Joint Venture Q&A with Eric Scharf – Sfera Legal
Posted: 8th August 2014 08:46
Due to the lack of specific regulation for Joint Ventures in Costa Rica it is critical that both local and multinational organisations utilise the help and support of a local expert.
Eric Scharf is one of the founding partners of Sfera Legal, which was created in 2012, based on the trajectory of its members which began more than 20 years ago. The firm’s main objective is to consolidate different practice areas that offer comprehensive legal services, exploring each case with an “out of the box” vision, in order to provide innovative solutions to the clients.
Mr. Scharf was admitted to the Costa Rican Bar Association in 1994. Five years later he got his LLM at Columbia University in New York. He was a member of the Board of Directors at Procomer and is the President of the Enterpreneurs Organization of Costa Rica. He has several publications such as “CAFTA and the Costa Rican Insurance market” and “Legal Studies on the Central America Free Trade Agreement”.
Have there been any recent legislative changes or interesting developments in your jurisdiction?
To the present day, Joint Ventures (JVs) are not regulated in Costa Rican laws. Neither is there any draft legislation directed to regulate them. Most of Costa Rican JV practices have come from day to day transactions, mainly supported on the experience of lawyers that have been able to study and analyse JVs in other legislations, jurisdictions or through their education in foreign universities. Therefore, drafting and counseling JVs has a lot to do with experience and pinpoint assessment of the transaction’s nature, as well as the party’s interests and complementary regulations. JVs in Costa Rica are atypical private agreements regulated only by the principle of autonomy and the general applicable Costa Rican framework which will be variable depending on the content and complexity of the JV for each particular case. JVs are validly used in the country and are governed by the obligations, responsibilities and rights agreed between the parties. It has been defined, studied and ruled by the jurisprudence since 2001 as: “An agreement celebrated between two or more companies which maintain their legal autonomy with the purpose of achieving a common objective by the contribution of resources and a shared administration between them”.
Are you witnessing any prominent trends or strategies?
There is a trend to use JVs for creating strategic partnerships to develop different businesses in order to take benefit from resources, information and knowledge. JVs are becoming a vehicle to share expertise. After the markets contracted a few years ago, and the access to finance reduced, companies are exploring JVs to participate into projects that otherwise individually could not be developed or exploited. Companies are pursuing the aggregated value of participating with other companies with expertise in other fields in exchange for a percentage of the proceeds of the project instead of adding extra costs for retaining the necessary services. Also, JVs are being facilitated because of the experience that has been acquired by law practitioners over the last decade.
Are you seeing a rise in the use of JVs in any specific industries?
- In the banking industry we have seen a rise in the use of JVs in project finance. Some examples are:
- JV between the “Central American Bank for Economic Integration” (CABEI) and the “Power and Light National Company” (CNFL) for the development of electricity projects in Central America.
- JV between CABEI and the Costa Rican Institute of Aqueducts and Sewers (AyA) for financing projects of potable water and aqueducts and sewage systems.
- We have also seen a rise in the use of JVs in real estate development for new projects between companies. Specifically, in the sectors of real estate, technical advice for construction and finance.
- Also, in the development of projects in hydroelectricity, for example the project of the “Costa Rican Electricity Institute” (ICE) or the “Company of Public Services of Heredia” (ESPH).
How do tax laws affect the construction of a JV within your jurisdiction?
The accounting rules and procedures used in Costa Rica is NIC 31: Participation in Joint Businesses, where the participations, assets, liabilities, expenses and incomes, are informed, regardless the structures of JV adopted. Additionally, the law doesn’t establish a special tax treatment for this type of agreement; therefore tax regulations emerge from the interpretation of general tax norms and of the applicable norms to consortiums and temporary unions. The companies in a JV would assume tax burdens together and proportionally, which is why it’s important to clearly establish in the agreement, the percentage of participation, and to have a good control of the contributions and the way in which the utilities would be distributed.
Can you outline any compliance issues or potential pitfalls that investors need to be cautious about?
- The main pitfall is regarding the joint administration and control of the business.
- In relation to the distribution of utilities, there could be opposing points of view regarding the reinvestment of utilities.
- It has a predetermined and limited term of validity as agreed among the parties which implies careful planning of the execution of the contractual obligations and contractual responsibilities.
- Since JVs extinguish by the same causes of trade agreements, it’s important to establish a compliance clause that clearly indicates the steps to follow in case of a breach of contract.
- As JVs don´t have individual legal personality, and aren’t regulated in any law, it’s very important that the agreements’ clauses are clear, precise and delimitate the obligations and responsibilities of each contracting party, to avoid and/or resolve any inconvenient that could eventually arise.
- It’s important to establish a clear arbitration clause that can enable the resolution of eventual conflicts and the applicable law.
What are the main challenges which tend to arise from multi-national Joint Ventures?
- The quality of the legal, financial and other professional counseling that may receive the possible parties.
- To conciliate the interests of the multinational companies and their ideas in relation to the operation and the business, since each legislation establish different limitations and it could be difficult for the companies to understand that certain business strategies or techniques are viable in some countries but not in others, or that some may have a more free implementation time than others. Therefore, the co-ordination and conciliation of the different initiatives in accordance with each company’s legislation could be an important challenge. This is where the creativity, proactivity and the initiative of the lawyers play a very important role.
- The joint administration and control of the business, which is why it has to be clearly delimited and there should be a strong equilibrium of opinions among the parties.
- The differences that might arise among parties in relation to their participation or roles in a JV agreement.
- The deficiency of the country regarding the provision of platforms and tools in different public institutions, which might discourage the construction of alliances or their durability along time.
What is the process used for accurately assessing the price of assets when establishing a Joint Venture company?
One option is to hire an expert to determine the price of the assets. Another alternative is calculating the value of each company, to determine the value added.
Do you feel there are suitable resources out there to aid companies in determining a good partner organisation?
The macro-organisation of the country doesn´t provide the incentives or tools to inform and facilitate the constitution of JVs in the different projects. The success of JVs depends on the good counseling the companies may receive, the resources and the contacts they can have or obtain.
What are the best methods for building trust between partners in a Joint Venture?
The degree of trust in a partnership depends on the scope of the shared venture and its risk defined by the uncertainty of the outcome or the level of consequences. The main method for building trust between partners could be by developing norms for defining the parameters of authority and accountability of the partnership, methods of consensus decision making, and meeting management techniques that support authentic participation by all partners. Another way for building trust would be constantly examining the partnership processes and recognising the lack of participation as a signal to change something.
What legal protection is available for partners in your jurisdiction?
There are no specific legal protection measures of preventive nature. However, a well-drafted agreement with clear rules between the members of the JV may be useful to prevent conflicts or easily solve them if necessary. Additionally, there are different methods of dispute resolution in Costa Rica which, if needed, would provide legal protection to the parties involved. The main legal means would be arbitration and the ordinary judicial jurisdiction.
Can you talk us through the benefits and drawbacks of the various methods of dispute resolution?
The most important methods of dispute resolution in Costa Rica are the following:
- The ordinary judicial jurisdiction.
- The costs are the principal benefit. Since it is a public service, the access to the Judiciary has no costs or expenses.
- The principal drawback is the time. An ordinary civil process may be definitively resolved in approximately five years or more.
- The alternative dispute resolution, especially arbitration.
- There are several benefits, for example: privacy of the process, specialised arbitrators, and prompt process.
- The principal drawback is regarding the high costs (arbitrator’s and arbitration centre´s fees, among others).
What exit strategies are proving effective for disputes that cannot be resolved?
Including exit clauses in the JV agreement may help a more efficient dissolution of the JV. The alternative dispute resolution methods might also be effective. Nevertheless, they depend on the parties’ will, on the existence of an important sophistication level of the parties, good legal or technical counseling, and highly qualified mediators, negotiators or arbitrators who can provide an efficient and correct resolution. The arbitration is a very efficient method of dispute resolution in comparison with the ordinary judicial jurisdiction.
Eric Scharf’s main practice areas are: Corporate Transactions, Mergers & Acquisitions, Insurance Law, Project Finance, Private Lending and Tax Planning. Other practice areas in which Sfera Legal has great recognition are: Real Estate, Dispute Resolution, Telecommunications and New Technologies and Intellectual Property.
For more information please contact Mr Scharf by phone on +(506) 2201 0022 or alternatively via email at email@example.com