Legal advice for successfully launching a joint venture

When two companies decide to join forces to undertake large projects, the biggest mistake they make when signing contracts is the lack of definition of mechanisms to resolve power struggles.
The president of HNA, Wang Jian (left), and the CEO of NH Hotel Group, Federico González (second from the right), during the signing of an agreement between both companies.
It is increasingly common to see two companies join their resources to create a partnership with which to tackle large-scale projects, such as landing in a new market or discovering a medicine. What's more, even competing companies have seen the creation of joint ventures as the perfect formula to explore new businesses without compromising all their financial muscle.
There are many Spanish firms that have been successful in finding partners to start new projects, such as NH Hotel Group with the Chinese company HNA or Gamesa with the French company Areva. However, there are also many joint ventures that have not ended successfully, as was the case of Fagor with the Asian company Haier.
"In these structures, when companies with different cultures come together, it is important that the contract makes clear the objectives of the common project, how the vehicle will be governed or the way to resolve potential conflicts that arise," explains Lucas Osorio, partner of commercial and director of the Madrid office of Hogan Lovells.
According to this expert, the advantages of this type of strategic alliances are clear: "It is about avoiding, as far as possible, exaggerated financial outlays." But not only the costs are shared, but also the risks. Furthermore, it is a very flexible model, since "the joint venture contract is not legally regulated as a typical and unitary figure, but in practice it is implemented as a complex legal means of negotiation, in which the parties define objectives, agreeing rights and obligations".
Precisely, this contract is key to the success of this joint adventure, since it is negotiated when the parties are on the same page and it is the document in which, among other things, the mechanisms to resolve problems, such as conflicts of power, an aspect that is not always taken into account.
The Hogan Lovells partner explains that “it is common to resort to so-called ADR; These are dispute resolution mechanisms that do not involve the rigors and deadlines of arbitration or courts. In this way, it is the managers of both companies themselves who try to mediate, until reaching the highest hierarchical level. If there is no agreement there, then other avenues are resorted to, such as judicial.
But these power struggles cannot become fierce and, above all, ways must be previously defined to, if necessary, end the alliance, but without implying the end of the new company. "The most extreme situation is to articulate exit mechanisms for one of the participants," or even both, selling the joint venture to a third party, says Osorio.
In these situations, different conditions are included. One is what is known as Russian roulette (one of the parties demands that the other buy or sell their participation), another would be to establish an auction or bet on the Andorran clause (one of the parties sets a price and the other decides if, for that amount, you prefer to sell your package or, on the contrary, buy your rival's).
Key aspects of a contract– 'Due diligence': if any of the parties, instead of capital, contributes a branch of the business or its own assets, it is necessary to make a precise valuation.
– The companies that participate must clearly define the objectives of the new company, as well as the configuration of the executive bodies.
– In joint control structures, it is key to define conflict resolution mechanisms that take both parties into account.
– Stipulate the operation of ADR or alternative problem-solving tools. Negotiation system prior to arbitration or courts.
– Define unlocking formulas for when an agreement is not reached. For extreme cases, it is necessary to plan for the departure of one of the parties (even both).
– If one of the partners is an industrial partner, when considering leaving the alliance, the brands and technology that it has contributed must be protected.
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