The legal advisory for the internationalization of SMEs highlights that international distribution and international agency agreements are certainly the most simple ways for an enterprise to enter into a foreign market; in facts, these agreements allow the exporter to drive the international expansion of its business from the national headquarter; but immediately afterwards, once consolidated the commercial network in the Target Country, the Italian exporter may tipically wish to grant its foreign clients with a more stable presence, also by means of contractual or corporate joint ventures.
Below you will find a brief insight about these very usefulagreements to Companies intended to expand their business into a foreign market.
2. Characteristics of international Joint Ventures
The definition “Joint Ventures” indicates different kinds of agreements, which may be of contractual or corporate nature; therefore, it’s worth to make a preliminary distinction between contractual and corporate Joint Ventures.
As Contractual Joint Ventures are generally defined those international agreements including the paramount provisions and fundamental precautions, in order to regulate the cooperation and collaboration between a national company and a foreign partner for the joint execution either of commercial or of production or of research activities, in the Target Country.
Instead, Corporate Joint Ventures are usually limited liabilities companies, therefore, corporate entities with a financial autonomy, where a national company and the foreign partner will be , frequently, equal shareholders.
The choice of selecting one or the other kind of Joint Venture may depend on different elements, among which, by way of example: laws of the foreign country, current level of trade in the foreign market, market entry barriers,
minimum level of investments to implement and consolidate entry strategies into the foreign market, tax and financial benefits offered to foreign investors.
3. Contractual Joint Ventures
At the outset, a Joint Ventures Agreement with a foreign business partner shall solve, in details, the critical and usual issues posed by an international agreement, including, by way of example: the choice of applicable law, the choice of competent jurisdiction or of the arbitration chamber entrusted to solve any disputes, formal validity requirements , the potential application of mandatory or imperative rules of laws, aspects related to international transports, terms of delivery of the goods, Customs procedures, internationaltaxation , restrictions imposed by antitrust laws.
Joint Ventures Agreements shall tipically establish the terms of a future cooperation between parties, to jointly manage one or more phases of their commercial or production activities in the foreign market (sale, distribution, franchising, etc.).
The advantages of J.V.A. are mainly expressed by a fast entry into the foreign market, thanks to both the compentence and the experience of the foreign business partner, and also in terms of costs saving due to the absence of a foreign branch.
Among the usual risks to consider, in practical terms, there may be a heavy dependence on the foreign partner, due to a limited sharing with the same of information, of contacts and of business relations.
However, it is always advisable to provide for contractual procedures that allow a coordinated management of purchases and of sales, as well as for remedies to prevent judicial disputes abroad also by means of alternative dispute resolutions and of international arbitrations.
4. Corporate Joint Ventures
In Corporate Joint Ventures, generally with limited liability, a national company and a foreign partner will be usually equal shareholders, meaning that each shareholder will tipically have its own member to the Board of Directors.
That’s also why it is so important an appropriate preliminary examination of the company law of the foreign country, which may highlight quantitative restrictions to the shareholdings of foreign investors or alternatively reserve specific services or productions for national enterprises only .
The Articles of Association shall provide for the composition of the Board of Directors, for capital increases, for disputes resolution and for pre-emption rights, if may occur that one of the shareholders intends to sell its shareholding, thus terminating the agreement.
In addition to the statutory provisions Shareholders’ Agreements will generally provide for the corporate governance and for the organization of the business, for the change of control, as well as, sometimes, for to co-selling clauses, like drag-along or tag-along clauses.
With this kind of company the foreign investor may have the advantage of using the know-how and the solid presence in the foreign market of the local partner, immediately boosting its entry into the same.
However, equal shareholdings may determine complex corporate issues, due to the absence of majorities in case of disagreement between the shareholders .
Therefore, adequate statutory or contractual provisions are necessary to avoid a dead-lock risk, also by means of lateral put-option or call-option agreements.
In conclusion, Contractual or Corporate Joint Ventures tipically represent alternative steps of a company’s internationalization strategy.
They are flexible tools to be specifically arranged accordingly with all the commercial objectives that can be pursued when entering into a foreign market, among which, by way of example: bypassing tariff barriers, exploiting facilitation for foreign investors, benefitting of a continue supply of commodities, products and components , but also, quite often, realizing research and development of new products or technologies abroad.
Landolfi & Associati corporate lawyers are available for any further insight and information on internationalization strategies both in EU or extra EU countries, either of Civil Law or of Common Law, and on international commercial contracts in English, French and Spanish.