Out-Law Analysis | 16 Dec 2020 | 11:44 am | 8 min. read
There are different JV models and it is important that businesses select the right one for them.
JVs are not without their challenges, and it is important that businesses address competition law issues, culture differences, and matters of governance to realise the benefits those arrangements can deliver to profitability, market presence, resilience and competitiveness.
JVs are strategic partnerships through which two or more parties come together to provide the capital, goods and services for a jointly controlled commercial project and which is independent from the branches in which the parties operate their original businesses.
A JV is therefore chosen if the specific project or objective a business wants to achieve requires active cooperation between the parties.
Partner, Head of Diversified Industrial
As the world of transport evolves to one of connected, autonomous, shared and electrified mobility, a new style of JVs is required in the automotive industry
Although there are numerous legal forms and structural types of JVs, most JVs can be classified into specific groups according to a limited number of criteria.
These are partnerships between businesses that operate as competitors in the same area, though not necessarily in the same industry nor with competing products, where businesses team up to mutually improve their positioning in their market in some way.
The businesses pursue economies of scale, working together to sell a product in more than one market, developing and selling a product based on complementary technologies which each business possesses, or simply cooperating on research and development. Examples include:
These are JVs along the value chain with suppliers or customers upstream or downstream. Examples include:
These are corporate vehicles which are legally independent and jointly owned and controlled by the parties.
Within the legal entity and subject to the legal regime governing them, the parties are usually free to allocate responsibilities and powers as is suitable for their purposes – i.e. to leave the control and financing to one JV party whilst the other party provides, for example, R&D-services.
Equity JVs tend to be particularly independent, in a legal and a business sense, and therefore assets which can be sold and acquired. As such JVs represent investment and transaction objects, there may be value in establishing a JV as an equity JV. If the economic, technological, political or local environment changes, the interests of the JV parties change and/or the JV even gets into serious economic or structural difficulties, parties could sell the company to one of the JV partners or a third party by way of an M&A or, instead float the JV in an IPO.
This is where the JV is based on a purely contractual relationship between the companies involved – i.e. if the parties have only concluded a contractual arrangement about the cooperation project.
While an equity JV can be based on close relationship and thus determine law and obligations by means of provisions in the articles of association and the establishment of its own management under a common corporate purpose, the contractual JV is advantageous, if the companies are only geared towards a short-term, project-related cooperation.
The reasons for using a JV to procure and set up a JV are broad and include:
Horizontal and vertical JVs encompass fairly similar and typical risk profiles. There are 'classic' risks of trading jointly in a market that should not be ignored.
The rationale of a JV should be tested on how it compares to other structures and how it performs in strategic and economic terms. A JV should only be pursued if it is the best vehicle of all available strategic options. There are many simpler business arrangements, including R&D, supply, distribution, marketing, and licensing agreements, that involve substantially less complexities and down-sides.
Unless the JV is the result of a prior long-term cooperation, the parties must start assessing the capabilities, culture, values, and intentions of a future partner based on the information available to them. Due diligence is sometimes done, but often limited specifically to the assets which one party intends to contribute to the JV.
The parties also have no insight into whether a competitor or a supplier is actually, exclusively, behaving to the benefit of the joint project. The cooperation of otherwise legally, economically and culturally independent companies involves on the one hand the problem that the players do not shed this culture from one moment to the next. On the other hand – especially in vertical JVs – the partner company may, with a view to maximising its own profits, engage in conduct that is detrimental to the JV in terms of market share, purchase or supply volumes.
Among the challenges of setting-up and operating JVs, the choice of its organisational governance structure has a profound impact on the JVs performance and long-term sustainability, but it often receives little attention. A working governance structure should factor in several parameters, namely differences of the partners in corporate culture and possibly cultural issues more generally, trust between the partners, needs for procurement autonomy, and motivation for continuous learning, reviewing and developing the JV.
Experience shows that a functioning management team will deal with many issues without having to resort to legal means
Partners will be keen to retain management capabilities, human resources, and to protect or to obtain access to intellectual property and know-how. Close attention also needs to be paid to the structuring of mechanisms for deadlocks and for exit processes. This leads to lengthy negotiations around protective mechanisms and control issues, making these JVs more formal structures.
The success of a JV can often depend on the composition and the quality of the board of directors. Having the right people in the corporate bodies will make an enormous difference. Experience shows that a functioning management team will deal with many issues without having to resort to legal means.
However, when a dispute cannot be resolved and legal steps are unavoidable, it helps to have tight mechanisms in place. Parties will be well advised to try to strike a balance between their own protection and the avoidance of deadlocks. On the other hand, cooling-off clauses and escalation mechanisms will always be helpful. Ultimately, simply walking away from the investment is not always the best exit strategy, either. Other means should be considered, such as put- and call-options in order to affect the sale and transfer of shares to a third party or to other partners in the JV.
The same applies to the use or establishment of incentive systems, especially in vertical JVs. Here serious issues can arise if the partners use the wrong parameters. In very few cases will the assumptions for costs, sales, use of resources, personnel costs or environment be proven correct in the operation of the JV. Parties may want to think about introducing contractual mechanisms to review and amend, if necessary, the commercial parameters of the JV from time to time.
Horizontal cooperation between competitors and vertical cooperation through the supply chain may give rise to antitrust problems. Increasingly, the parties to JVs in the automotive sector are competitors – they being companies that historically would never have worked together but now need to pool their resources to face the new challenges of connected, autonomous, shared and electric vehicles and stay relevant.
This brings antitrust laws into sharp focus, in particular the prohibition on anti-competitive agreements, which is common across most jurisdictions. Whilst the prohibition is designed to catch cartel activity between competitors, it may also apply to JVs which seek to coordinate the parties’ conduct or restrict new technologies reaching the market, whether these arrangements are entered into between competitors or not.
It is therefore important to examine whether special requirements must be observed under respective national and international laws, such as the EU antitrust laws and regulations. If a competent competition authority assesses the JV as anti-competitive, that would lead to serious conflicts.
However, JV partners in the EU may be able to benefit from ‘block exemptions’ from the prohibition on anti-competitive agreements for certain technology transfer or R&D agreements.
The Technology Transfer Block Exemption covers technology licensing agreements in relation to most intellectual property (IP) rights, to the extent these are used for the production of goods exploiting the IP. This can be particularly useful for tie-ups between major OEMs and start-ups with novel technology.
The R&D Block Exemption applies to R&D agreements entered between competitors and non-competitors regarding the R&D itself as well as joint exploitation. The R&D Block Exemption is a potentially useful tool for competing OEMs to combine resources and develop new technology, provided the relevant criteria are satisfied.
The automotive industry has a long tradition of horizontal and vertical forms of cooperation. With digitalisation and the disruptive changes in mobility, the JV partners are also changing and a sustainable redesign of the concept, intensity of commitment and flexibility in JVs is required.
As the world of transport evolves to one of connected, autonomous, shared and electrified (CASE) mobility, a new style of JVs is required in the automotive industry. Yesterday's supplier is today's software company of tomorrow. In numerous fields of technology such suppliers are a precondition for the ability of established OEMs to take part in CASE mobility.
Partner, Head of Diversified Industrial
More than ever before, companies have to deal with completely new corporate cultures and timeframes
Start-ups and established players from areas such as IT, telecommunications and internet-based media have become part of the automotive supply chain. More than ever before, companies have to deal with completely new corporate cultures and timeframes. Due to rising R&D-costs, external investments are playing a greater role and are bringing new partners to the JV.
Horizontal JVs are playing a role predominantly in joint procurement and providing the scale necessary for some developments in mobility. Today they serve to establish common interfaces and standards in the areas of technology, infrastructure and quality. Examples of this are Ionity, working on a wide network of charging stations for electric vehicles, and the mapping and location data company.
Disruptive technologies and the changing times present companies with great challenges. To meet these challenges and to continue to be economically successful in the market, they must be open-minded and use different forms of cooperation.
JVs offer flexible possibilities for long-term or short-term project-related cooperation and for achieving positive economic effects. Companies that openly face the challenges of this form of cooperation and keep the risks low can profit from the advantages of a JV in the long term.
16 Dec 2020