EXTENDING THE LONGEVITY OF BUSINESS JOINT VENTURES

Jeff Leong

Joint ventures are value-creating transactions that depend on mutual dependencies to generate value. Conflicts of interest over how to share that value are managed and mitigated through governance mechanisms outlined in transaction documents.

The legal dynamics of these transactions follow a clear pattern: the deeper the mutual dependencies, the less conflict arises, and the greater the willingness to share and collaborate. Conversely, when mutual dependence, trust and or reliability are low, conflict increases.

When mutual dependence and trust are strong, transaction documents can be thinner—sometimes even handshake deals suffice. But when mutual dependence and trust are weak, especially over time, opportunistic behavior, moral hazard, and conflict intensify. The thicker the documents, the higher the risk that the transaction will unravel later due to a lack of trust. It is not a question of foresight. No drafting is capable of comprehensively addressing the unpredictable future, and the myriad of computations and scenarios possible.

The central question at the outset is often whether you have found the right partner—one who is trustworthy and reliable. Alignment and compatible business values, ethics and systems matter greatly.

A former client of mine frequently asked me to join presentations from potential business partners. In many cases, they declined deals because they assessed the counterparty as too combative or different. If conflict-driven and or non compatible partners can be identified even before the deal begins, it is wise to walk away despite the attractive business opportunity. That client later went on to IPO, grow its regional operations, and eventually sell its main business (while retaining the listed company and other assets) for USD 400 million.

Over time, circumstances change. Joint ventures are long-term contracts and are, by necessity, incomplete. They function as relational contracts that carry an implied duty of good faith. This principle has been recognized and developed in English case law. In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) , the court provided a comprehensive analysis of the implied duty of good faith in the context of a long-term distribution agreement . The court found that such a duty could be implied where the contract is a “relational” one, requiring the parties to act honestly and not to undermine the purpose of the contract . This approach was further considered in the context of the Post Office Horizon litigation in Bates & Ors v Post Office Ltd (No.3) [2019] EWHC 606 (QB) , which extensively analyzed the nature of relational contracts and the implied duty of good faith . In Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent [2018] EWHC 333 (Comm) , the court examined the duty of good faith in a joint venture between friends, holding that such a duty could be implied based on the expectations of the parties in a relational contract . The principles governing long-term contracts and the expectations of the parties were also central to the dispute in Essex County Council v UBB Waste (Essex) Ltd [2019] EWHC 819 (TCC)and the related planning case, UBB Waste Essex Ltd v Essex County Council [2019] EWHC 1924 (Admin) , which, while focused on different legal issues, arose from a long-term PFI contract .

If a counterparty proves unreliable and opportunistic from the start, it sets the stage for disaster as circumstances evolve. Over time, business terms often need adjustment to reflect new realities.

What can business partners do to strengthen the relationship? The more you invest in the relationship, the greater the trust and lesser the conflict. That is why, along the Old Silk Road, business partners would sometimes marry their children into each other’s families. It is also why golf remains such a popular pastime for building business relationships.

An INSEAD professor taught me in the 1990s that research shows the “seven-year itch” applies to joint ventures as well. He advised that every four years, partners should reassess the venture and initiate new projects to extend its life. Over the years, I have found that to be sound advice.

#JointVentures #Malaysia #Singapore #ASEAN #JLPw #Lawyers #BusinessLawyers #Mergers #ValueCreation #CorporateLaw

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Published by Jeff Leong

I am the senior partner of Messrs Jeff Leong, Poon & Wong, Malaysia. I am also serving with the Law Association For Asia And The Pacific (LAWASIA), the peak body for national bar associations and law societies in more than 40 jurisdictions in the Asia Pacific region as Chair of the Corporate, Securities & Investment Law and Co Chair of the Belt And Road Initiative Standing Committees. I lead a Special Projects team, structure and run complex M&A deals, resolve critical problems faced by clients such as crisis management, regulatory investigations, shareholder fights and board tussles and advise founders, business owners and senior management on business transactions. With numerous IPOs and M&A deals over 30 years, I am often consulted by clients in Shipping and Logistics, Technology and Digital Economy, Oil & Gas and other heavily regulated industries on complex, urgent and critical matters. I have been included on Asia Business Law Journal’s A List of Malaysia’s Top 100 Lawyers and Legal 500’s Hall of Fame for Corporate and M&A for Malaysia. I am an accredited Mediator of the Malaysian Mediation Centre, the International Commercial Mediation Centre For the Belt And Road Initiative, Benchmark Chambers International & Benchmark International Mediation Centre, Shenzhen Qianhai International Commercial Mediation Centre, CCPIT/CCOIC Hangzhou Mediation Centre and Hainan International Arbitration Court. I founded JLPW in 1999 during the 1997 Asian Financial Crisis with 2 other founders. We were deep into corporate rescues and mergers of banks, insurance companies and stockbrokers to resuscitate the bleeding Malaysian economy, working on some of the major corporate rescues of the 1997 Asian Financial Crisis. Affiliations with Deacons Graham & James 2001- 2012 and Dacheng (now Dentons China) 2012-2016 quickly followed. In 2012, we founded JLPW CROSSBORDER ASIA, a regional law firm network. In JLPW, we developed the current due diligence system adopted and used by industry participants in capital markets transactions in 1999. I assisted the review of the 2020 Due Diligence Guide for Malaysia with investment bankers, accountants, capital market lawyers and other industry participants. I currently lead our Japan Services Group, assisting Japanese companies venturing into Malaysia and South East Asia with market entry strategies, M&As and post merger integration advisory together with our Japanese speaking team. I am also leading our China Services Group and regional JLPW Belt and Road Services Group assisting Chinese companies investing and undertaking Belt and Road projects in Malaysia and other ASEAN countries. As leader, strategist, chief talent scout, builder and problem solver, I have initiated and developed various practice groups in JLPW and am now leading our Legal Tech initiatives to better support our clients in the new Digital Economy.

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