With globalization, innovation and competition, companies are embracing Joint Ventures (JVs) as a key to compete in today’s technology driven business environment. In addition, foreign investors in specified sectors in Ghana must partner with Ghanaian companies to be allowed to carry on business in those sectors. Through JVs, companies pool resources and strengths together to improve their competitive positions in a way that they could not achieve alone or be able to obtain relevant licenses to operate in specific sectors. The success of JVs is dependent on the right foundations. This article explains some of the factors to consider in forming JVs in Ghana.
Choice of Structure
JVs may take many forms. The choice of form depends on factors including legal requirements of the sector, objective or purpose of the parties, cost involved including capital contributions, transaction structure (choosing the optimal) and others. Typically, a JV can be set up contractually (without incorporating a JV company (JVC)) or by the establishment of a special purpose vehicle (SPV) or JVC.
- Contractual JV
The basis of any JV arrangement is a contract. Parties can choose to undertake a JV activity (business or project) where both parties maintain their independence but undertake the activity jointly (i.e., the parties do not form a JVC). This structure is flexible and relatively quick to implement as no separate legal entity is created. Contractual JVs allow the parties to decide how the JV is conducted as the parties are not constrained by company law compliance requirements. For a short-term project or business where the parties play distinct roles based on a simple contract, contractual JV is preferable.
- Special Purpose Vehicle (SPV)
Parties may agree for the JV to take the form of an SPV/JVC which is a separate project company incorporated under the Companies Act. A JVC makes it easier for the parties to join resources for a single project/business, manage liability risks associated with the project/business and establish a management team that is focused solely on the JV. This form of JV may result from a merger or an acquisition arrangement. In Ghana, some local content restrictions in specific sectors makes JVC a market entry requirement and the only option to meet licensing requirements. The use of a JVC is useful for long term projects and businesses that require a single governance and management system.
Though the JVC is the outcome of a contract, there must be terms regulating the relationship between the parties as shareholders in addition to the JV project/business.
Key Legal Terms and Commercial Issues of the Agreement
Irrespective of the choice of structure, there must be an agreement governing the JV relationship which must be drafted with care to minimize future disputes. The JV Agreement must provide for key requirements covering the project, role and obligations of each party, deal with events that may prevent achievement of the parties goal, exit options, conflict resolution mechanisms, etc. Some of the key terms that must be addressed in the agreement include:
- a) Term of the JV- how long are the parties to be in the JV relationship? The duration must be clearly defined.
- b) Purpose-what is the goal of the project or business? There must be clear description of the project or business to be undertaken with clear timelines.
- c) Decision Making- how are decisions to be made? The agreement must clearly set out how the parties make decisions on issues arising. Will decisions be made unanimously, by majority decision or some decisions will be by a particular party? The decision-making process must be provided.
- d) Duties & Obligations – what will be the obligation of the parties? The roles of the parties must be clearly set out. If a party is required to provide funding, whilst the other provides market access, the agreement must state so.
- e) Ownership & Profit Splitting-what are the ownership percentages and how will the JV be funded? Will a party be contributing non-cash assets to the JV. How will such non-cash assets be valued? The ownership percentages and funding must be provided as well as profit sharing. Parties must negotiate and decide the appropriate measurement for their efforts and payments to avoid confusion where remunerations or fees are to be paid for particular services provided by a party or whether such services are capitalized as contributions must be stated.
- f) Non-compete/Confidentiality-how would confidential information be kept? And can the parties compete against each other during the pendency of the JV. This provision will set clear rules on how the parties will keep confidential information and provide if the parties are able to compete in the same markets as the JVC.
- g) Exclusivity-will there be restrictions on a partner’s ability to undertake similar project or business? If the parties intend to avoid each other undertaking similar business or project, then the agreement must clearly provide for this and state the consequence for default.
- h) Intellectual property (IP) rights- how will the IP of the parties be protected? Will there be limits on the usage and distribution of IP? Clear provisions for the protection of IP must be stated including instances where new IP is created, the agreement must establish ownership rights among the parties.
- i) Termination/ Exit of JV- what happens where parties are unable to continue the relationship for any reason? Will a party be allowed to exit where they are no longer interested in the JV relationship? The agreement must outline what processes to be followed for exit or to end the JV relationship. Generally, mutual consent is the most important element of JV dissolution. If there is no mutual consent, such as where there is disagreement, then the agreement must outline the steps for dispute resolution in this provision.
- j) Law and disputes-what happens if disputes arise between the partners? How will the parties resolve the issues when they arise and what law will govern the resolution of disputes. The agreement must therefore have a dispute resolution mechanism, i.e., whether to arbitrate or litigate and a governing law.
- k) Boiler Plate Clauses- the standard clauses that address general contract issues such as amendments, entire agreement, severability, waiver, assignment, notices and force majeure must be included in the agreement.
Critical Success Factors
Undoubtedly, a well drafted agreement with clear terms that walk the parties through what each has to do is a critical success factor for JVs. However, there are other key factors that parties must consider prior to reaching the stage of entering into an agreement for the success of the JV. These key success factors include:
A) Compatibility/Synergy
The compatibility of a partner is a key factor in determining the success of a JV. The parties must consider, what assets and competencies each party brings to the table, the synergies that maybe achieved in the JV. Example, a small construction contractor may align with a larger contractor to obtain access to a specialized labour force with financing resources to assist in completing a project that the smaller contractor does not have the resources to complete on its own.
B) Partner Commitment
For the JV to be sustainable, the JV partners must treat the relationship like a marriage. It should be built on communication, trust and understanding. Ongoing communication is critical during the planning and operational phases of the JV as this will enhance productivity and help avoid clashes in culture as well.
C) Due Diligence
The conduct of due diligence prior to entering into a JV offers an invaluable opportunity to look into the business of the other party to determine if there are any risks or surprises before proceeding with drawing up the necessary paperwork to formalize the arrangement.
D) Efficient Planning
The JV partners must have an effective planning and management system during the pendency of the JV. This calls for streamlining the project plans and programs to fit within the schedule of both parties to avoid delays in undertaking the project or business.
Conclusion
JV is akin to the concept of marriage. It is a matter of trust and teamwork. To make it work, each party must be committed to the venture. It offers vast opportunity for growth and success despite some challenges. So long as businesses continue to seek growth, the option of coming together as a JV will be a viable option that will be adopted. With JVs, companies can be robust and resilient and withstand the shocks that come with growth. Additionally, companies will be able to offer more to their clientele and reduce country specific risks. With a well drafted contract and adoption of the critical success factors, a JV is likely to succeed in Ghana.
Vera is a Partner, with the Corporate and the Intellectual Property, Telecommunications & Technology Practice Group of AB & David Africa. She is based in the Accra office and has over 18 years of experience in assisting local and international clients on corporate and compliance matters across sub-Saharan Africa. Vera is also a Tutorial Master at the Ghana School of Law.
