JOINT VENTURES

 PRESENTATION TO LAW SCHOOL STUDENTS

 APRIL 2023
Key Highlights

 Introduction
 Rationale of Joint Ventures
 Practical Experiences
 JV Agreement
 Case study
 Discussion
 The Presenter
Martin Mdoe Esq.
LL.B. LL.M MBA
He is the Partner of MM Attorneys. He holds a Degree in Law (LL.B)
(Hons.) from the University of Dar es Salaam and Masters in Laws
(LL.M) from the University of Northumbria, UK. He also holds a
Masters in Business Administration (MBA) from the Eastern and
Southern Africa Management Institute (ESAMI).
Mr. Mdoe practices and has vast experience in Corporate and
Commercial law; Banking and Finance law; Telecommunication and
Information and Communication Technology Law; Investment Law
and Land Law, Conveyance and Real Estate. He has worked in both
public and private sectors with Tanzania Development Finance
Company Ltd (TDFL) as Legal Officer; Diamond Trust Bank Ltd as
Company Secretary, Legal & Human Resources Manager; MIC
Tanzania Limited (tiGO) as Company Secretary, Legal & Regulatory
Manager and National Housing Corporation (NHC) as Director of
Legal Services & Corporation Secretary.
 Mr. Mdoe has acquired further post-graduate qualifications in
banking, corporate governance, public relations, legal and regulatory
issues, business ethics and compliance and customer support.
Tanzania and Australian Firms ink crucial
deals
Tanzania and Australian Firms ink crucial
deals
The reality on JVs

Government Regulators Private Sector

The Tanzanian government The Public Procurement Formation of joint ventures
encourages joint ventures Regulatory Authority (PPRA) between construction companies
between local firms and foreign encourages Firms combining is one of the recent efforts in
investors;   Many foreign firms combating contractors problems
their resources together in a
have recently partnered with the in Tanzania and addresses one of
National Development joint venture in the bidding the key challenges facing the
Corporation, Tanzania Petroleum and tendering process. A construction industry today
Development Corporation, and number of companies both especially when large and
the National Housing local and international have complex
Corporation, in energy, biofuels, utilized this space. projects are involved.
and real estate ventures.
Do you know
What are the
Why do JVs
Key features
fail

Presentation for LST

of a JV

What are the Why embark

Difference btn JV on JVs
and other
commercial Ventures

What are the key

What are the JVs clauses of a JV

key terminologies agreement

7
 Joint Venture can be described as a business
arrangement, wherein two or more independent firms
come together to form a legally independent
undertaking, for a stipulated period, to fulfil a specific
purpose such as accomplishing a task, activity or
Definition project. In other words, it is a temporary partnership,
established for a definite purpose, which may or may
Joint Venture not uses a specific firm name.
The co-ventures come to a contractual agreement for
carrying out an economic activity, which has shared
ownership and control. They contribute capital,
pooling the financial, physical, intellectual and
managerial resources, participating in the operations
and sharing the risks and returns in the
predetermined ratio.
 Joint venture
Salient features
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Joint Venture
 Lawyer’s Role in JV set up
Dispute Resolution

Legal Advise/deal structure Contract Review/Drafting/Management

Due Diligence
 Disclaimer !
Joint venture may take a number of forms and in this module we will
discuss the basis to consider in the Joint Venture formation. However, we
will not dwell much on the following much as they impact JV structure and
operations:

 Industry specific joint ventures

 Country specific joint ventures

 Multiparty joint ventures and

 Tax and Regulatory affairs

Rationale of Joint Ventures as an alternative to;

Organic
Growth

Acquisi
tion
Merger
Rationale for Joint Venture

Strategic intent Primary Reasons for JVs

 Sharing operation Risks

Capabiliti
es & Market  Access to other customers and markets
Positional Access
Assets
JV  Alternative to an acquisition in cash
Strategic
Intent  Access to additional Capital
 Access to human capital

Econo Capital
 Access to technology
mies of & Risk
Scale Sharing
Rationale of Joint Ventures

Maximize use of Leverage on

Expand new
Create Strategic new partner’s
technology
Alliance to access technology, brand &
through new
wider market products and reputation to
markets
services increase sales

Share expertise Leverage on

Serve as buy
and relationship to joint resources
out stepping
Risk sharing penetrate new but yet remain
stone
markets independent

15
Practical themes in setting up successful JV

In the Context of uncertain market and financial conditions

JV can achieve growth while minimizing risk levels:
JV deals are effective at decreasing company risks ;
Increased Return on investment.
Choosing a partner carefully is instrumental to the success of a JV
Participants cultural fit, deal experience, and trust are critical factors
Clarity of the purpose and control and strong management support:
Commitment of senior executives in the parent company can secure delivery of the vision
Importance of exit strategy
Participants to have a clear exit strategy from very beginning, preferred one is a sale assets to one of the
partners
 

.
Practical themes in setting up successful JV

• Ensure that the rationale and objectives for the JV are set out clearly
from the start for all parties
• Build the blue print for the JV as early as possible
Clarity of Purpose • Agree how value will be derived and shared with JV partners
• Communicate clearly to ensure broad buy in across the company
• Identify the sources of benefit and establish clear ownership and
accountability

• Give careful consideration to the appointment of JV leaders and how they

work as a team, allocate your best people
• Tackle risks and issues quickly and take tough decisions early
• Make practical planning and reporting frameworks
Control • Establish NHC Bank to support its construction activities plus supporting
mortgage loans
• Implement robust planning and programme process to underpin the JV
objectives

SUCCESFUL JOINT VENTURE

Clarity of purpose is key
Practical themes in setting up successful JV

• Management of people dimensions of change is principle difference btn

success and failure
• Recognize that major changes increase uncertainty and ambiguity
Managing People • Remove uncertainty as quick as possible through open, honest and timely
communications
• Realign objectives and rewards with the objective of the JV
• Plan for change at all levels across the company and if need be undertake
training
• Explore potential investors e to partner with NHC on its large projects
• Involve HR early on and ensure is fully resourced

A joint venture is like a marriage, you

Bottom line need to put time and effort into the
relationship with your partner
SUCCESFUL JOINT VENTURE
Key factors guiding selection of a JV
partner-
 Willingness
 Financial stability
 Competitiveness of required task
 Similar business philosophy
 Firm's ability
 Firm's experience
 Political stability
 Track record in JV‘
 Spoken language
Risks of undertaking Jv in Tanzania

 Cultural and social differences

 Delays in approvals
 Financial risks
 Foreign currency fluctuation
 Loss of trust
 Incompatibility with local policy
 Termination of JV agreements
 Cost Escalation
 Political stability
Biggest Issues to set up JV

• Governance
• Cultural
Differences/Lack of
trust
• Social/Human Capital
• Regulatory/Deal
Structuring
• Dispute Resolution
• Dividend Policy
Biggest Issues during due diligence

• Financial Due diligence

• Legal, Tax and
Regulatory
• Operations due
Diligence
• Trust
How to improve JVs

• Clarity of the strategy

• Top Management
selection
• Project Management
Biggest Issues during negotiation phase

• Governance and conflict

resolution
• Alliance Agreement
• Exit scenarios
PROS AND CONS OF JVs

• Opportunity to leverage the distinct strengths of both partners

• Cut investment or funding costs
• Reduces down side risks
• Pros
• Increased power over activities and principles guiding JVs
• Provide quick and low costs access to expertise
• Allows contributions in kind such as assets, know how etc.

• No overall control, possibility of deadlock

• Some potential synergy opportunities might not be delivered
• Rewards of success shared with JV partners
• An exit plan need to be worked out to avoid disagreement or deadlock
• Cons
• Partner may use the knowledge gained through JV to set up in
competition

26
PROS AND CONS OF JVs…….
Pros
 Use of the benefits due to the involvement of
the host country.,
- Division of IES and investment risk.,
- The existence of property.,
- Combining the specificity of both
companies.,
- The possibility of investing in the
international arena with limited resources of
their own funds.,
- Due to the regulations, this is the only
possible alternative.,
- The local partner provides information on:
local market conditions, the local workforce,
relationships with authorities, local customers
and suppliers.,
- The best ways to provide inputs or goods
that is difficult to obtain otherwise.,
- To serve you giving up can be compensated
(by the other partner)
Cons
 Conflicting objectives of partners
(individual).,
- Agreeing on a profit statement, income,
production, reinvestment price expansion.,
- The division of profits and control of the
company.,
- Takes time engagement of experts and
official travel (costs).,
- The problem of communication.,
- The diversity of habits and business
practices.,
- Problems regarding the harmonization of
different interests.,
- The possibility of antitrust reactions of
others.,
- Problems of determining the appropriate
investment and control connections
Practical Challenges for every JV
1. The Vision

• Setting a clear vision from day 1 through to completion is critical;

• Defining the operating model will enable JV to be appropriately planned with practical
series of deliverables
2. Governance
• Establishing JVs board and governance is challenging because each partner and JV own management
team has different agenda, needs, priorities, interest hence delays or unresolved issues
• Constitution of the Board and governance structure should create a framework for decision making and
issue resolution to enable delivery of both parent coys and JV goals

3. Synergy
• JVs are established to deliver synergies neither parent could achieve, delivering sooner than planned
will drive expectations for further growth
• Programs require a robust financial tracking mechanism to report progress and alert any possible delays

4. Management Team
• Need for a competent team with clear roles and responsibilities to deliver shareholders objectives
• Appointing an effective and empowered management team responsible to the board is critical for
driving the JVs value

28
Practical Challenges for every JV
5. Parent company commitment

• Without visible commitment form senior executives with accountability in the parent company the JV
will fail
• The consistent and continued commitment of parent company will secure delivery of the original vision
6. Human Capital
• Prolonged transaction timeline will be distracting to employee resulting in loss of focus on the current
business
• It is essential to retain and motivate key talent, win the heats and minds of all employees and provide
certainty where possible

7. Response of stakeholders
• Transaction announcement is a chance to competitors to win market and may confuse customers
• Focus on customer retention may be required to minimize disruption and competitor spoiling tactics
need be built into the strategy
• Regulators and other oversight organs need to be kept on the loop and relevant approvals obtained
timely
8. Exit strategy
• Planning exist is as important as planning JV itself
• Parties should be open to each other and articulate potential exit scenarios.

29
Challenges facing JVs in Tanzania

 Identification of Possible Risks

 JV Agreement Interpretation
 Operations by Different Contractors
 Alignment of Partner Strategies
 Management Control over Local JV
 Grading JV ability and capacity
 Competitive cost Structure
 Joint Venture Formation
 Establishing Joint Goals
 Tender document Pricing
Common
conflicts
btn JV
partners
JVA: Clause by clause close look of a joint
venture Agreement
Profit Sharing Formula

Parties Term

JV Agreement
Contributions Compliance
features

Management Divorce

Purpose

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JVA: Clause by clause close look
Issue Proposed Approach

• Clarify activities of the JV

• Consider technology, IP rights other resources
Scope/
Purpose
• Plan for due diligence of the parties
• Develop business case/plan
• Non Competition

• Considering tax, regulatory, 3rd party consent if required and ascertain whether
• Partnership
Form of JV • Contractual
• others

• Identify current or anticipated changes to regulatory environment

Regulatory • Ascertain compliance in ownership and control
• Consider dilution, exit and liquidation rights

33
JVA: Clause by clause close look
Issue Proposed Approach

• Ascertain accounting treatment

• Determine and align existing
Existing • Contractual relationship
Operations • Debts
• Confidentiality agreements
• Son competition clauses

• Tax consequences of the proposed structure

Tax • Undertake tax planning accordingly

• Ascertain departments or subsidiaries with material interest in the transaction

Internal
Preparations • Ascertain the impact and their involvement

34
JVA: Clause by clause close look
Issue Proposed Approach

• Consider signing a confidentiality Agreement and determine whether binding

• NDA
• LOI
Conf.
• Term sheet etc.
Agreement
• If non binding set time for replacement with binding agreement
• Consider whether listed company is involved

• Consider which parties should be a party to the contract whether

Parties to • Holding company
the
Agreement • Subsidiary company
• Whether JV entity also a party

35
JVA: Clause by clause close look
Issue Proposed Approach

• Need for Management vehicle to manage the JV such as Board, Committee etc.
• Depending on structure chosen clarify
• Selection criteria, removal, decision making
Governance
• Conflict of interest, non arm’s length transactions
• Approvals of say budget business plan etc.

• In drafting this clause consider

• Ratio, formula, proportionate
Board of
Directors • If 50-50 how to deal with deadlock i.e. chair with casting vote
• Qualification, removal, replacement, quorum, notices, who can call meeting

• How often
Meetings of • Quorum, casting votes
co ventures
• Instruments acceptable

36
JVA: Clause by clause close look
Issue Proposed Approach

• Right to nominate CEO, CFO,COO

Managemen • Limits of authority
t • Right to rotate officer in key positions
• Right to hire and fire

• Who is the auditor and how to change auditors

• Reporting and access to information
Internal • Frequency
Control
• Nature
• Some rights to be removed if diluted

• To be developed depending on authority and consider amending depending on dilution

Action to • Budget, business plan, borrowing, sale, certain contract,
consent
• Insolvency related transactions

37
JVA: Clause by clause close look
Issue Proposed Approach

• Once developed what if not approved

Business
• Ascertain whether previous budget to roll over
Plan/
Budget • Consider 3rd part mediation or
• Arbitration

• When drafting dispute clause consider

• Applicable law
Disputes • If Arbitration location, number, how chosen, costs
• Litigation, DAB

• Philosophy of financing either debt or equity if debt whether third party or shareholders
• Financing by shareholders consider whether
Financing • Prorate to interest of JV
• What if one doesn’t have
• Specify amount and time of contribution
• Other support in kind how priced
38
Parties contribution
JVA: Clause by clause close look
Issue Proposed Approach

• Craft the clause to cover technology/IP to be transferred to JV and licenses if any and
determine
Technology • Restrictions
• What will happen on JV termination or exit
• Value attributed to the IP

• This clause is very key and sensitive, parties are restricted to

Non • Hire JV personnel during or after exit of JV
compete
• Arrangement of competitors restricted

• Classify material defaults

• E.g. failure to honor capital call , non compete, confidentiality etc.
Breaches • Provide possible remedies
• E.g. dilution, loss of board representation etc.

40
JVA: Clause by clause close look
Issue Proposed Approach

• Exit and termination rights are key especially to minority

• Put triggering events for exit and termination
Termination • Default; failure to observe obligations
• Non default ;management deadlock, project frustration
• Remedies; dissolution of JV, buy out of party’s interest

• Put share transfer restrictions

• No transfer except as per agreement, or after lapse of time
Share • Transfer limited to affiliates, (defined)
transfer
• Pledge of shares etc.

• The former is when minority co venture is allowed to negotiate a put right because of change
of law or regulation. Aim is to restore the affected party into original position
Put or Call
Rights • The latter is the ability to purchase the co venture interest
• In both cases consider fixing price, fair market, time specific, and or formula price

41
JVA: Clause by clause close look
Issue Proposed Approach

• Right of first offer and Right of first refusal

• Right of first offer is the right of non selling to receive offer from selling party
First offer/ • Right of first refusal is the right of a non selling to require the selling to sell to the non selling
first refusal however, need to consider the above;
• In the context of default, exit, termination rights
• Consider prohibition against sale to 3rd parties who are competitors

• Tag along is the right of co venture especially minority to tag along on any sale by the other co
venture or only on sale of control block which would result in the majority party ceasing to
Tag and or have control.
Drag along • Drag along is a right of co venture to require the other co venture to sell its shares into third
party offer

• Buy rights or sell rights also known as Shotgun

Shotgun • Each co owner has the right to buy or sell interest of the other at a named price

42
JVA: Clause by clause close look
Issue Proposed Approach

Profit
Sharing
• Determine whether to distribute profit or reinvest
• Develop formula for distribution

• Treatment of JV debt
• Regulatory aspect of exit transaction
Other issues • Price valuation
to consider • Closing process
• Termination/Dissolution
• Miscellaneous

43
Land as Equity Contribution focus on
ownership
•NHC 25%
Start •Partner 75%

•NHC 50%
After 10 yrs. •Partner 50%

•NHC 60%
After 15yrs •Partner 40%
Land as Equity Contribution focus on cash
flow
•NHC 25%
Start •Partner 75%

•NHC 50%
After 10 yrs. •Partner 50%

•NHC 75%
After 25yrs •Partner 25%
Land & Finance as Equity Contribution

•NHC to contribute land & Finance

•Partner to contribute Finance

•Form an SPV

•Shareholding as per @ parties' contribution

•Criteria: IRR 12%, payback 12 yrs., value Tzs 50b

Revenue sharing model

•NHC to contribute land

•Partner to contribute Finance

•Sell the project by 100%

•Share revenue, minimum for NHC is twice her land value

•Criteria: IRR 12%, payback 15 yrs.,

Long Term Lease

•Tenure 10 to 30 years

•Only for commercial projects

•Value of development 4 times of land value

•Share revenue, NHC 25% first half and 50% second half

•Upon lease expiry land revert back to NHC

Key take away

Build Trust

Understand View partnership as

Objectives mindset not formula

Share and learn from Learn from your

mistakes partner

Transforming to meet challenging time

Understand your Draft Clear agreement

partner and be flexible
Bed time Readings

 Aimin, Y. and Yadong, L. 2001. International Joint Ventures: Theory and Practice,
2nd Edition, M. E. Sharpe, Inc, 80 Business Park Drive, Armonk, New York
10504, United States of America.
 Bairi, M. and Njaa, S. 2005. Registration of Joint Ventures Contracting Firms, A
Paper presented in a Workshop on Joint Ventures Partnership for Contractors in
Tanzanian, 14th and 15th April, Dar-Es-Salaam, Tanzania.
 Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture
formation between construction organization in Tanzania’, Australasian Journal of
Construction Economics and Building, Conference Series, 1 (2) 32-42
 Wolf, R. C. 2000. Effective International Joint Venture Management,
M .E.Sharpe, Inc 80 Business Park Drive, Armonk, New York 10504
 contacts
Presented by;
Martin Mdoe Esq.
MM Attorneys
Suite No. 1005, 10th Floor
Uhuru Heights
Bibi Titi Mohamed Road
Box 7281, Dar Es Salaam
www.mmattorneys.co.tz