JOINT VENTURES

 PRESENTATION TO LAW SCHOOL STUDENTS

 APRIL 2021
Key Highlights

 Introduction
 Rationale of Joint Ventures
 Practical Experiences
 Clause by clause close look of the JV Agreement
 Discussion
The Presenter
Martin Mdoe Esq.
LL.B. LL.M MBA
He is the Partner of MM Attorneys. He holds a Degree
in Law (LL.B) (Hons.) from the University of Dar es
Salaam and Masters in Laws (LL.M) from the University
of Northumbria, UK. He also holds a Masters in Business
Administration (MBA) from the Eastern and Southern
Africa Management Institute (ESAMI).
Mr. Mdoe practices and has vast experience in
Corporate and Commercial law; Banking and Finance
law; Telecommunication and Information and
Communication Technology Law; Investment Law and
Land Law, Conveyance and Real Estate. He has
worked in both public and private sectors with
Tanzania Development Finance Company Ltd (TDFL)
as Legal Officer; Diamond Trust Bank Ltd as Company
Secretary, Legal & Human Resources Manager; MIC
Tanzania Limited (tiGO) as Company Secretary, Legal
& Regulatory Manager and National Housing
Corporation (NHC) as Director of Legal Services &
Corporation Secretary.

Mr. Mdoe has acquired further post-graduate

qualifications in banking, corporate governance,
public relations, legal and regulatory issues, business
ethics and compliance and customer support.
Lawyer’s Role in JV set up
Dispute Resolution

Legal Advise Contract Review/Drafting

Due Diligence
Rationale of Joint Ventures as an alternative to;
 Rationale of
Joint Ventures
Basis for formation of a joint venture is commercial collaboration in which
two or more unrelated parties pull, exchange and integrate some of their
resources with a view to mutual gain while at the same time remaining
independent.

Joint venture may take a number of forms and in this module we will discuss
the basis to consider in the Joint Venture formation. However, we will not
dwell much on the following much as they impact JV structure and
operations:

 Industry specific joint ventures

 Country specific joint ventures

 Multiparty joint ventures and

 Tax and Regulatory affairs

Rationale of Joint Venture
Rationale for Joint Venture
Strategic intent Primary Reasons for JVs

Market
Access

 Sharing operation Risks

 Access to other customers and markets
Capabilities JV
Capital &  Alternative to an acquisition in cash
& Positional Strategic
Risk Sharing
Assets Intent
 Access to additional Capital
 Access to human capital
 Access to technology
Economies
of Scale
Rationale of Joint Ventures

Maximize use of Leverage on

Create Strategic Expand new
new partner’s
Alliance to technology
technology, brand &
access wider through new
products and reputation to
market markets
services increase sales

Share expertise Leverage on

Serve as buy
and relationship joint resources
Risk sharing out stepping
to penetrate new but yet remain
stone
markets independent

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 ;

Practical themes in setting up successful JV

 In the Context of uncertain market and financial conditions

 JV can achieve growth while minimizing risk levels:

 JV deals are effective at decreasing company risks ;

 Increased Return on investment.

 Choosing a partner carefully is instrumental to the success of a JV

 Participants cultural fit, deal experience, and trust are critical factors
 Clarity of the purpose and control and strong management support:
 Commitment of senior executives in the parent company can secure delivery of the vision

 Importance of exit strategy

 Participants to have a clear exit strategy from very beginning, preferred one is a sale assets to one of the
partners
Practical themes in setting up successful JV
• Ensure that the rationale and objectives for the JV are set out clearly from the start for all
parties
• Build the blue print for the JV as early as possible
• Agree how value will be derived and shared with JV partners
Clarity of Purpose • Communicate clearly to ensure broad buy in across the company
• Identify the sources of benefit and establish clear ownership and accountability

• Give careful consideration to the appointment of JV leaders and how they work as a team,
allocate your best people
• Tackle risks and issues quickly and take tough decisions early
• Make practical planning and reporting frameworks
Control • Establish NHC Bank to support its construction activities plus supporting mortgage loans
• Implement robust planning and programme process to underpin the JV objectives

SUCCESFUL JOINT VENTURE

Clarity of purpose is key
Practical themes in setting up successful JV
• Management of people dimensions of change is principle difference btn success and failure
• Recognize that major changes increase uncertainty and ambiguity
• Remove uncertainty as quick as possible through open, honest and timely communications
• Realign objectives and rewards with the objective of the JV
Managing People
• Plan for change at all levels across the company and if need be undertake training
• Explore potential investors e to partner with NHC on its large projects
• Involve HR early on and ensure is fully resourced

A joint venture is like a marriage, you

need to put time and effort into the
Bottom line
relationship with your partner

SUCCESFUL JOINT VENTURE

Biggest Issues to set up JV

• Governance
• Cultural
Differences/Lack of trust
• Social/Human Capital
• Regulatory/Deal
Structuring
Biggest Issues during due
diligence

• Financial Due diligence

• Legal, Tax and
Regulatory
• Operations due
Diligence
How to improve JVs

• Clarity of the strategy

• Top Management
selection
• Project Management
Biggest Issues during negotiation
phase

• Governance and
conflict resolution
• Alliance Agreement
• Exit scenarios
PROS AND CONS OF JVs

• Opportunity to leverage the distinct strengths of both partners

• Cut investment or funding costs
• Reduces down side risks
• Pros
• Increased power over activities and principles guiding JVs
• Provide quick and low costs access to expertise
• Allows contributions in kind such as assets, know how etc.

• No overall control, possibility of deadlock

• Some potential synergy opportunities might not be delivered
• Rewards of success shared with JV partners
• An exit plan need to be worked out to avoid disagreement or
• Cons deadlock
• Partner may use the knowledge gained through JV to set up in
competition

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Practical Challenges for every JV
1. The Vision

• Setting a clear vision from day 1 through to completion is critical;

• Defining the operating model will enable JV to be appropriately planned with practical series of deliverables

2. Governance
• Establishing JVs board and governance is challenging because each partner and JV own management team
has different agenda, needs, priorities, interest hence delays or unresolved issues

• Constitution of the Board and governance structure should create a framework for decision making and issue
resolution to enable delivery of both parent coys and JV goals

3. Synergy
• JVs are established to deliver synergies neither parent could achieve, delivering sooner than planned will
drive expectations for further growth

• Programs require a robust financial tracking mechanism to report progress and alert any possible delays

4. Management Team
• Need for a competent team with clear roles and responsibilities to deliver shareholders objectives

• Appointing an effective and empowered management team responsible to the board is critical for driving
the JVs value

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It is all about alignment
Practical Challenges for every JV
5. Parent company commitment

• Without visible commitment form senior executives with accountability in the parent company the JV will
fail

• The consistent and continued commitment of parent company will secure delivery of the original vision
6. Human Capital
• Prolonged transaction timeline will be distracting to employee resulting in loss of focus on the current
business

• It is essential to retain and motivate key talent, win the heats and minds of all employees and provide
certainty where possible

7. Response of stakeholders
• Transaction announcement is a chance to competitors to win market and may confuse customers

• Focus on customer retention may be required to minimize disruption and competitor spoiling tactics need
be built into the strategy

• Regulators and other oversight organs need to be kept on the loop and relevant approvals obtained timely

8. Exit strategy
• Planning exist is as important as planning JV itself

• Parties should be open to each other and articulate potential exit scenarios.

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 Investment
decision

Management Profit sharing

Common
conflicts
btn JV
partners
Return on
Business Plan
investment

Capital
contribution
JVA: Clause by clause close look

Profit Sharing Formula

Parties Term

JV Contract
Contributions Compliance
elements

Management Divorce

Purpose

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JVA: Clause by clause close look
Issue Proposed Approach

• Clarify activities of the JV

• Consider technology, IP rights other resources
Scope/
• Plan for due diligence of the parties
Purpose
• Develop business case/plan
• Non Competition

• Considering tax, regulatory, 3rd party consent if required and ascertain whether
• Partnership
Form of JV • Contractual
• others

• Identify current or anticipated changes to regulatory environment

Regulatory • Ascertain compliance in ownership and control

• Consider dilution, exit and liquidation rights

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JVA: Clause by clause close look
Issue Proposed Approach

• Ascertain accounting treatment

• Determine and align existing
Existing • Contractual relationship
Operations • Debts
• Confidentiality agreements
• Son competition clauses

• Tax consequences of the proposed structure

Tax • Undertake tax planning accordingly

• Ascertain departments or subsidiaries with material interest in the transaction

Internal
Preparations • Ascertain the impact and their involvement

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JVA: Clause by clause close look
Issue Proposed Approach

• Consider signing a confidentiality Agreement and determine whether binding

• NDA
• LOI
Conf.
• Term sheet etc.
Agreement
• If non binding set time for replacement with binding agreement
• Consider whether listed company is involved

• Consider which parties should be a party to the contract whether

Parties to • Holding company
the
• Subsidiary company
Agreement
• Whether JV entity also a party

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JVA: Clause by clause close look
Issue Proposed Approach

• Need for Management vehicle to manage the JV such as Board, Committee etc.
• Depending on structure chosen clarify
• Selection criteria, removal, decision making
Governance
• Conflict of interest, non arm’s length transactions
• Approvals of say budget business plan etc.

• In drafting this clause consider

• Ratio, formula, proportionate
Board of
Directors • If 50-50 how to deal with deadlock i.e. chair with casting vote
• Qualification, removal, replacement, quorum, notices, who can call meeting

• How often
Meetings of co • Quorum, casting votes
ventures
• Instruments acceptable

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JVA: Clause by clause close look
Issue Proposed Approach

• Right to nominate CEO, CFO,COO

Managemen • Limits of authority
t • Right to rotate officer in key positions
• Right to hire and fire

• Who is the auditor and how to change auditors

• Reporting and access to information
Internal • Frequency
Control
• Nature
• Some rights to be removed if diluted

• To be developed depending on authority and consider amending depending on dilution

Action to • Budget, business plan, borrowing, sale, certain contract,
consent
• Insolvency related transactions

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JVA: Clause by clause close look
Issue Proposed Approach

• Once developed what if not approved

Business
• Ascertain whether previous budget to roll over
Plan/
Budget • Consider 3rd part mediation or
• Arbitration

• When drafting dispute clause consider

• Applicable law
Disputes • If Arbitration location, number, how chosen, costs
• Litigation, DAB

• Philosophy of financing either debt or equity if debt whether third party or shareholders
• Financing by shareholders consider whether

Financing • Prorate to interest of JV

• What if one doesn’t have
• Specify amount and time of contribution
• Other support in kind how priced
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Commercial break
JVA: Clause by clause close look
Issue Proposed Approach

• Craft the clause to cover technology/IP to be transferred to JV and licenses if any and
determine
Technology • Restrictions
• What will happen on JV termination or exit
• Value attributed to the IP

• This clause is very key and sensitive, parties are restricted to

Non • Hire JV personnel during or after exit of JV
compete
• Arrangement of competitors restricted

• Classify material defaults

• E.g. failure to honor capital call , non compete, confidentiality etc.
Breaches • Provide possible remedies
• E.g. dilution, loss of board representation etc.

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JVA: Clause by clause close look
Issue Proposed Approach

• Exit and termination rights are key especially to minority

• Put triggering events for exit and termination
Termination • Default; failure to observe obligations
• Non default ;management deadlock, project frustration
• Remedies; dissolution of JV, buy out of party’s interest

• Put share transfer restrictions

• No transfer except as per agreement, or after lapse of time
Share • Transfer limited to affiliates, (defined)
transfer
• Pledge of shares etc.

• The former is when minority co venture is allowed to negotiate a put right because of change
of law or regulation. Aim is to restore the affected party into original position
Put or Call
• The latter is the ability to purchase the co venture interest
Rights
• In both cases consider fixing price, fair market, time specific, and or formula price

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JVA: Clause by clause close look
Issue Proposed Approach

• Right of first offer and Right of first refusal

• Right of first offer is the right of non selling to receive offer from selling party
First offer/ • Right of first refusal is the right of a non selling to require the selling to sell to the non selling
first refusal however, need to consider the above;
• In the context of default, exit, termination rights
• Consider prohibition against sale to 3rd parties who are competitors

• Tag along is the right of co venture especially minority to tag along on any sale by the other co
venture or only on sale of control block which would result in the majority party ceasing to
Tag and or have control.
Drag along • Drag along is a right of co venture to require the other co venture to sell its shares into third
party offer

• Buy rights or sell rights also known as Shotgun

Shotgun • Each co owner has the right to buy or sell interest of the other at a named price

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JVA: Clause by clause close look
Issue Proposed Approach

Profit
Sharing • Determine whether to distribute profit or reinvest
• Develop formula for distribution

• Treatment of JV debt
• Regulatory aspect of exit transaction
Other issues • Price valuation
to consider
• Closing process
• Termination/Dissolution
• Miscellaneous

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Conclusion and Recommendations
Key Message to Practitioners

Build Trust

Understand
View
partnership as
Transforming to
meet to meet
Objectives mindset not
formula

challenging
Share and
Learn from
learn from
your partner
mistakes

Understand Draft Clear

time
agreement and
your partner be flexible
 contacts

Presented by;
Martin Mdoe Esq.
MM Attorneys
Suite No. 1005, 10th Floor
Uhuru Heights
Bibi Titi Mohamed Road
Box 7281, Dar Es Salaam
www.mmattorneys.co.tz