INTERVIEW: All about joint ventures
Giorgos Landas, founder of the top tier firm Giorgos Landas LLC in an interesting interview regarding joint ventures, their opportunities and risks.
Q 1: Joint ventures could be a practical solution to minimize risks associated with business development. Do you see an increase lately in joint ventures in Cyprus due to the economic instability caused by the pandemic and now lately the side effects of the war in Ukraine?
A: Cyprus along with other countries around the globe has suffered the consequences of the rapidly and continuously changing developments of the world. There has been unprecedented instability globally that originated from the global health crisis and was exacerbated by the war in Ukraine. A joint venture is a strategic alliance where two or more parties, form a partnership to share markets, clientele, resources, knowledge, and, of course, profits. A joint venture that is established under the right circumstances provides a unique opportunity for new investments, and the expansion of the business while at the same time helping minimize the common inherent risks of businesses, inter alia, supply chain bottlenecks, scarcity of recourses, or production costs. Therefore, the increase in joint ventures in Cyprus provides a solution to minimize the financial risks of companies and an attractive proposition to face the economic instability that emerged due to the war in Ukraine.
Q 2: What are the main advantages of establishing a joint venture?
A: A joint venture offers numerous advantages to its participants. The advantages are, prima facie, quicker growth rates as well as the opportunity to attract and generate additional profits. Other main advantages of establishing a joint venture include the following:
- Reduction of risks
- They are not permanent agreements by default and can be fairly flexible depending on their nature and structure.
- Companies gain access to greater resources.
- Greater resources lead to new skills, options as well as intelligence.
- You can always set exit points through the agreement if ever needed to withdraw from a joint venture.
Q 3: What must a joint venture agreement include to protect all parties involved?
A: Those who enter a joint venture need a contract that spells out the parameters of their involvement to be protected. The parties need to set the extent of their commitment and make sure that they do not overcommit in a joint venture and this is where the lawyer’s expertise comes to play a significant factor in the setup of the affair.
Usually, an SPV is a common solution to keep each party’s commitment up to the desired level through their commitment to the shareholding, while also keeping in check liabilities and rights between the two parties under a separate entity.
This Agreement should set up everything all parties need to start their shared venture while also providing a roadmap to continue their ever-evolving commitment to a common goal. More importantly, clauses and conditions for withdrawal and/or liquidation of the participants should be devised to avoid entering into an undesirable phase of negotiations that could cause distress and estrangement between the participants.
Examples include clauses for options like first refusal or the option to purchase the other party’s participation in the joint venture.
Other options include “deadlock” periods and “bubble” periods where the participants are forbidden to withdraw according to conditions like timeframes, the value of the joint venture, or even the maturity of obligations.
Eventually, like every business affair, there is the risk of deadlock, and a solid agreement can mitigate that risk significantly.
Q 4: What are the main forms of joint ventures and which form is the most common?
A: There are many types of joint ventures. Specifically, there are four major types of joint ventures. The Personnel-Based Joint Venture, the Equipment-Based Joint Venture, the Domestic Joint Venture, and the International Joint Venture.
The Personnel-Based Joint Venture includes the merging of the employees of the parts that establish the joint venture.
The Equipment-Based Joint Venture includes the merging of the facilities of the parts that establish the joint venture.
The Domestic Joint Venture refers to the agreement that occurs between companies that are registered in the Registrar of the same country.
The International Joint Venture refers to the agreement that occurs between companies that are not registered in the Registrar of the same country meaning they are companies of two completely different countries that get into business.
Particularly in Cyprus, there is no reference to the law of a joint venture, but four forms of joint ventures have emerged from practice: contractual joint ventures,partnership joint ventures (general or limited),corporate joint ventures,and European Economic Interest Groupings (EEIG). The most common type of joint venture in Cyprus is the contractual joint venture since it gained popularity due to the increasingly large construction projects that have arisen, especially in the context of public tenders where both perceived costs and risks are high.
Q 5: Does the lack of a legal framework pose a key problem? What other disadvantages could occur with joint venture cooperation?
A: Joint Ventures have become an increasingly common form of business organization thus a legal framework is essential for the parties to feel protected by the provisions of the law. The exception to this need for the legal framework is the corporate joint ventures as their establishment, operation, and termination is regulated by the Companies Law (Chapter 113) and between the parties’ agreement. Although joint ventures may have numerous advantages, they also have some disadvantages.
The main disadvantages that may occur from establishing a joint venture are the following:
- It can result in a lack of balance of assets for one or more parties.
- A part may feel like they’re providing an unequal amount of effort or resources.
- Leadership gaps can form in some joint ventures, while also employee cuts may result from merging.
- The expectations set for the joint venture could be unreasonable.
- Deadlocks may arise at a point where withdrawal and/or liquidation of one’s position in the joint venture may lead to significant losses in many areas, including clientele, profits, equipment, or facilities.
Q 6: Joint ventures can play an important role for foreign investors who wish to participate in investment processes in Cyprus. According to your experience do you see a significant number of foreigners choosing joint venture agreements and if yes why do they choose Cyprus?
A: Joint ventures led many foreigners to choose Cyprus for their business due to the low corporate income tax rate which is the lowest in the European Union and the exception of taxation for corporate shareholders’ returned to profit and dividends. Additionally, the flexibility of the regulatory and legal framework, the vast services offerings, and the ever-increasing opportunities that are created every day make Cyprus an attractive business destination.
Q 7: Are there any cases you would advise a client not to establish joint venture cooperation?
A: We examine the risks of each case with integrity, and we advise the client depending on the joint venture structure they may require. Every joint venture case is different; therefore, we advise accordingly and always use our client’s best interests as a compass.