joint venture agreement checklist

Prepared By: Robert Auerbach Email: robert@auerbach.co.nz Website: www.marketnewzealand.com/auerbach Joint Venture Agreement checklist Disclaimer: These checklists are provided for information purposes only and are no substitute for professional advice, which should be sought prior to entering into any transaction. New Zealand Trade and Enterprise (NZTE) has not verified these checklists and makes no representations as to the completeness, correctness, currency, accuracy or fitness for purpose of the information, or the person that prepared the information. Accordingly, NZTE will not be responsible for any damage or loss suffered by any person arising from the information whether that damage or loss arises from negligence or otherwise. This document is one of a series of free information tools for exporters to assist businesses through every stage of the export process. For the protection of Robert Auerbach's clients, all names in this document are fictitious. Any resemblance to actual people or companies is purely coincidental. For information or advice, visit www.marketnewzealand.com, ring NZTE on 0800 555 888 or contact your Client Manager. Joint Venture Agreement Checklist May 2006 1 contents abstract .......................................................................................................................3 1. the joint venture partners......................................................................................4 2. creation of joint venture corporation ...................................................................4 3. the shareholders ....................................................................................................4 4. date that the joint venture corporation will officially commence business .....5 5. description of business to be handled by the joint venture corporation.........5 6. territorial limitations...............................................................................................6 7. minimum performance requirements...................................................................6 8. transactions between the shareholders and the joint venture corporation.....6 9. funding requirements of the joint venture corporation......................................7 10. headquarters of the joint venture corporation..................................................7 11. financial and management reporting .................................................................8 12. the board of directors ..........................................................................................9 13. shareholders meetings......................................................................................10 14. certain action requiring shareholder approval ...............................................10 15. procedure if a party wishes to sell its shares .................................................11 16. distribution of profits .........................................................................................11 17. expenses of the shareholders ..........................................................................12 18. what to do in the event of corporate deadlock, irreconcilable differences and disputes.....................................................................................................................12 19. licenses and permits..........................................................................................12 20. insurance ............................................................................................................12 21. confidential information and trade secrets .....................................................12 22. intellectual property ...........................................................................................13 23. restraint of trade.................................................................................................13 24. term of agreement ..............................................................................................14 Joint Venture Agreement Checklist May 2006 2 abstract A joint venture, properly conceived and executed, can offer significant benefits to an exporter. A joint venture may provide the cash an exporter needs to penetrate a new market. An exporter may lack the resources to set up a branch but not wish to surrender control to an independent distributor. A joint venture to establish a marketing presence in the target market may be the answer. An exporter may not be able to produce a product competitively but does not want to surrender production control. A joint venture to manufacture the product in the target market may be the answer. Thus, a joint venture partner may offer an exporter cash, marketing resources, manufacturing resources, technology and know-how. A joint venture checklist identifies all issues that joint venture partners should consider before they sign a joint venture agreement. Use of the checklist will greatly reduce the possibility of disappointments and misunderstandings. An exporter will have more realistic expectations. The checklist covers these issues among others: Contribution of Joint Venture Partners What will each partner contribute? When will the contribution be made? What will the partner receive for its contribution? Business of the Joint Venture Define the scope of the joint venture's business. Specify prohibited activities. Self Dealing Consider all other relationships between a joint venture partner and the joint venture. Such relationships, if not arms length, may lead to misunderstandings and disputes. Theft of Joint Venture Opportunity A joint venture partner should not steal a business opportunity properly belonging to the joint venture. Territory Specify any territorial limitations for the joint venture. Funding Requirements Create a business plan, including a pro forma budget and cash flow statement. Management Establish a management structure. Profit Distribution Specify the dividend policy. Selling Out Establish the procedure for withdrawing from a joint venture. Dispute Resolution Consider mediation or arbitration. Joint Venture Agreement Checklist May 2006 3 A joint venture may turn out to be a very strategic relationship for some exporters. Unfortunately, for all too many, it is a recipe for disaster. They do not do their homework. They act too hastily. They do not check the credentials of their partner. A bad joint venture is the business equivalent of a bad marriage. Do not confuse a casual flirtation with a long term relationship. Rarely does a solid, enduring relationship evolve from a casual flirtation. By using the joint venture checklist, an exporter will certainly know what he is getting into. Such knowledge can be crucial to the success of the relationship. 1. the joint venture partners 1.1. Specify the name, address, telephone and facsimile numbers of each participant in the joint venture. 2. creation of joint venture corporation 2.1. Name of corporation: 2.2. This checklist shall hereinafter refer to this corporation as the “Joint Venture Corporation”. 2.3. Place of incorporation: 3. the shareholders 3.1. Who they are: Contribution to Capital Percentage Ownership Shareholder Name: Tel: Fax: Name Tel: Fax: Name Tel: Fax: Total Paid in Capital Joint Venture Agreement Checklist May 2006 NZD$___ % NZD$___ % NZD$___ NZD$___ % 100% 3.1.1. Will the contribution to capital set forth above cover all anticipated start-up 4 expenses? If not, where will the rest of the money come from to finance the Joint Venture Corporation’s operations during the start-up phase? 3.2. The shareholder’s capital shall be paid within two weeks after both of the following two conditions are met: 3.2.1. Execution of a Joint Venture Agreement; and 3.2.2. The incorporation of the Joint Venture Corporation. 3.3. Specify any non-capital contributions that any shareholder shall make to the Joint Venture Corporation. For example: 3.3.1. Technology and know-how. 3.3.2. Human resources. 3.3.3. Sales and marketing. 3.3.4. Machinery and equipment. 3.3.5. Other. 4. date that the joint venture corporation will officially commence business 4.1. Specify date: 5. description of business to be handled by the joint venture corporation 5.1. Describe in as much detail as possible what activities the Joint Venture Corporation shall engage in. 5.1.1. Specify the products that the Joint Venture Corporation shall import and distribute. 5.1.2. Will the Joint Venture Corporation be permitted to import and distribute products supplied by third parties? What about competitive products? 5.2. Are there any prohibited activities? 5.2.1. An example of a prohibited activity might be one which is competitive with an activity presently engaged in by a shareholder. 5.3. Will the shareholders or their affiliated companies be precluded from engaging in certain activities in competition with the Joint Venture Corporation? 5.3.1. If so, for how long? 5.3.2. What constitutes a competitive activity? Joint Venture Agreement Checklist May 2006 5.3.3. For how long will the shareholders or their affiliated companies be prohibited from engaging in competitive activities? 5 5.3.4. What about business presently and formerly handled by the shareholders? 5.4. Presumably the Joint Venture Corporation will have certain exclusive rights in a defined territory. 5.4.1. What are those exclusive rights? 5.4.2. Are there any conditions imposed upon the Joint Venture Corporation in consideration for the grant of those exclusive rights? (i.e. minimum performance requirements). 6. territorial limitations 6.1. Do the shareholders wish to impose any territorial limitations upon the Joint Venture Corporation? 6.1.1. Specify the countries in which the Joint Venture Corporation may do business. 7. minimum performance requirements 7.1. Specify below any minimum performance requirements that the shareholders wish to impose upon the Joint Venture Corporation. 7.2. What happens if the Joint Venture Corporation does not meet such minimum performance requirements? 7.2.1. Either party should have the right to terminate the Joint Venture and force a liquidation of the Joint Venture Corporation. 7.2.2. The parties may wish to consider other, less draconian measures such as reducing the size of the Joint Venture Corporation’s territory, or taking away the Joint Venture Corporation’s exclusive rights. 8. transactions between the shareholders and the joint venture corporation 8.1. Will the shareholders be transacting any business with the Joint Venture Corporation? If so, what types of transactions do the shareholders anticipate entering into with the Joint Venture Corporation? 8.1.1. What type of contracts do the shareholders need with the Joint Venture Corporation concerning these transactions? The parties should discuss the terms and conditions of any such contracts. 8.2. Any future transactions not expressly allowed by the Joint Venture Agreement shall be subject to the consent of both parties. Joint Venture Agreement Checklist May 2006 6 8.2.1. The parties should establish procedural guidelines for the consideration of such transactions in the future. 9. funding requirements of the joint venture corporation 9.1. Determine the Joint Venture Corporation’s working capital requirements during the first two years of operation. 9.1.1. Prepare a budget and cash flow analysis to be attached to the Joint Venture Agreement. 9.2. Will the initial capital contributions of the shareholders plus whatever capital the Joint Venture Corporation is able to internally generate through its business operations be sufficient to meet its budgeted cash flow requirements? 9.3. Consider whether the Joint Venture Agreement should provide that the shareholders guarantee loans of the Joint Venture Corporation up to a certain designated amount. 10. headquarters of the joint venture corporation 10.1. Where located? 10.2. Size and type of premises? 10.3. Rental of office space and any office equipment should be specified. 10.4. Rental of manufacturing space and any machinery and equipment should be specified. 10.5. Type and availability of warehouse space, and the rental thereof, if required by the Joint Venture Corporation. 10.6. Type and availability of any transportation equipment, and the rental thereof, if required by the Joint Venture Corporation. 10.7. Management Structure: Customary positions 10.7.1. Managing Director: 10.7.2. General Manager: 10.7.3. Marketing Manager: 10.7.4. Operations Manager: 10.7.5. Financial Manager: 10.7.6. Company Secretary: 10.7.7. Company Treasurer: 10.7.8. Chairman of the Board: 10.7.9. Other Officers [Specify]: Joint Venture Agreement Checklist May 2006 Note: All of these positions need not be filled. Some may not apply to the Joint Venture Corporation, others can be combined. In short, there’s plenty of flexibility. 7 10.7.10. Create job descriptions for all officers, indicating whether or not they are full time or part time employees. Make sure the job descriptions address the following key areas of responsibility: Financial and accounting; legal; general administration; sales and marketing; operations management and execution; strategic planning; public relations; research and development; and other. 10.7.11. Focus upon the three key areas of any business: Operations, Finance and Marketing. Who will assume responsibility in each of these three key areas? 10.7.12. Prepare an organisational chart showing who reports to whom. 10.7.13. Where will each officer be based? Will any New Zealanders be residing overseas? What about their wives and children? Are there any legal impediments? Who will handle the immigration law matters? 10.8. Define the number and functions of all other staff. 10.8.1. Who makes staffing decisions? 10.9. Set salaries, fringe benefits and other forms of compensation for officers and staff. 10.10. What type of support and assistance will the Joint Venture Corporation receive from the shareholders? 10.11. Describe the type of day to day interactions that the shareholders are likely to have with each other or with the Joint Venture Corporation. 10.11.1. Have we identified all potential bottlenecks and areas of friction? 10.12. Employment Contracts. 10.12.1. Do we need an employment contract with any senior officer of the Joint Venture Corporation? If so, refer to the Robert Auerbach Employment Contract Checklist. 11. financial and management reporting 11.1. Types of financial and management reports desired. 11.1.1. Budget. 11.1.2. Schedule of sales booked and tendered for. 11.1.3. Schedule of debtors. 11.1.4. Schedule of creditors. 11.1.5. Income [loss] statement. 11.1.6. Balance sheet reviewed quarterly. 11.1.7. Cash flow statements. 11.1.8. Other financial or management reports [specify]. 11.2. Frequency in which such financial reports are furnished. 11.2.1. Monthly, quarterly or semi-annually? Joint Venture Agreement Checklist May 2006 11.3. Who prepares financial reports? 8 11.3.1. Are they prepared “in-house” (if so, by whom?) or by an outside accountant? 11.3.2. Suggest financial reports shall be prepared internally, subject to review by an independent outside accountant if any shareholder so requests. 11.4. What bank accounts are required and where? 11.4.1. Who has cheque signing power? 11.4.2. How many signatures are required? 11.5. Nominate a law firm to incorporate and represent the Joint Venture Corporation. 11.6. Who will be the outside accountant? 11.7. Determine the Joint Venture Corporation’s fiscal year. 12. the board of directors 12.1. Who are they? 12.2. Name Address 12.2.1. Will each shareholder have the same number of directors? If so, how will they handle a corporate deadlock? Might they wish to appoint an independent person as a director in order to break any deadlock that could arise? 12.2.2. In the event that any director should resign, his replacement shall be designated by the shareholder he represented. 12.2.3. If the independent person resigns as a director, his replacement must be acceptable to the shareholders. 12.3. Who will act as Chairman of the Board? 12.3.1. Will he have a casting vote? 12.4. How often should the Board meet? 12.4.1. Suggest that there be not less than four meetings a year. 12.5. Where should the Board meet? 12.5.1. Suggest that the Board may also meet by teleconference. 12.6. How much advance notice should be given of meetings? 12.6.1. Suggest not less than 30 days advance notice. 12.6.2. The notice should include the nature of business to be transacted at the meeting. 12.7. What constitutes a quorum? 12.7.1. Suggest a simple majority. Joint Venture Agreement Checklist May 2006 12.8. In order to vote, a director must attend the meeting, either in person or by teleconference facility. However, if permitted by law, a director shall have the right to appoint an alternate or 9 nominee to represent him if he is unable to attend a meeting either in person or through teleconference facility. 12.9. Should the Board appoint any committees? 12.10. What about directors’ fees and expenses for attending Board meetings or providing director-type services to the Joint Venture Corporation? 12.11. Minutes of all directors meetings should be recorded and circulated. 12.11.1. Who will handle this function? 13. shareholders meetings 13.1. How often? 13.1.1. Suggest at least once a year, within three months of the close of the Joint Venture Corporation’s fiscal year. 13.2. Where should the shareholders meet? 13.3. How much advance notice? 13.3.1. Suggest at least 30 days. 13.3.2. The notice should include the nature of business to be transacted at the meeting. 13.4. What constitutes a quorum? 13.4.1. Suggest: A simple majority of shares represented in person or by proxy. 13.5. Minutes of all shareholders meetings should be recorded and circulated. 13.6. Devise a procedure to deal with corporate deadlock. 13.6.1. Suggest some form of mediation or arbitration. 14. certain action requiring shareholder approval 14.1. The following corporate actions should require either shareholder approval or a two thirds majority of the Board of Directors. 14.1.1. Issuing shares or otherwise changing the capital structure. 14.1.2. Expanding the board of directors. 14.1.3. Buying out a shareholder. 14.1.4. Compensation practices. 14.1.5. Entering into a licensing agreement or exclusive distribution agreement. 14.1.6. Any other transactions between the Joint Venture Corporation and the shareholders, or their affiliates. Joint Venture Agreement Checklist May 2006 14.1.7. Borrowing money. 10 14.1.8. Purchasing or selling a “substantial asset”. (Defined as possessing a value greater than 20% of total assets.) 14.1.9. Incurring or discharging a “substantial liability”. (Defined as possessing a value greater than 20% of total liabilities). 14.1.10. A merger or acquisition. 14.1.11. Any other change in control. 15. procedure if a party wishes to sell its shares 15.1. This being a privately held company, do the parties wish to impose reasonable restrictions upon each other’s right to sell the Joint Venture Corporation’s shares to outsiders? 15.1.1. Perhaps give each party a right of first refusal to repurchase the shares on the same terms and conditions as those offered by a bona fide third party in an arms length transaction. 15.2. In the event that a party is unable to find a purchaser for its shares, it shall offer them to the other party. 15.3. If, within 60 days of such offer, the other party is either unwilling or unable to purchase the shares, the Joint Venture Corporation shall be liquidated forthwith. 15.4. The value of the shares shall be determined by the shareholders in the first instance. If they are unable to agree upon the value within 30 days, then it shall be determined by a mutually acceptable certified public accountant with experience in business valuation, whose fees shall be paid by the Joint Venture Corporation. 15.5. The standard of value to be applied by such certified public accountant shall be the market value of the Joint Venture Corporation as a going concern, with due consideration for good will and earnings growth potential, the value of all assets and liabilities at their present market value and using price earning multiples prevailing for similar type distribution businesses. 15.6. Payment terms. 15.6.1. The settlement date shall be ___ days after the parties agree upon the price for the shares or the accountant renders his valuation report, whichever the case may be. 15.6.2. Specify whether it’s all cash at settlement or whether the purchase price is to be paid in instalments. If instalments, provide details on term of loan, rate, etc. 16. distribution of profits 16.1. Will all profits be reinvested or a proportion distributed to shareholders in the form of a dividend? 16.1.1. Should this be taken up in this agreement or left to the board of directors? Joint Venture Agreement Checklist May 2006 11 17. expenses of the shareholders 17.1. Are any expenses of the shareholders reimbursable by the Joint Venture Corporation? If so, list them. 17.2. Specify the procedure for reimbursement. 17.2.1. When is prior approval required before an expense is incurred? 17.2.2. When is prior approval not required? 17.2.3. Who approves expenses? 17.2.4. What documentation is required? 17.2.5. Frequency of reimbursement. 17.2.6. Any other details regarding the reimbursement process. 17.3. List all non-reimbursable expenses. 17.4. Specify any other important expense policies for the Joint Venture Corporation. 18. what to do in the event of corporate deadlock, irreconcilable differences and disputes 18.1. Do the parties wish to provide for arbitration or a mechanism for winding up and liquidating the Joint Venture Corporation? 19. licenses and permits 19.1. The Joint Venture Corporation should appoint local counsel to obtain for it all appropriate licenses and permits, and to ensure that it complies with all applicable laws in the territory. 20. insurance 20.1. What types of insurance will the Joint Venture Corporation purchase? 21. confidential information and trade secrets Joint Venture Agreement Checklist May 2006 21.1. The parties may wish to treat certain types of information as confidential. 12 21.1.1. Will the Joint Venture Corporation be the recipient of confidential information from either party? 21.1.2. If so, what types of confidential information is the Joint Venture Corporation likely to receive? For example: Customer information Drawings Financial data Forecasts Ideas Inventions Know-how Marketing information Models Patent information Product information 21.1.3. What happens to such confidential information upon the termination of this Agreement? Can the parties then use the confidential information for their own benefit or does the commitment to confidentiality extend for a period of time after termination of the Agreement. Product registrations Production information Projections Prototypes Quality standards Research & development Samples Specifications Technical information Trade secrets 22. intellectual property 22.1. Will the Joint Venture Corporation be the recipient of intellectual property from either party? 22.2. What types of intellectual property is the Joint Venture Corporation likely to receive? For example: Patents, trademarks, copyrights, know-how, system designs, etc. 22.3. What happens to such intellectual property upon the termination of the Agreement? 22.4. What about intellectual property developed by the Joint Venture Corporation on its own? 23. restraint of trade 23.1. Should the Joint Venture Agreement include a reciprocal restraint of trade provision preventing each shareholder from competing with the other shareholders or with the joint venture corporation? 23.1.1. What is the duration of such restraint of trade? 23.1.2. What territory does the restraint of trade cover? Joint Venture Agreement Checklist May 2006 23.1.3. What types of acts would be deemed competitive? 13 24. term of agreement 24.1. Is the term limited or perpetual? 24.1.1. If limited, any renewal options? Prepared by: Robert Auerbach P.O. Box 34-555 Birkenhead, Auckland 1330 New Zealand Tel: +64-9-419-2214 Fax: +64-9-418-3651 E-mail: robert@auerbach.co.nz Website: www.marketnewzealand.com/auerbach Disclaimer: These checklists are provided for information purposes only and are no substitute for professional advice, which should be sought prior to entering into any transaction. New Zealand Trade and Enterprise (NZTE) has not verified these checklists and makes no representations as to the completeness, correctness, currency, accuracy or fitness for purpose of the information, or the person that prepared the information. Accordingly, NZTE will not be responsible for any damage or loss suffered by any person arising from the information whether that damage or loss arises from negligence or otherwise. Joint Venture Agreement Checklist May 2006 14