Creating a joint venture in Russia: key issues of the organization. Part 1 of 2

Joint venture

This article explains how to create a joint venture (JV) with a foreign company in Russia, the key issues of the company’s organization, and what to do if the partnership was unsuccessful.

 

Partners: who are they?

 

Let’s assume that there is a Russian company that occupies a niche in the market, which has a request from the consumer to present a new and more technological product.

The company studies competitors ‘ technologies presented on the market taking into account consumer requirements and comes to the conclusion that the necessary technology is not available on the Russian market. But the necessary technology is owned by a foreign company interested in entering the Russian market together with a local partner. A foreign company wants to expand its business geography and is looking for a partner in Russia to enter the market or localize its product.

Partnership, in this case, is beneficial to everyone: a foreign company will be ahead of its competitors by taking the Russian market or giving a localized product a better price. a Russian company will satisfy the consumer by offering the desired product.

 

What should you negotiate with your partner?

 

Before starting negotiations with a partner, you need to determine the list of issues that are crucial for negotiations and the starting negotiating position on such issues.

Initially, you need to reach an agreement with your partner on the following issues:

  • the strategic vision of the JV;
  • product of JV, the quality and the price;
  • the consumer of the JV product;
  • the geographical scope of the JV; JV business plan;
  • contributions and role of each JV participant;
  • partner support for the joint venture;
  • conditions for non-competition of JV participants between themselves;
  • start date of the JV;
  • start date of product deliveries to the market;
  • functional areas of responsibility in the JV and in the management bodies;
  • the legal form of the JV;
  • corporate rights and obligations of the parties to the joint venture and applicable law;
  • contractual support scheme for the joint venture by its participants.

 

The project approach to creating a joint venture

 

Within the company, a team is created that will participate in the project to create a joint venture, and a project manager is appointed. It is logical to appoint a Project Manager, for example, the head of a functional division in the company responsible for the product. If the company is conducting several projects to create a joint venture with different partners, it is advisable to enter the position of coordinator in the project team, responsible for the interaction of project teams with partners.

The starting negotiating position should be understood equally by all team members and employees involved in negotiations with a potential partner.

We recommend creating a file that contains the team members, team leader, areas of responsibility for each team member, their contacts and photos, and sharing this data with the partner.

 At the start of negotiations, you must agree with the partner about the rules and document flow. You can grant the right to team members from both sides to communicate directly with each other, or you can introduce the principle of “one window”.

If the parties choose “one window”, it is important to ensure that incoming requests are distributed quickly within the team and that feedback is provided promptly.

If the parties decide to give their team members the opportunity to communicate directly, it is important to constantly update information about the project status and maintain the same level of project awareness within the team.

The partner’s internal procedures, including compliance, which must be completed to approve the creation of the partnership and the terms of participation in the partnership, may affect the timing of progress on the schedule. Therefore, it is recommended that teams provide each other with information on how the internal procedures of each party may affect the timing of negotiations.

 

Commencement of negotiations. Identifying the parties ‘ intentions

 

At the initial stage, the parties usually sign two documents – a Memorandum of intent and a non-disclosure agreement.

In the Memorandum of intent (analogs-Memorandum of understanding, letter of intent), the parties state their inherent competence, confirm their mutual interest in exploring the possibility of creating a joint venture and conducting negotiations, determine the applicable law and the judicial authority that will consider disputes between the parties. The partner may also insist that the Russian company does not conduct similar negotiations with competitors during the period of validity of the Memorandum.

The Memorandum should specify the period during which the parties perform a feasibility study of the possibility of creating a joint venture and are required to make a decision on the feasibility of creating a joint venture.

 During this period, the parties provide each other with detailed information about themselves and their competencies. To protect the information, the parties enter into a non-disclosure agreement (non-disclosure of information). The agreement defines the range of issues on which information is provided, the list of persons to whom such information can be provided, as well as the fate of the information in the event of termination of the agreement and the decision of the parties to abandon the partnership.

The agreement also defines the channels for transmitting the information. Please note that global corporations can use secure communication channels that have not been certified in Russia. Therefore, you need to discuss ways to transmit information that satisfy all parties and remove the risks of violating the law.

Since the parties can engage external consultants to work on the project, the agreement should include special conditions for agreeing on the list of consultants, the procedure for transmitting information to them, and extending the terms of the non-disclosure agreement to the consultants.

 

 What base should you use to create a joint venture?

 

The subject of the agreement should also be the choice of the legal form of the joint venture. As a rule, if the partner is entering the Russian market for the first time, it will be useful to prepare a short presentation for them with a representation of the JSC and LLC, describing the differences in regulation and specifying recommendations for choosing the legal form.

Separately, we need to highlight the issue of providing a site for JV production. As a rule, if a joint venture is created to produce a product using new technologies, then the industrial site of a Russian company built in the Soviet years may not be suitable for hosting a joint venture. Buildings may not meet modern requirements from the point of view of ecology and logistics and require significant expenses for renovation and reclamation of the site. The utility costs of maintaining the site are also high.

Modern production facilities are located in compact territories. Technological equipment is designed and delivered with the calculation of the configuration of the existing building. The technology provides for operations within a single building, as this prevents additional costs associated with a suboptimal route of movement in production.

In addition, if a Russian company produces a wide range of products on a non-modern site, then both inside the company and the partner will have difficulties with the transparency of the economy of the finished product. The partner will consider, and not unreasonably, that the cost of the finished product will include the cost of maintaining the entire site and producing other products.

Therefore, you must be prepared for the fact that from the point of view of the future joint venture, it will be necessary to separate the new production both geographically, providing for separate premises, and legally, creating a new legal entity and not using the existing one.

If a Russian company wants to reduce the time for launching a joint venture and creates a new legal entity for a future joint venture by offering the partner to buy a share in it, the partner will have to conduct a verification procedure not only for the company but also for this new legal entity.

 

JV business plan

 

The development and approval of a business plan are critical for making a decision to create a joint venture. Participants define and agree on the resources that should be allocated to the joint venture before the deadline set by the parties in the business plan. Achieving the set indicators will mean the success of the joint venture. The parties may determine that if the business plan indicators are not met, the following actions can be taken with respect to the joint venture:

  • liquidation of the joint venture;
  • purchase of another participant’s share by one of the participants;
  • sale by the participant or all participants of the joint venture to third parties.

 

To be continued

 

In the continuation of the article, you will read:

• Under what brand should the JV product be released?
• What is the final stage of the feasibility study of the possibility of creating a joint venture?
• What should you do if the JV fails?

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