Cross Border M&A – when to opt for a minority stake in a cross border joint venture

Whether your company has engaged in successful joint venture activities for years, or it is new to joint ventures, there is always an element of uncertainty when deciding to enter into a cross border joint venture, whether the objective is to expand reach and distribution of the company’s products and services in highly developed countries, or in emerging markets.

Whatever the key strategic purpose your company wants to achieve, there are two options for entering into a joint venture – which create different outcomes and specific governance issues. Whether the joint venture is established through an acquisition of an existing company or the set up of a joint venture vehicle, your company may either opt for a majority stake or a minority stake.

The decision to opt for a minority stake may be driven by various factors, including the power relationship with the JV partner.

In emerging markets, this choice is often driven by two key considerations:

Regulatory Constraints – Regulatory constraints in specific markets may cause the foreign investment to be restricted to minority investment levels.

Commercial Credibility – Accepting a minority stake may also reflect the need and strategy to enter the market with a credible local JV partner which has already established scale and reputation. This brings along an advantage where the JV partner is operating solidly and effectively in the emerging market environment, and has established government and public policy relations.

Aside from the above, this strategy may be useful or necessary for pure strategic purposes, where the JV partner has the commercial lead in the JV for example because it has proprietary technology, key products or client base/distribution platform which your company heavily relies on.

When deciding to enter into a JV where your company will hold a minority stake, the key point to be considered is that this structure requires a greater preparedness for your company to rely more heavily on the JV partner’s capacity to lead the joint venture and achieve common objectives.

In this circumstance, one of the key issues to be addressed is the establishment of minority protections both at the shareholders meeting and board level. This needs to be done by carefully negotiating and drafting a shareholders’ agreement and ancillary documents which include such protections, in order to achieve a governance structure that balances the powers of the JV partners to achieve the desired objectives.

 cropped-foto-stefania-sito-web-3.jpg© Stefania Lucchetti 2017.  For further information Contact the Author

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