a claim for fraud brought by one joint venture party may also create
For joint venture entities with a minority joint venture party, minority liability for the other joint venture party, even if there are contractual
protections typically take a central role in negotiating the joint venture carve-outs excluding such claims.
structure. The corporate and LLC codes of certain states protect
minority investors. For example, in the context of a corporation’s freeze- Disclosure of evidence
out or squeeze-out merger, whereby two corporations are merged into 29 Are there any particular issues that can arise in joint venture
one and the minority joint venture party is forced to sell its interests as disputes in your jurisdiction concerning disclosure of
part of the transaction, state corporate laws often require the majority evidence?
joint venture party to pay the minority joint venture party a fair value
cash buyout. In Delaware, for example, the minority joint venture party Unlike in many jurisdictions, the United States allows for broad
has the right to have its interests appraised to ensure that it receives discovery of evidence. With limited exceptions, parties can request any
a fair price. documents containing relevant information or which may lead to the
However, because state rules can often be limited or waived by discovery of relevant information. Joint venture parties often provide
the joint venture parties, the minority member joint venture party often for dispute resolution by arbitration with express restrictions on the
seeks not only to keep statutory protections in place, but also to include scope of discovery to avoid the often unduly burdensome discovery
additional protections. Some additional minority protections include: process in the United States.
• supermajority requirements or veto rights for certain actions, Joint venture parties may encounter issues related to attorney-
which prevent the majority joint venture party or the joint venture’s client privilege. Some courts have applied the ‘common interest
management from making certain decisions without the minority’s privilege’ to collaborative business ventures, like joint ventures. The
approval. For example, Delaware requires the vote of a majority of common interest privilege is an extension of the US’s attorney-client
outstanding shares to approve a merger, while Ohio requires a vote privilege and it protects communications passing from one party to the
of two-thirds of the outstanding shares (but allows the articles to attorney for another party. Importantly, for the privilege to apply, the
stipulate a different proportion not less than a majority); parties must have a common interest and that interest must be legal in
• the right to appoint one or more board members. If the minority nature. When the joint venture parties are in a dispute between them-
member cannot obtain a board seat, it should seek observer rights selves, the privilege is unavailable. Thus, in general, parties to a US
allowing it to designate a person to observe board meetings and joint venture should assume that most information will be discoverable
stay appraised of the entity’s actions; in litigation.
• the ability to require the majority member to purchase the minor-
ity’s interest in certain situations, such as a change of control of the
majority party (known as a put option or put right); and
• tag-along rights, which allow the minority joint venture party to sell
its interests on a pro rata basis should the majority joint venture
party seek to sell its interests to a third party.

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 United States Frost Brown Todd LLC

MARKET OVERVIEW

Jurisdictional advantages
30 What advantages does your jurisdiction offer for parties
wishing to set up and operate joint ventures?

The key advantage of the United States is the flexibility it affords. It is a

freedom of contract jurisdiction and, with few exceptions, the parties are
free to structure and manage an entity joint venture or contractual joint Kai Bitter
[email protected]
venture as they see fit. The United States affords several entity forms
to choose from to achieve the parties’ specific goals for the venture and Kristen A Elia
their formation is usually simple and quick. US courts typically enforce [email protected]
the (unambiguous) terms of the joint venture agreement as written. Emily Tanji
Additionally, foreign investors are largely subject to the same rules as [email protected]
domestic parties.

Requirements and restrictions Great American Tower

301 East Fourth Street, Suite 3300
31 Are there any particular requirements or restrictions
Cincinnati, OH 45202
relating to joint ventures in your jurisdiction that could deter
United States
international investors? Tel: + 1 513 651 6800
www.frostbrowntodd.com
Typically, the most significant deterrent to international investors is
US litigation, which is notoriously lengthy, expensive and, for parties
unused to US discovery rules, invasive. For this reason, foreign inves-
tors should properly draft the dispute resolution mechanism when Coronavirus
forming the joint venture. Such a mechanism should avoid litigation in 33 What emergency legislation, relief programmes and other
US courts to resolve disputes between the joint venture parties and initiatives specific to your practice area has your state
instead provide for arbitration, possibly preceded by mediation. implemented to address the pandemic? Have any existing
Although not necessarily a deterrent, foreign investors should government programmes, laws or regulations been amended
also be aware of the reporting requirements of the Bureau of Economic to address these concerns? What best practices are advisable
Analysis, which may be triggered by the foreign investor’s activities in for clients?
the United States, and the possibility that the Committee on Foreign
Investment in the United States may examine the investor’s activities. The most prominent emergency legislation in response to the corona-
virus pandemic in the United States is the Coronavirus Aid, Relief, and
UPDATES & TRENDS Economic Security (CARES) Act, which aims to provide economic relief
to small businesses, American industries, and more. The CARES Act
Key developments of the past year provides certain tax benefits to businesses and includes the Paycheck
32 What are the current trends affecting joint ventures in your Protection Program, which administers forgivable loans to fund payroll
jurisdiction? What recent developments in legislation and and certain overhead expenses of small businesses (companies with
case law have had an impact on joint ventures? 500 employees or less). In addition, the Families First Coronavirus
Response Act, as amended and clarified by the CARES Act, significantly
On 6 August 2020, President Trump issued an executive order giving the expands the reach of the Family Medical Leave Act with regard to paid
Chinese company ByteDance 90 days to sell the popular video-sharing sick leave and family leave in connection with covid-19.
app TikTok. The President’s authority for this executive action derives Individual states have also taken steps to address concerns related
from the Committee on Foreign Investment in the United States (CFIUS), to the pandemic. For example, Ohio has adopted legislation that bars
which has the power to unwind or block deals involving foreign inves- civil actions for injury, death, or loss caused by exposure to, or trans-
tors. The committee was relatively unknown (even in legal and political mission or contraction of covid-19 or any mutation of the virus, where
circles) until recently, but has taken on a new significance under the it cannot be established that the exposure, transmission or contraction
Trump Administration. Originally formed to review transactions with was caused by reckless conduct or intentional, wilful or wanton miscon-
an eye on US national security, its scope of review has recently been duct by the person who is being sued.
expanded to include a broader focus on the economic implications of There continue to be new legal developments and guidance issued
individual foreign investment transactions and the cumulative effect of in connection with the pandemic. It remains particularly important to
foreign investment on certain sectors of the economy or by investors keep up to date in areas of tax and employment, and with relevant loan
from certain countries. CFIUS is not required to provide data about its programs and developments in the relevant state.
activities, making it impossible to know the precise number of CFIUS
filings that have been made since the change in law. However, it is clear
that CFIUS has been more active in the past few years. Foreign inves-
tors interested in entering the US market should continue to monitor
CFIUS’s activities – to the extent they are made public.

94 Joint Ventures 2021

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