Good reasons to set up joint ventures abound – and then problems invariably arise. That’s the executive summary of HICAP Singapore’s opening session where Tony Ryan and Robert Williams of Ryan Lawyers presented a lively discussion of the whys and wherefores of joint ventures.
A number of major deals have taken place in recent months with various underlying motives, but the biggest was that between Accor and China’s Huazhu. This one is certainly worthy of a closer look, as evidenced by the number of ‘sooner them than us’ reactions among the audience when Tony flagged it up.
On the surface, the advantages to both parties are pretty clear. Huazhu adds local expertise to international brands such as Ibis, Mercure and Novotel in creating a network of over 2,000 hotels in China. Accor gains greater access to China and exposure for the brand. The loyalty programs are to be combined, serving Accor’s interests with the ever-increasing numbers of Chinese outbound travelers, while Huazhu benefits domestically from Accor’s global network of members. The deal therefore directly ticks four of the six boxes that Tony had presented at the outset as reasons to find a partner: expertise, platforms, market access and customer base – the other two being assets and capital.
However, Tony was quick to stress that although things might start out smoothly, the potential for difficulties is ever-present. In this particular case, he invited those with personal experience among the audience to comment on the ease of maintaining control of the quality and image a brand represents once a Chinese partner has been invited to collaborate, and the audience demurred.
When a joint venture does present itself as the best way of realizing particular aims, the focus shifts to giving the arrangement the best possible chance of success. First of all it is essential to select the most appropriate structure for the deal given the objectives of the two parties and in the light of what each brings to the table; secondly it is very important to consider an exit strategy.
In establishing the right framework for the joint venture vehicle, tax regimes, arbitration and the source of capital will be influential factors. It may be the case that investors would be reluctant to commit capital to a venture based in one jurisdiction while an alternative such as the Cayman Islands might be much more attractive. The structure of the vehicle must also be addressed, with the extent of each party’s exposure to risk to be determined. Convenience may also be a factor; many operators are content to pay key money to an owner rather than take equity, simply to avoid the complexities involved in the latter arrangement, which would necessitate shareholders’ agreements and the greater involvement of lawyers. As Tony pointed out, “most deals follow the internal path of least resistance.”
Where Tony was adamant, however, was on the issue of conflict resolution, and the need to prepare for the worst. “Exit is the first and last question,” he declared. “It’s not if but when,” before softening slightly and allowing, “well it can work, but there’ll be disputes.” If a process can be laid out in advance, as long as it doesn’t have too many rules, this can help in smoothing over any troubles, although as Richard then countered, “silence is often as helpful as process in forcing a resolution.”
What was apparent throughout the session was that deals can be negotiated for all kinds of reasons in a wide range of circumstances. The experiences of the legal experts are accordingly a broad accumulation of wisdom and represent the rule, while those of the parties involved are specific and can easily be the exception. One of the conference delegates had been engaged in a successful joint venture for almost thirty years; Tony asked this outstanding role model if he had an exit strategy.