Session 311 - Joint Venture and Consortium Agreements for

International Energy Projects: Surrendering the “Me” for the “We”

Presented by the ACC Energy Committee

Introduction

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Introduction• EEM, Inc. Project in Gabahna– Joint venture (JV) agreement giving EEM 51% of the

ownership and voting power– Intellectual Property (IP) agreement granting EEM

absolute control over all IP associated with the first project– JV partner signed a term sheet for a purchase and sale

agreement for the first project– First project financing package with the Export/Import

Bank that covers all equipment EEM will make in the U.S. that will be used for the first project

– All agreements are to be governed by New York law

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Introduction

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Introduction

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Introduction

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Introduction

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Introduction• Tim Kinskey, Senior Corporate Counsel,

Caterpillar, Inc. (Kinskey_Tim_M@CAT.com)• Ben Clark, Partner, Sutherland Asbill & Brennan

LLP (ben.clark@sutherland.com)• Craig Johnson, Deputy General Counsel -

Energy & Transportation, Caterpillar, Inc. (Johnson_Craig_A@cat.com)

• Bob Temple, General Counsel, Generation mPower LLC (rktemple@babcock.com)

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STRUCTURETim Kinskey

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Structure Issues1. Why create a Joint Venture? What are the key business reasons?2. Why does it need to be a shared equity investment or JV? Are

there alternatives to an equity JV?3. Form of JV4. Funding and financing5. Scope of the JV (exclusivity and non-compete)

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StructureWhy create a Joint Venture? What are the key business reasons?

1. Entry into new market2. Access to complementary resources: capital, technology, expertise3. Sharing costs and mitigating risks4. Potential tax advantages

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Structure QuestionQ: You and a potential partner are considering a 50/50 JV. Which is an advantage of an equity JV compared to a contractual arrangement, such as an alliance?

1. Governance provisions in a JV will provide decision making mechanisms that help the parties avoid deadlocks and disputes,

2. Intellectual property rights are more clearly defined in a JV than in an alliance,

3. JVs are faster to create and help the parties “go to market” more quickly, or

4. JVs are harder to exit and both parties have natural incentives to work together longer.

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StructureAre there alternatives to an equity JV?

1. A 100% purchase or sale (with or without earnout)2. Supply or distribution agreement3. Marketing agreement4. License agreement (IP)5. Secondment agreement (employees) and lease agreements

(assets)6. Alliance agreement (combination of items 2 – 5)

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StructureWhat form of JV?

1. Equity or entity JV• Partnerships, Limited Liability Companies (LLCs), Corporations• The vast majority of equity JVs are LLCs (USA) or the equivalent• Equity instruments: common, preferred, options, warrants, convertible debt• 51% for “control”? Accounting and SEC tests of “control”

2. Virtual or contractual JV

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StructureFunding and financing?

1. Business plan and financial model• Leveraged? Degree of debt • Internal vs. external financing• Self-sustaining with dividends vs. breakeven

2. Capital contributions• Initial • Additional (function of Governance)

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StructureScope of the JV?

1. Geography or other markets2. Exclusivity (by geography, by industry or by application)3. Non-competition covenants4. Antitrust implications

• Access to competitively sensitive information, e.g., costs and pricing• Allocation of markets, non-compete and exclusivity provisions• Market power? Other anticompetitive effects, e.g., consolidation?

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GOVERNANCEBen Clark

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Key Governance Issues• Important to structure governance of the joint venture (JV) carefully

to avoid deadlocks • Local law may dictate certain minority protections or have

restrictions on foreign ownership• How will board seats, votes, profits and risk be allocated? • Can returns be allocated in a way that does not follow “ownership”?• Who will appoint key management personnel?• How will the JV take action?• Who is the legal representative of the JV in the jurisdiction of the

venture?• What authority do the officers have independent of the board?• Do you need a management committee in addition to a board?

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Key Governance Issues• Example: JV with Two Equal Partners

– JV may be managed by a board with an equal number of members appointed by each partner, and one or more independent directors mutually selected by the partners

– Will have an odd number of directors to avoid impasses– Certain fundamental decisions may require the assent of both partners

• Example: JV with Two Unequal Partners– Majority owner will want to run the business with little interference from minority

and will want to hold a majority in voting power, appointment rights, etc. – The list of items over which the minority holder has “veto” power will be smaller.

Items the minority partner will want to retain power over include:• Amendments to organizational documents• Sales of all or substantially all assets, mergers or consolidation• Dissolution • Issuances of equity• Affiliate contracts• Amendments to the project agreements (e.g., a key offtake or supply agreement)

– The minority partner may want to negotiate a detailed business plan to be included in the JV agreements 19

Question?Q: You are planning to enter a JV as a 20% minority interest holder. Your potential partner will hold an 80% equity interest in the JV. How should you allocate JV voting rights?

1. All JV actions should require the vote of the partners representing a majority of the outstanding equity,

2. All JV actions should be delegated to a third-party manager,

3. The 80% partner should control day-to-day decision-making, but you should have a veto right over certain material actions, or

4. It does not matter, because an 80%/20% JV would never work.

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Governance• Key Take-Aways: • Before drafting, it is crucial to understand the

requirements of local law regarding ownership and governance structures

• Working within that framework, look to allocate responsibilities and rights in a way that appropriately values what each partner brings to the JV and reduces the possibility of future conflicts (i.e., avoid cramdown controls)

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• FCPA, Bribery and Corruption Issues– A company can face significant liability under the FCPA because of the

misconduct of its joint venture or joint venture partner– Investors in joint ventures can be liable for anti-bribery violations if they or their

agents had actual or constructive knowledge of the illegal acts, or if they otherwise authorized, directed or controlled the illegal activity

– If a U.S. company forms a JV with a foreign company that bribed foreign government officials (even prior to formation of the JV) in order to obtain or retain business for the JV, the U.S. company can be held liable under the FCPA unless it takes steps to identify and remove the tainted business from the JV going forward

– Prior to forming the JV, partners should conduct thorough due diligence of each other’s relationships with foreign officials; use an FCPA questionnaire

– The JV documents should contain representations and warranties regarding anti-bribery law compliance, and an audit and investigation provision permitting ongoing due diligence regarding the JV partners’ dealings with foreign officials

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Who Is Your Partner? – Regulatory Considerations

Who Is Your Partner?- Regulatory Considerations

• Foreign ownership– Understand the approvals and licenses that may be required

for foreign investment • How long does the approval process take?

– Are there any restrictions on what a foreign party can own? • Do you need a local JV partner? • Are there limits on expatriation of profits?

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• Host country– Consider the political environment: Instability; corruption; stability of

local currency– Consider the legal environment: Ability to effectively enforce JV rights

• Assessing a JV partner– Conduct background checks on the principals and affiliates– What are your partner’s goals? Do the partner’s culture and practices

align with your own? How does the partner make decisions? What are the partner’s financial resources, expertise, business relationships?

• How to address red flags– Conversation with potential partner, keeping in mind cultural sensitivities– Adding protective provisions to JV Agreement

• Audit and investigation rights and a requirement that the JV partner cooperate• Indemnification for JV partner’s legal non-compliance• Termination right if the JV partner is discovered to have made misrepresentations

regarding past improper payments or violates the FCPA24

Who Is Your Partner?- Due Diligence

• Key Take-Aways: Due diligence is a critical first step to creating a joint venture, particularly if you are agreeing to an ongoing relationship with a foreign partner to do business in a foreign country. Be aware that the routine diligence you perform in connection with your domestic business may not be sufficient to uncover the risks of an international JV project.

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Who Is Your Partner?

Negotiating Tactics• Consider cultural differences in negotiations – progress made on

an agreement may be subject to change later• Have an exit strategy; be willing to walk away if you cannot see a

path to resolving critical legal and business issues• If the negotiation is not conducted in English, have fluent

speakers advising you during contract negotiation and finalization

• Key Take-Aways: Think about your negotiation strategy in advance and avoid pressure to get the deal done at any cost/risk.

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Question?Q: Which of the following is the best way to start a discussion with a local potential JV partner regarding the risks of doing business in a country with widespread corruption?

1. Accuse your potential partner of corruption and suggest that you receive additional compensation in the JV arrangement for doing business with a risky partner,

2. Request permission to conduct due diligence of your partner and discuss ways to avoid future violations,

3. Request an indemnity for any violations of anti-corruption laws by the JV and complete control over day-to-day JV operations, or

4. Ask your potential partner whether any conditions exist that would present an anti-corruption problem for you

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Ancillary Agreements• The parties may enter arrangements outside the JV agreement in order to develop

the JV• Examples of common ancillary agreements:

– Technology licenses and other IP agreements (Craig to discuss IP in depth in the following section)• What rights will the JV have to continue to license IP from an exiting partner? • What rights will the parties have to jointly developed IP?• What rights will the parties have to IP contributed to the JV by one partner? • What does local law require?

– Transition services or long-term service agreements• One partner may provide employees or administrative services• One partner may market the JV’s finished products to its customer network

– Related purchase and sale agreements• One partner may be a major offtaker of the products for resale• One partner may be a major supplier of raw materials or equipment• Construction/EPC and other project development agreements

– Confidentiality agreements• Defines the scope of protected, confidential information• Allows for the exchange of sensitive information while mitigating the risk of misuse

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Ancillary Agreements• The parties may enter arrangements outside the JV agreement

in order to develop the JV– Consider the effect of termination/exit on these agreements.– Does it matter that the JV is for project development but your partner will own the

finished product?

Key Take-Aways: Ancillary agreements can be just as important to your JV’s success as its governing documents. These agreements should be drafted with an eye towards preserving your rights should the JV terminate, or should you or your partner want to exit the JV.

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KEY PROVISIONSCraig Johnson

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Intellectual Property• Identification of IP – find all IP/potential IP– Patent, trademark, copyright, trade secrets

• How will existing IP be contributed to the JV?– Assignment or license

• How will contributed IP be valued?– Contributed as equity? Limits

• Due diligence – rights to IP are complex – Do contributors have all rights for scope needed?

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Intellectual Property• License provisions– Exclusive or non-exclusive, territorial or market

• Will the provisions be enforceable?– Under local law or as a practical matter

• Who will own improvements – or new IP?• What will process be for identification and

protection of improvements/new IP?

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Intellectual Property• What happens to IP, improvements or new IP

on termination of JV or exit by partner?– Is license terminable if IP or technology is core to

JV? • Protection of IP and contributed IP– Can IP be effectively protected in jurisdictions of

operation? • Confidentiality obligations– Robust and enforceable? – Survive the termination of the JV?

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Intellectual Property• Hypothetical: One JV Partner demands

agreement that it should have ‘absolute control’ over all Intellectual Property (IP) associated with the Joint Venture– Is that the best approach – what will be the likely

reaction of the JV partner to this proposal?– In a very general sense, what are the major types of

IP that might be most important in JV of this type?– What is the best tool to maintain control, while

providing flexible use of the IP?

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Competition Law• Filing requirements:– What law applies – local, national and regional– Size and other factors drive filing requirement– Responsibility for filing, costs and cooperation

• Covenants not to compete: – An agreement between the partners not to compete– Tension with competition law– If supportive of legitimate purpose (pro-competitive),

then likely acceptable; if not, e.g., marketing JV that results in geographic exclusivity, likely wrongful

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Competition Law• Covenants not to compete (cont.):– Factors to be considered• Scope of non-compete provision• What length of time?• What geographic territory? • Jurisdictions in which the JV operates• Jurisdictions in which the JV is planning to operate• What business? How is it defined?• Competition law considerations may influence scope

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Employment Law• What is the general plan to staff the JV?– Venturers contribute/transfer? New hire?

• What are the applicable laws and regulations?– TUPE (Transfer of Undertakings), WARN Act– Labor law, collective agreements, works council

• Consider transfer issues– Consents, terms of employment, non-solicitation– Who will pay costs of severance and transfer?– Immigration and tax law considerations

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Employment Law• Compensation and benefits issues– What employee compensation and benefits will cover the

joint venture employees?

• Compensation structure, retirement plans, incentive and equity plans, health, pensions

– Will transferred employees fall under the new plans or remain under their old plans?

– Will the joint venture need transitional services (e.g., payroll, HR administration, benefits administration, and so forth)?

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Employment Law• Hypothetical: You are entering a JV with a state-owned

entity. In order to ensure financial control, you will contribute the CFO. – Your candidate is an experienced financial manager whose total

employment cost is $350K/year.

– A local national CFO at a comparably sized company costs $80K/year, and the CEO of the JV, a local national from the JV Partner will be paid 100K.

– How will you add this employee?

• Beyond salary, what other key Compensation & Benefits considerations for this employee?

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DISPUTES AND TERMINATIONBob Temple

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Termination: 50 Ways to Leave Your JV

• Expectations for JV duration• Avenues for exit– Events of default– Actions on default (triggers and consequences)– Transfer– Sale or dissolution (voluntary transfer)

• Plan for member transition

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Question?

Q: Which of these are Major Defaults requiring a quick cure period?

1. Failure to make capital contributions2. Conviction of a crime or proven malfeasance

involving JV property3. Allowing JV to default on obligations without

member consent4. All of the above

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Disputes and Choice of Law• Mechanism for dispute settlement short of

litigation• Dispute escalation on deadlock– Time

• Arbitration– Legal issue or business

judgment?– Why arbitration?– Which rules do you use?

• Choice of law and venue43

Question?

Q: Given a choice, under the laws of which country would you select to control your JV governance documents?

1. Vietnam, 2. China, 3. Indonesia, or 4. Singapore

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CASE STUDY (see handout)All

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Case Study• EEM, Inc., a U.S. industrial manufacturer of

energy equipment• Proposed JV with state-owned utility in Gabahna• Bridge to Gabahna (BTG) may act as

representative and local partner for EEM• Negotiations in Gabahna– Contracts and negotiations can be written and held in

English, but only the Gabahnan version binding

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Case Studya) Which are key issues Jane needs to take into

account?b) Which internal process and policies of EEM Jane

needs to follow?c) Which Departments does Jane need to talk to help

Jane on her strategy?d) Which other suggestions, from a legal perspective,

or steps are needed to implement a satisfactory strategy to develop business in Gabahna?

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Checklist

• Structure• Governance• Choosing a JV Partner• Ancillary Agreements• Intellectual Property

• Competition Law• Employment• Termination/Exit• Disputes and Choice of

Law

When in doubt, use a checklist!48

QUESTIONS AND ANSWERSAll

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