Israeli companies doing business abroad often conduct their activities through joint ventures (“JV”) for various commercial and regulatory reasons. A JV is an arrangement in which two or more companies join forces on a defined project. This form of collaboration can be particularly helpful when accessing new markets or when exploring new lines of business. It allows the JV partners to leverage each other’s expertise and resources. In some cases, JV formation is mandated by “local content" requirements, meaning that a foreign entity must partner with a local company in order to do business. Such requirements are particularly common in African countries with respect to natural resources exploration activities. Likewise, in China, partnership with a Chinese company is mandatory for foreign companies seeking to invest in certain industries.
While various business needs often justify forming a JV, a JV also presents significant legal risks for its partners when it comes to corruption and bribery. For instance, a company may face liability for misconduct by its JV or the JV partners. Therefore, it is imperative that companies examine thoroughly the efficacy of their internal controls pertaining to JVs.
Under the FCPA, liability for the misconduct of a JV or a JV partner can arise under both the accounting and anti-bribery provisions. In the first case, if a company holds a majority interest in the JV, it is strictly liable for the JV's books, records and accounting controls. This means that such a company will be held accountable for bribes or improper cash payments perpetrated by the JV, even if the company did not have actual or constructive knowledge of such misconduct. A company that holds only a minority interest in the JV can also be on the hook for failure to undertake good faith efforts and use its influence to cause the JV to implement proper controls and compliance with the accounting provisions. In such cases, liability will depend on the level of the company’s operational control over the JV, involvement in long-term business planning, and ability to appoint directors.
Under the FCPA anti-bribery provisions, a company’s liability will depend on whether it was involved with or had knowledge of illegal conduct on the part of the JV. The knowledge does not have to be actual and the liability can arise even from the failure to act on significant red flags indicating bribery (“willful blindness”) or knowledge that some of the JV assets were procured through bribes.
When conducting business through a JV, we recommend limiting your company's risk of liability through due diligence, representations and warranties. To this end, the following aspects ought to be taken into account:
- Pre-deal due diligence on the JV and the proposed JV partner:
A company that is considering entering into a JV arrangement should conduct comprehensive anti- corruption due diligence on the potential JV partners. This due diligence ought to be more thorough than that typically carried out with respect to third parties. Due diligence for prospective JV partnerships should focus on reputation and historical compliance records, and should identify any relationships that the potential JV partners may have with foreign officials. Moreover, the due diligence should focus on the assets that the proposed partner will be contributing to the JV, making certain that those assets were not obtained or retained through bribery or other corrupt means.
- Adequate contractual protections within the governing agreements, including exit rights:
Contractual arrangements should include provisions regarding further due diligence and audit rights, standards for conducting business and the implementation of a comprehensive anti-corruption compliance program on the JV level. There should also be provisions addressing termination rights linked to anti- corruption violations (through a “put option” or otherwise).
- Effective ongoing monitoring of JV operations:
A company that takes part in a JV should have a representative with powers to review the JV’s accounts and expenditures. The company should also ensure that there is adequate training of employees and regular updating of due diligence on third parties. It is crucial to maintain thorough records of these activities.
To learn more about how to protect your company when operating through a JV in high-risk jurisdictions, and to learn how to build an effective compliance program, please contact GK Advisory at email@example.com