Broadly speaking, a joint venture can be defined for our purposes as a new business entity formed by two or more independent business entities, sometimes referred to as "parents." A business entity can be defined as an individual, a partnership, or a corporation. Joint ventures are generally formed when one parent seeks another in order to provide needed resources or capabilities, to exploit potential synergies, or to share risks. Joint ventures can be established for a definite time span to accomplish specific objectives, or they can be established as on going businesses with no future dissolution envisioned. The contributions of each parent usually consist of capital as well as physical assets, technology, patents, personnel, or other tangible and intangible assets.

U.S. investors as well as those from other parts of the world continue to view joint venturing in Mexico with a Mexican partner as an important option for structuring their operations there. In the new business climate of Mexico, foreign investors and Mexican counterparts who are no longer forced into partnering are now looking at joint venturing opportunities for good business reasons.

There are numerous advantages which attract firms to joint ventures. These advantages include the sharing of costs and risks of projects beyond the reach of a single enterprise. For small or medium-sized firms, joint venture offer an opportunity to act together to overcome entry barriers, including trade barriers, in a new market or to compete more effectively in an existing one. Firms may also use a joint venture to save transaction costs, for example the costs of creating, monitoring and if necessary, enforcing extensive contractual obligations in a joint production arrangement. Finally a joint venture may provide a means for a firm to spin off its know-how into a new field.

Joint venturing in Mexico between foreign business and Mexican partners historically has played an important role in the country’s economic development. Although its origins can be traced back to the 1870s, more recently the joint venture has been used by foreign investors in response to specific regulatory regimens for controlling the investments made by foreigners in Mexico. Joint venturing with a Mexican partner was for many enterprises the only avenue by which to enter the Mexican market. One author commented in the early 1980's , "The contemporary joint venture is thus not a voluntary institution created by foreign investors; rather it is a part of the over-all regulatory scheme for controlling foreign direct investment.

Many internal benefits could be enjoyed if joint ventures were used effectively, but since firms seek diverse strategy objective when forgoing joint ventures, there will be limits to what they should expect to achieve through them. Past studies suggest that in their eagerness for gain, firms have often invested too little of the appropriate time or resources in their joint ventures. If the reasons for forming joint ventures are poorly conceived, if partners are not selected carefully, if firms have over estimated their partners’ strength, or if the agreements and systems used to control the venture are inadequate, such that each partner believes the other is shortchanging it, firms may often be worse off than they were before entering joint ventures.

When two or more independent business organizations agree to form an alliance for some specific purpose, they create duties and rights among themselves and also between the alliance and the third parties with which it deals. These rights and duties are distinct from those of the individual business components acting in their individual capacities. The ventures must be careful, therefore, to adequately define the scope and purposes of the venture. The venturers themselves should have a clear understanding of what activities are those of the venture and what activities they may pursue in their individual capacities. The parties should also have a clear understanding of which assets they will own jointly. Most importantly, these understandings should be documented at the outset so that not only the venturers, but a third party, perhaps a court, required to examine the issue at some later date, will clearly understand the scope of the venture.

The most far-reaching Mexican regulatory regimen that provided for joint ventures of foreign investors and Mexican partners as a primary means of economic development was the Law To Promote Mexican Investment and To Regulate Foreign Investment (foreign investment law) enacted in 1973. In combination with the 1972 Law on the Transfer of Technology and the Use and Exploitation of Patents and Trademarks (technology transfer law), which was applicable to all foreign investments, the process of Mexicanization already underway was accelerated and the role of the joint venture became more central to the foreign investment regime. In particular, the foreign investment law codified, and made more predictable, multiple regulations and practices that had been evolving since the late 1950's and early 1960's and that has created a somewhat arbitrary and unpredictable regime for foreign investment.

At the time of its enactment and up until recent regulatory changes, the foreign investment law effectively required foreign investors to use joint ventures, providing that enterprises were Mexican majority owned in those sectors not reserved for one hundred percent state or private

Mexican ownership. Specifically Article 5 of the foreign investment law provided:

In cases where legal provisions or regulation do not specify a given percentage, foreign investment may hold no more than 49% of the capital of business enterprises, provided it is not empowered by any title to determine the management of the business enterprise. The participation of foreign investment in the administration the business enterprise may not exceed its participation in the capital.

Although provisions existed for the National Commission on Foreign Investment to allow an increase or decrease in the percentage held by a foreign investor under certain circumstances, the practical effect of the foreign investment law was to require joint venturing by virtually all inbound foreign investors with Mexican partners who held majority ownership and control of the enterprise. The "forced marriages" of joint venturing in Mexico during Mexico’s prior economic history arose not out of business considerations or because of the advantages of international strategic business alliances, but because it was the only avenue for investing in Mexico.

There have been various restrictions on foreigners contracting in Mexico, such as the requirement for advance government approval of transfer of technology agreements. The Transfer of Technology of 1982 requiring such government approval has since been repealed. Joint ventures are another area in which contracting restrictions for foreigners have decreased. Changes in the regulation of foreign investments have greatly increased the number of sectors in which foreigners may control or even wholly own businesses in Mexico. The United States and other foreign ventures are now free to contract for joint ventures with much more varied control structures than formerly. As a general proposition, the recent unilateral Mexican economic reforms and the corollary impact of NAFTA have further diminished restrictions on foreign investor activity in Mexico.

When faced with the provisions of the foreign investment law, most foreign investors had no alternative but to seek a Mexican partner and to devise a joint venture arrangement, often ignoring business danger signs. Ventures of foreign investors with Mexican government-owned enterprises were perhaps the most dramatic example of mismatches with inadequately shared strategic goals and little knowledge of one another’s potential contributions to the enterprise.

The purposes as well as the business strategies of partners in such combinations were frequently at odds.¹³

Struggles related to control also jeopardized some joint ventures, particularly when capital investment and operational know-how were contributed by one partner while the other had majority ownership and administrative control. Innovative approaches such as the appointment of very high level executives from the minority foreign venturer to its few board positions, dispersion of the Mexican ownership interest by a public offering of shares in Mexico on the stock exchange, indirect participation of the foreign partner in selection of Mexican board member, were developed so that strategic goals were shared and conflicts minimized.¹⁴

Often the objectives of host nations are not the same of those of the joint venture partners, and this conflict is likely to persist even within mature, industrialized economies. For example, domestic partners frequently want to import highly advanced technologies and leading global brand names into their home markets as a sort of instant remedy that would give them overwhelming advantages over local competitors. But host governments frequently want those technologies that create jobs for the greatest number of workers. Alternatively, foreign partners may form joint ventures with local firms to use technologies that exploit the advantages of lower wages. Many host governments want the most modern technologies, rather than those that would make the most sense.

The result of these conflicts could be problems in day-to-day operations or in capital recovery if foreign parents are unwilling to accommodate governments’ economic development plan.¹⁵ In brief, decisions regarding whether to license technology (or brand names) or take local partners in joint ventures cannot be analyzed using traditional schemes of technology transfer if host governments exert substantial bargaining power, especially if local partners are nationalized firms.¹⁶

Late in 1984 U.S. antitrust officials indicted that joint ventures might be tolerated ( even among competitors within highly concentrated markets) if efficiency gains offset the harm to competition that such arrangement had previously been assumed to create.¹⁷

If a joint venture violates antitrust laws, it faces the possibility of civil and criminal penalties and even the dissolution of the venture. The last thing the venturers want is uncertainty as to the venture’s status under the antitrust laws. Inconsistencies in interpretation between the Department of Justice and the Federal Trade Commission, the two bodies charged with enforcing antitrust laws, along with ever changing enforcement policies and the possibility of private lawsuits make it very difficult to predict whether any given joint venture will attract an antitrust action. If a planned venture raises any of the general antitrust concerns, the venturers will do well to undertake a full analysis of the issue prior to formation. In depth analysis will be required on an individual basis because the spectrum of potential joint ventures is so broad.

In a speech delivered at the American Bar Association’s National Institute on Joint Ventures, Robert Pitofsky, Dean and Professor of Law at Georgetown University Law Center, provided a framework of antitrust analysis of joint ventures. The analysis was reprinted in an article in 1986 in the Georgetown Law Journal. Professor Pitofsky points out that joint ventures are an uncertain subject of antitrust enforcement. He goes on, however, to suggest that since the primary purpose of the antitrust laws is to curtail activities which have an anticompetive effect on the marketplace, the joint venture analysis generally involves a balancing between the anticompetitive effects of a joint venture and the economic efficiencies that it achieves. Would-be venturers should examine their proposed alliance to see if it will produce any of these anticompetive effects.

The principal antitrust concern with respect to the formation of a joint ventures is the possibility that the venture will reduce competition in its market. In determining whether the venture will lessen competition, courts will look to what the parent corporations would have done had it not been for the joint venture. An antitrust challenge is most likely where, as a result of a joint venture, a single entity is in a marketplace in which there had been two separate competitors. In order for a venture of this kind to withstand an antitrust challenge, the venturers have to show that the efficiencies produced by the combination could not be achieved independently by the two ventures acting separately and also that those efficiencies outweigh the elimination of competition between the two parties. In some cases, however, even such joint venture may not raise concerns if it is limited in time or scope in such a way that the anticompetitive effects are limited.

Another potential anticompetitive arrangement, which produces somewhat gray area, is the situation where one of the joint venturers is already established in a marketplace and the other is not but could possibly enter the market at some point. The participation of the second joint venturer means that it will never enter the market separately and thus, will no longer be perceived as a company which threatens to enter. That threat of potential competition is generally considered to be a competitive asset in the marketplace. Nonetheless, current antitrust analysis treats the "in-the-wings company" situation very leniently. It is not very likely, although it is possible, that a joint venture of this type will run afoul of the antitrust laws.

Another type of anticompetive effect, different from reduced competition between the parents, is known as the "stifling effect" on the market. The effect of a joint venture may be that each parent will refrain from market activity in which it would have engaged had it not been for the venture. Since the joint venture parents will very rarely compete with the venture itself, nearly all joint ventures will have this stifling effect. That is, a company is not likely to enter a joint venture to produce a certain product and then produce the same product itself. The enforcing agencies, therefore, tend to recognize that disallowing joint ventures because of the stifling effect would greatly inhibit the development of joint ventures. Their response, therefore, has been to wait and see whether the stifling effects of the joint venture at some later point develop into problems of monopolization or other anticompetitive activity.

The third potential antitrust problem of joint ventures is that they provide great potential for the facilitation of collusive activities between the parents. In the course of organizing or operating the venture, the parents may exchange internal information regarding prices, production capacity, sales volume and other information pertaining to the venture. The exchange of internal information of that sort is often the means of collusion between parties and such an effect by a joint venture may attract the attention of antitrust enforcing agents. Under the antitrust laws, the opportunity to conspire is treated as circumstantial evidence supporting the inference of collusion, but is not adequate in itself to show collusion.

Antitrust concerns also arise out of the agreements which the joint venturers make between themselves in forming the joint venture. Those agreements almost always limit or specify the says in which the venturers will compete with one another and with the venture. While this type of agreement may be illegal in isolation, it is generally permitted to the extent that it is necessary to further the purposes of a venture if the agreement is no broader in scope that is required. For instance, the type of agreement as to scope, in which venturers agree to cooperate in future market developments, might be illegal if made between two non-venturing businesses but will generally be considered valid between co-venturers. Venturers, therefore, need to be careful in drafting their joint venture agreements. Agreement provisions which exceed the required scope for the venture may be struck down separately as antitrust violation, but they may also jeopardize the entire venture itself.

Note that until 1984, U.S. antitrust authorities preferred to treat many forms of cooperative strategy as though the partners had merged. When firms plan joint ventures within such environments, it is particularly important to show a procompetitive design and an antitrust-sensitive explanation of the 1) need for the joint venture, with convincing portrayals of the 2) inability of either parent to go it alone, the 3) expected gains in efficiency from cooperation, the 4) stream of new products (or technologies) that the alliance could create, and 5) what role the joint venture would play in promoting the growth and international competitiveness of the national economy. Because cooperative strategies raise questions of market division and limited freedoms to compete vigorously,¹⁸ aspiring partners must write their joint venture agreements carefully, with thoughtful provision for the resolution of disputes and modifications to suit local antitrust agencies. Neglect of this aspect of joint venture planning could result in costly litigation with public agencies (or private parties), wasteful exposure of company resources on litigation, exposure of firms’ innermost business secrets, and potential loss of competitive momentum.¹⁹ Joint ventures should examine the effects of their proposed venture and in many cases will want to undertake a more detailed analysis of antitrust compliance.

U.S. antitrust law applies to the formation and activities of joint ventures operating overseas. In the landmark joint venture case of Timkin Roller Bearing Co. v. United States, 341 U.S. 593 (1951), the U.S. Supreme Court ruled that agreements to divide world markets have a direct and substantial effect on domestic commerce and, therefore, are subject to U.S. antitrust laws. There are, however, certain important exceptions.

The Justice Department will decline to intervene in practices that directly affect only foreign markets and that have no competitive impact upon U.S. markets or the import and export opportunities of U.S. firms. According to its 1988 proposed Guidelines for International Operations, the Department of Justice will not challenge a joint venture performing a foreign project that has no competitive effect on U.S. markets, even if the joint venture has engaged in conduct which would clearly be illegal if it affected markets in the United States. The Justice Department will exercise jurisdiction when the U.S. government bears 50 percent or more of the cost of the foreign project, since it is the U.S. taxpayer who suffers the harm in this instance.

Congress has reduced the impact of the antitrust laws upon foreign conduct, absent substantial and foreseeable effects in the United states. In 1982, Congress enacted the Foreign Trade Antitrust Improvements Act, 15 U.S.C. Sec. 6a. This statute renders the Sherman Act inapplicable to conduct involving trade or commerce, other than imports, with foreign nations unless such conduct has a "direct, substantial, and reasonably foreseeable effect" upon domestic or import trade, or upon the export trade of a person engaged in export trade in the United States. This law was intended to help eliminate business thinking that the antitrust laws inhibited the formation of efficiency-enhancing joint-export activities.

Note that the Clayton Act was unaffected. However, the formation of a joint venture having no direct, substantial and foreseeable effect upon domestic or import trade, or export trade of U.S. persons, would seem unlikely to substantially reduce in competition in any of those markets. In other words, a joint venture shielded from the Sherman Act by the 1982 legislation could seem unlikely to be susceptible to attack under § 7 of the Clayton Act. The federal courts of the United States have declined to exercise jurisdiction over antitrust matters when there has not been sufficient evidence that U.S. markets have been affected by the alleged conduct.

This is not to say that joint-venture activity outside the United States should be conducted without regard to expose to U.S. antitrust laws. Most international business have some dealings in U.S. markets. Standing to assert claims under the U.S. antitrust laws is not limited to U.S. citizens and in fact such claims can be brought by foreign governments if the required link with domestic or foreign commerce of the United States can be established. The U.S. Supreme Court rules in 1978 that foreign governments can sue under the U.S. antitrust laws. The Foreign Sovereign Antitrust Recoveries Act of 1982, 15, U.S. Sec 15 (b) and 15 (c) restrict the right of foreign governments to recovery of actual damages, without trebling.

United States companies are responsible for the actions of their foreign subsidiaries which have antitrust consequences affecting U.S. commerce. Although a decision of the U.S. Supreme Court in 1984 abolished the legal fiction that a U.S. company could conspire with its own wholly owned foreign subsidiary to violate the Sherman Act, activities of foreign subsidiaries in joint ventures affecting U.S. commerce remain with the reach of U. S. antitrust law.

An element of policy which prevents faster use of joint venture is the refusal of some companies to transfer unpatented know-how. The concern is that technical know-how, including formulas, process techniques and flows, manufacturing and tooling shortcuts, etc., are released out of the protected control of a parent. This is clearly a risk, but it can be guarded against. Some companies list the specific unpatented products which they will turn over to a joint venture. The technical service agreements generally spell out the precise products covered, leaving out products dependent on unpatented know-how, where disclosure could threaten a basic strength of the parent. Some new market penetration is, therefore, precluded, but the trade-off decision has to be evaluated.

Patents, if one is prepared to spend time and money necessary to prosecute infringers, give some shelter, even when a license is granted to the joint venture. Obviously, to the extent that technology can be patented and disclosure in patent application is not too revealing, patents are used. One parent may protect its formula by manufacturing a key ingredient and allowing only mixing or processing, packaging, and marketing done by the joint venture company. This is obviously a risky matter to be weighed against opportunity los in new countries and market areas. If production is complex and if the use of unpatented know-how requires substantial training and control for implementation parents’ rights, through appropriate disclosure agreements.

Another issue is the conflict of reinvestment for growth versus dividend return. This not only enters into the basic decision as to whether joint venture partnership is possible but into the selection the partner. If one partner has resources to reinvest for the maximization of growth opportunity in a given market, and the other partner requires net cash flow and dividend return, this issue must be placed on the agenda for early negotiation. The obvious solution is to select a partner whose objectives are reasonably in concert with the other partner. The other solution is to respect the differences in attitude and attempt to provide for an equalization through some form of compromise.

Another policy issue of consequence is that of operational control. An ideal joint venture arise where one side is willing to administer the local content and have day-to-day operational responsibility, while the other provides technical know-how, including formations and customer applications. A balanced sharing of these functional skills, with on going responsibility for state- of-the-heart development assigned to the appropriate partner, can ve expressed in policy statements during the planning and structuring of the joint venture.

The contract is the foundation of any international business venture. It sets the framework for the business relationship and establishes the rights and duties of the parties. As with domestic contracts, care should be taken that the intent of the parties is fully represented by the contract. Moreover, any joint venture contract should be in writing, even it states merely, the position and goals of the parties. In some cases, standardized contracts may be used by the parties. When such standardized contracts are not available, however, the follow clauses are often included in joint venture contracts.

The greater distances between the parties and the difference in the parties legal systems almost assure that a joint venture contract will require special financial considerations. In managing the financial risks that may arise, special care should be taken in the specification the method of payment and the currency in which payment is to be made. In addition the parties may need to be concerned about removing profits from the countries in which they conduct their business.

A business may wish to exchange that currency into its own country’s currency. The exchange of money, however, is not always a simple mathematical calculation. Losses in international business sometimes center on exchange risk-the potential loss or profit that occurs between the time the currency is acquired and the time the currency is sold or exchanged for another currency. Suppose, for example, that U.S. Wine Importers Inc. enters into a contract for the purchase of Mexican wines. Suppose further that the contract calls for the payment of 2.8 million Mexican pesos in 180 days. When the contract is signed, the exchange rate is 7.00 Mexican pesos to the dollar. Thus, if U.S. Wine paid immediately, the 2.8 million Mexican pesos would cost $400,000. Suppose, however, that U.S. Wine elects to wait the full 180 days before paying and that during that time the exchange rate falls to 6.58 Mexican pesos to the dollar. Unless U.S. Wine has undertaken to protect itself from exchange risks, it now must pay $425,000 to satisfy the terms of the agreement. That is, movements in the exchange rate cost the company $25,000. To avoid such difficulties, U.S. business often require payment in dollars rather than in the currency of the other country.

The payment clause is an important requirement for any joint venture contract. The method and a manner in which payment is to be received as well as the currency in which payment is to be made should be clearly specified. Some nations do not allow their currencies to leave the country. If payment is made in currency under such a situation, the payment has special restrictive effects on the receiver of the currency. Those effects should be taken into account when the contract is written. Problems with inflation and currency exchange risks, especially in unstable economies or in long-term agreements, should also be address in this contract clause.

According to Professor Anibal Sierralta Rios the "intention clause" is the fundamental element of the contract in which the object of the contract is defined among the parties. It is the "common denominator" of the relation and interests that originated the contract.

This clause refers to the goals and intention that encourages the contracting parties and although it is not common in national contracts, it is fundamental and even more necessary if the joint venture is established between companies of two different judicial systems. Sierralta Rios goes on to say that this clause is like a preamble of the contract, since it is the expression openly manifested of the reasons that leads to establishing a joint venture, as well as the intention of the parties or their common goals.

An example of this clause in the usual English version:

___to record the understandings and agreements of A and B as to the nature, the scope and the basic conditions of their joint venture,

It is the determination of the object of the contract, what type of operation will it cover. It is different than the intention clause in that this one explains the "animus", the motivation that lead the parties to associate, and it being mentioned clarifies the object which is an essential requirement of the contract. Professor Sierralta puts it as the object, the action or definite service, it is the point towards where the parties are headed.

Parties to joint venture contracts do not always speak the same language. Even when they do, the complex contractual terms may exceed the understanding one of the parties when the contract is not in that party’s native language. Further, a word or phrase in one language may not be readily translatable to another. Therefore, the contract must have a choice of language clause, which sets out the official language by which the contract is to be interpreted. As Professor Anibal Sierralta Rios states in his book "Joint Venture International", that in international transactions the ideal of identifying jurisdiction law and language is sought, but "the best is enemy of good or of reality". The use of two languages in the contract increases the problem.

One fundamental concern is the language, the proof of foreign law in the hands of a national judge is the greatest proof of such difficulty. Professor Sierralta Rios goes on to say that the decision shall be based on proof, arguments and reason in the national language. You can not leave out in a joint venture contract the clause that indicates the contract’s language of interpretation.

Although the mere expression of an official language may not remedy all language problems, it does aid in making the parties aware of the language that will be used.

An example of Choice of Language Clause with Arbitration Provision is as follows:

In operating a joint venture business, companies face additional uncertainties relative to their domestic transactions. With the expectation of reducing some of these uncertainties in the event of a dispute, more and more companies are placing forum selection and choice-of law clauses in their contracts. The forum may be in one place, and the law to be applied are in agreement.

Through their initial negotiations, the parties to a joint venture contract may select the court in which disputes are to be resolved and the law that is to be applied. This eliminates the possibility that one or both of the parties will go "forum shopping" looking for the most favorable forum for the resolution of a dispute. Forum selection clauses are generally presumed valid unless they deny one party an effective remedy, cause substantial inconvenience, are developed through fraud of unconscionable conduct, or contravene public policy.

Frequently, the forum selection and choice-of-law clauses are interrelated. Thus, the validity of one will often reflect on the validity of the other. As a rule, choice-of-law provisions will be found to be valid if (1)the law chosen is from a place with a substantial relationship to the parties and (2) the law is not contrary to a strong public policy of the place in which the lawsuit is brought. In the following case, the California Supreme Court considers a choice-of- law clause specifying that the laws of Hong Kong are to apply in lawsuits between the parties.

Nedlloyd Lines B.V. v. Seawinds Limited²⁰ : Seawinds Limited was a Hong Kong corporation with its principal place of business in California. The company had been successful in its primary business international shipping for several years. The company owned three large container ships that operated primarily between the Far East and the United States. Seeking opportunities to expand, the company entered into an agreement with a group of international companies from Hong Kong, Singapore, Great Britain, the Netherlands and the United States. With the agreement, the company expected to grow and develop into a major player in international shipping. Unfortunately, it expectations were never realized and it brought suit against the group of international companies alleging breach of contract. The contract specified that all disputes were to be brought before the Hong Kong courts and subject to the law of Hong Kong. However the laws of Hong Kong relative to those of the United States would not likely be favorable to Seawinds.

The choice-of-law clause in the shareholders’ agreement provided the following: "This agreement shall be governed by and construed in accordance with Hong Kong law and each party hereby irrevocable submits to the nonexclusive jurisdiction and service of process of the Hong Kong courts" The California Supreme Court concluded that: When a rational business person enters into an agreement establishing a transaction or relationship and provided that disputes arising from the agreement shall be governed by the law of an identifies jurisdiction, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship. . . . To allow Seawinds to use California law would further no ascertainable fundamental policy of California; indeed, it would undermine California’s policy of respecting the choices made by parties to voluntarily negotiated agreements. The Supreme Court of California held that a valid choice-of-law clause existed in the contract between the parties. Since the clause was valid, it encompassed all causes of action arising from or related to their contract regardless of how those causes of action are characterized.

Business persons, attorneys, consultants should be aware of the basics of contracting in Mexico. These persons should understand how to negotiate contractual arrangements with Mexican counterparts and should be able to satisfy certain procedural formalities required under Mexican law. For successful negotiation and finalization of a contractual agreement in Mexico, it is important to have an introduction to the dual historical foundations of the civil-law and Mexican culture.

Mexico’s civil law system is fundamentally different from the common law system with which U.S. attorneys are familiar. The common law system developed in England and eventually extended to most of Great Britain’s colonies, including the United States.²¹ The common law system characterizes itself through three distinct traits: 1) unwritten principles, 2) often contradictory precedential opinions from court cases, and 3) powers vested in the judiciary changing times.²²

On the other hand, civil law system is characterized as one in which laws are written down and organized into complete and carefully organized codes. Civil system codes are self-explanatory, and their application does not requires special interpretive guidance or outside authority.²³ A Mexican lawyer, for example, to determine a point of law, may refer to the Civil Code, the Criminal Code, the Civil Procedure Code and the Criminal Procedure Code for each state and federal district,²⁴ as well as the Commercial Code and other such codes that are federal in scope.

There are numerous other factors that distinguish the civil law system from the common law system. For example, certainty in the civil law system is often attained at the price of flexibility.²⁵ The evolution of a civil law system is in the hands of scholars, professors and legal experts, most of whom are more organized in their approach and use more consistent terminology than is possible in the common law system in which judges’ opinions adapt the law.²⁶

Two fundamental divisions of the law are recognized in Mexico. First, public law is categorized separately from private law: public law includes constitutional, labor, commercial and criminal law, as well as civil and commercial procedural law; private law includes the commercial and civil law.²⁷ Secondly, in Mexico there is a clear distinction between commercial and civil law. Within the category of civil law, the Mexican system includes family law, property law, contract law and the law of succession; while the category of commercial law includes corporate law, banking law, the law of negotiable instruments, bankruptcy, maritime and insurance law. The civil and commercial law distinction is especially import for contracts, which may be either civil or commercial and would thus be governed by different codes.²⁸

B. Mexico’s Commercial and Civil Contracts

The first step to take when identifying the applicable law governing a contract is to determine whether the contract is civil or commercial. The Commercial Code²⁹ explicitly describes as commercial certain types of acts or contracts. The list is not all inclusive, however, certain other kinds of contracts may be deemed commercial if they were entered into for the purpose of business.³⁰ Following is a list of types of acts and contracts that the Commercial Code lists as commercial transactions and are subject, therefore, to its provisions. All other acts or contracts are deemed civil and are subject to the provisions of the Civil Code³¹

Commercial Contracts Specified in the Mexican Commercial Code:

I. All acquisitions, alienations and leasing made with the object of commercial speculation of necessaries, articles, movables or merchandise, whether in their natural state or after having been manufactured or worked;

II. Purchase and sales of a movable property made with said purpose of commercial speculation;

III Purchases and sales of interests in and shares and bonds of commercial companies;

IV Contracts relating to the obligations of the state or other negotiable instruments used in commerce;

V. Undertaking for selling provisions and supplies;

VI. Undertakings for construction and public and private works;

VII. Undertakings for fabrication and manufacturing;

VIII. Undertakings for the transportation of persons or goods by land or water, and travel agents;

IX. Booksellers and editorial and printing undertakings;

X. Undertakings for commissions, agencies, houses for commercial business and establishments and offices for sales at public actions;

XI. Undertakings for public shows;

XII. Mercantile commission operations;

XIII. Agency operations in mercantile transactions;

XIV. Banking Operations;

XV. All contracts relating to maritime commerce and to river, lake and sea navigation;

XVI. Insurance contracts of all kinds, provided they are made by companies;

XVII. Deposits on account of commerce;

XVIII. Deposits in general storage warehouses and all operations affected with certificates of deposit and pledge bonds issued covering same;

XIX. Checks, bills of exchange, or remittances of money from one place to another, between persons of all kinds;

XX. Orders, or other negotiable instruments payable to order or bearer, and the obligations of merchants, except when proven to arise through causes alien to commerce;

XXI. Obligations between merchants and banks, unless they are of an essentially civil nature;

XXII. Contracts and obligations of the employees of merchants, and all that concerns the commerce of their employer.

XXIII. Sales which the proprietor or cultivator makes of the products of his farm or holdings;

XXIV. All other acts which are of a similar nature to those mentioned in this code. In case of doubt, the commercial nature of an act shall be defined by judicial decision.

Some contracts may be commercial as to one party but civil as to the other. For instance, when a merchant sells a product to an individual’s personal use,³² the transaction involves a commercial contract for the merchant and is governed by the Commercial Code. For the individual consumer, however, it is a civil contract governed by the Civil Code.³³

The two codes are not mutually exclusive. The Commercial Code, for example, provides that the Civil Code shall be the controlling authority for issues not address in the Commercial Code. Thus, because there are no provisions in the Commercial Code addressing contract formation, the Civil Code applies to such issues.³⁴

The Commercial Code does not cover the creation of contracts or the elements or formation of agreements. Instead, one must refer to the Civil Code to settle such issues. The explicit provision within the Commercial Code that refers to the Civil Code for such matters is Article 81 of Chapter II: "Subject to the modifications and restrictions of this [Commercial] code, the provisions of civil law with reference to the capacity to act of the contracting parties and the exception and grounds which may rescind or invalidate contracts are applicable to commercial transactions."³⁵

One of the greatest challenges for U.S. and Mexican counsel, when documenting a joint venture with a Mexican partner, is to negotiate the extent and length of documentation that will be used. Mexican business persons and their legal counsel are more likely to use concise documentation, with more provisions left to be settled at a later time or to evolve as the business develops. United States business persons and their lawyers are more accustomed to detailed and lengthy legal documents, particularly for a complicated contractual arrangement. Balancing the differences between these two approaches is at times difficult to accomplish. Business persons and their attorneys should be aware of the basics of contracting in Mexico, and should understand how to negotiate contractual agreements with the formalities required under Mexican law.

The two elements required for the existence of a contract under the Civil Code are the following:

1) consent or the act of agreement by the parties regarding the contract; and 2) an object for the contract that my be either the act that the obligor must perform or must not perform or the thing to be given by the obligor under the contract terms.³⁶ Without these two elements, the contract does not exist or more precisely, has never been created.

The opportunities in Mexico are long term. An increasingly affluent market is expected to develop in Mexico as North American trade increases, as foreign companies enter the Mexican market for production and sales and as the Mexican enterprises become competitive. Joint business associations are especially useful for a business seeking to expand for the first time into another country. Often the principal reason to take on another party as a co-venturer is to obtain the use of that party’s knowledge and experience in the country where the venture’s operations will be located.³⁷ Knowing how to deal with the governmental authorities, how to recruit local capital and management personnel, and how to assess the local market are all significant contributions that may be made by the partner in the county hosting the joint venture. The participation of local venturer may also enhance perceptions that the enterprise is a local operation, thus encouraging good relations with local consumers, suppliers and government.³⁸

A clear-cut statement that the operation of the venture over a long period of time will get the benefit of top management attention is something which should be expressed and abided by in practice. As the joint venture continues, issues will arise continually to challenge the venture partners’ policies, and if top management is not prepared to deal with these effectively and decisively, delays in decisions will inevitable call into question the viability of the joint venture. It is natural that this sort of testing will go on all the time, but is better to have the philosophy and commitment understood early in the formation of the venture than to let it evolve.

It should be noted that the number or names of the agreements are not important: that there be a signed document covering all relevant considerations is important. Ordinarily, there will be an agreement, sometimes called the Formation Agreement, to form the joint venture, which will contain provisions relating to capitalization and financing, management structure, action processes, objectives of venture and related subjects. Other agreements, such as Operation Agreement, a Transfer of Technology Agreement, Service Agreement, etc., are prepared along with the Formation Agreement and are usually attached to the Formation Agreement as exhibits. They are usually all signed simultaneously and therefore all issues relating to any part of any of the agreements need to be thought through and decided upon prior to entering the venture.

The following lists the more significant provision or concepts on which attention should be focused and which should probably be included in a venture agreement.

Capitalization-- If a corporation, a description of securities and amount thereof issued to the co-owners. Complete, description of the consideration or capital to be contributed by owners, whether cash, plan, equipment, or intangibles. Values should be agreed to and specified for non-cash consideration.

a. Financial--This is particularly important to the co-owners with a minority interest in the venture. Examples of actions to be reviewed are as follows:

• Incurrence of debt. Possibly there should be a limit on the amount the venture can borrow or a limit on any financing outside of the ordinary course of business for other than working capital needs.
• Capital expenditures in excess of ordinary needs of the business.
• Long-term leases in excess of existing space requirements
• Compensation package, including benefits, in excess of dollar amounts.
• Transfer or pledges of a substantial part of the assets.

• Liquidation or dissolution
• Reorganization
• Merger, acquisition, consolidation or other joint venture or other business combination
• Recapitalization, reclassification or change in terms of co-owners’ stock

• Election or change of directors or number of directors
• Election or change in chief executive officer or other key officers.

• Change in business purpose clause
• Termination of business, or part of it
• Engaging in new business
• Entering any transaction or business arrangement with a co-owner or in which he has an interest

After determining which corporate actions should be subject to veto, the procedure for establishing the veto power should be addressed. Usually this is covered in the Formation Agreement itself: however, restrictions may also be included in the organization papers. The advantages to inclusion in the organization papers relate to the amendment process. An amendment requires stockholder approval, and formal amendment papers evidencing such approval must usually be filed in the appropriate state government office. Each co-owner must vote its stock in the venture, and depending on the charter, by-laws, etc., of the co-owner, the procedure for voting the stock probably call for top management, and possibly even board of director, approval. On the other hand, if the restrictions are in the Formation Agreement is can be amended or modified by any authorized officer and such amendment need not be signed by top management and in fact, in most states, need not even be in writing, notwithstanding a provision in the agreement that amendments must be in writing and signed by the president. Hence, the inclusion of the restrictions in the organization in the organization papers achieves two purposes:

It protects against inadvertent waiver or modification of the restrictions;

It ensures top management scrutiny of any proposed change.

C. Finding Partners

Partners who are pursuing a joint venture relationship must build into their timetable a period of months during which they will seek a co-venturer, become acquainted and establish a relationship with the prospective partner and share sufficient information about strategic business goals to ready themselves for the actual venture negotiations

The ideal joint venture partner will be one who will: Finance the completion of product development, usually a larger corporate entity that makes outside investments in a related industry or that has a stake in the completion of the product; provide appropriate lab facilities in which product development can be completed, usually a specialist company in the same industry; share in-house, professional talent to support or contribute to the developing product or technology, usually a contract research house or an industry-related company large enough to have its own expert staff; distribute and/or market the finished product along with complementary in-house products through its won established sales networks, usually a larger corporation or even a competitor; advance whatever is needed to complete the commercialization stage in order to sell the product/technology or buy rights to it. The planning and partnering phase of joint venturing includes many facets. Among the most important are establishing the relationship, performing due diligence and agreeing on a business plan.

The operating management will have access to the agreements and the planning documents, assuming some real effort has been made to plan formally, but these will only be guidelines for the venture. A system of communication and identification of decision makers among the partners will be found advisable.

The joint venture will have to set up the means of securing adequate contact with the partners to assure constant flow of new technology or business techniques from the partners. Periodic visits from parent staff to the joint venture will be needed to stay abreast of the changing developments. Personal contact is the only way to have the co-venturers responsive in full to the environment and problems the venture will face. This is not much different from the same need in any geographically-dispersed business, but it does have the overburden of having to reconcile the perspectives of the two or more partners. It will be further compounded by partner nationalities which are different as between them and then by location of the joint venture in yet another cultural/economic area.

When two or more independent business organizations agree to form an alliance for some specific purpose, they create duties and rights among themselves and also between the alliance and the third parties with which it deals. These rights and duties are distinct from those of the individual business components acting in their individual capacities. The ventures must be careful, therefore to adequately define the scope and purposes of the venture. The venturers themselves should have a clear understanding of what activities are those of the venture and what activities they may pursue in their individual capacities. The parties should also have a clear understanding of which assets they will own jointly. Most importantly, these understandings should be documented at the outset so that not only the venturers but a third party, perhaps a court required to examine the issue at some later date, will clearly understand the scop of the venture.

This operating document should be written with potential joint venture partners in mind, including an analysis of the smaller company, its potential products, the market and the complementary aspects of the potential partner’s product. Add a feasibility analysis of the product, market analysis, project budget, and manufacturing plan.

Planning for change over time is one of the critical elements of both the initial phases of partnering and the later organizational negotiations. In addition, business goals of the two partners will not remain static. As a result, the zone of mutuality initially shared by the two partners will continue to change and must, at least to some extent, be re-identified periodically throughout the life of the joint venture.³⁹

The business environment of Mexico will be the dominant factor in determining the day to day operational style of the joint venture. However, the extent to which the United States or other foreign investor participates in control and management will have an impact on how the venture operates in the Mexican business community. The partners must ensure that they both understand the necessary compromises that will be made in business procedures, management styles and company culture to create a mix that will be workable for both partners and yet fit well within the Mexican context where the venture will be operating.

No business organization has as many problems to resolve as has a joint venture. The ultimate success of a joint venture depends considerable on the skill devoted to the formation, negotiation, start-up and attendant changes which occur through much of the early life of the joint venture. What may start out as enthusiasm can end in impasse and disillusionment. Experience is the most valuable ally. Professional guidance is helpful. Common sense and general business acumen are necessary, but dependence on them alone is risky.

Joint venture has built-in self-destruct devices. With or without planning, some of the devices remain through the life of the joint venture. The generally desired route to a business opportunity is through internal development or acquisition. Joint venture is a compromise in which the wish to take over may be momentarily repressed, but never eliminated. Two or more partners bring two or more independent organizations into the position of have to share sovereignty or control.

Following the initial planning and partnering phase of the venture, it is time for the venturers to identify with more specificity what is that each is willing to contribute to the proposed venture and to determine whether their respective strengths are truly complementary. Venturers should also explore in much greater detail whether they have a similar vision of the venture business and whether the proposed operations are feasible, in both practical and legal terms. A series of questions and related issues should be examined and negotiated:⁴⁰

1. What exactly is to be the business and scope of the venture and how will it operate?

2. What are to the venture’s specific strategic goals?

3. Which of these goals are short, medium and long-term?

4. To what extent are these goals shared by the venturers?

5. What are the core businesses of the partners and how will the new venture strengthen those core businesses?

6. Will the venture be used to expand non-core activities?

7. To what extend will partners be allowed to do business outside the new venture?

8. What is the overall assessment of the feasibility of the business venture?

9, Will it work in the Mexican market?

10. What will be the location of business operations?

11. What barriers or problems exist in Mexico for the particular type of venture to be undertaken: economic, political, legal, other?

12. Are any of them insurmountable?

13. What can each partner contribute to the venture: initially at start-up of the venture and later during its business life cycle?

14. How will each of the venturer’s contributions to the venture be valued: Are these values comparable to the proportions of ownership and control desired for each party: If not, how is the disproportion of contributions to ownership to be handled?

15. What will be the exact ownership percentage for each venturer?

16. How will investment costs, initial capitalization and ongoing financing needs be shared?

17. Will outside financing be used? Where will it be obtained?

18. How will risks and liabilities be allocated, and to what degree are losses to be shared?

19. What return on investment is sought by each party? Are these expectations realistic?

20. Are the desires of the parties for financial return compatible?

21. How will profit or other compensation be shared?

22. How will the venture be managed? Who will control daily business operations, and to what extent will each of the parties have a role in making major decisions?

23. How long is the venture to operate? How will it be terminated and what consequences will result from termination.

24. Do either of the partners plan to be the buyer or seller of the venture when the partners disengage from their relationship?

25. How will disputes between the partners be resolved?

26. Are any of the business issues, economic and political risks, or legal restrictions fundamentally incompatible with the plan for the venture?

The Commercial Code explicitly recognizes the freedom of two parties to negotiate and reach an agreement and to decide independently their unique set of and privileges as well as their obligations under the negotiated agreement. Article 78 of Chapter II states: "In commercial contracts each one binds himself in the manner and terms in which it appears that he wished to bind himself, the validity of the commercial transaction not depending upon the observance of formalities or specific requisites." This fundamental principle validates the private contract that arises between the parties, and this principle provides the basic matrix for contractual obligations in Mexico, as it does in the United States and in most jurisdictions throughout the world.

In order to make the contract enforceable against third parties, certain contracts must be recorded in a public registry. The purpose of such recording is to make available to the public an accessible compilation of facts, actions, agreements, and other legal matters related to a company’s operations.⁴¹

The Public Registry of Commerce, is defined and regulated primarily by the Commercial Code. It is maintained in the principal towns of each governmental division or judicial district. Among the most frequently registered contracts are general power-of-attorney granted by companies in favor of managers, employees, professionals or other agents. Because the Public Registries of Commerce are federal agencies created by the federal Commercial Code, they are managed uniformly throughout Mexico. Registration is kept in three books: 1) a book of commercial entities, listing each entity’s organizational acts, agency agreements and dates of property transactions: 2) a book of mortgages, debentures, bonds, and other contracts: and 3) a book of judicial decrees regarding bankruptcy or attachments.⁴²

To determine whether a particular type of contract must be recorded in a public registry, one may assess the contract’s potential effect on third parties. If public knowledge of the contract would be useful, then the contract is probably one that must be recorded to be valid. The applicable law governing a contract should always be analyzed with the assistance of Mexican legal counsel, before determining whether recording is required..

Differences in culture between the United States and Mexico are significant and these differences have an impact not only on the business customs of parties from both countries, but also on the parties’ negotiation styles and their general approaches to contracting. In order to establish a successful agreement and sound legal contract each party has to make an effort to understand the other’s culture, business customs, negotiating style and contracting posture.

The United States businessperson during negotiations and contracting focuses closely on the matter at hand. Contracting for most persons in the United States is a business-to-business undertaking in which the persons acting for the companies are viewed not as individuals but as manifestation of the businesses they represent. Exchanges of information are related to the business not the individuals and theses exchanges often are composed of financial statements, credit ratings, business plans, and other objective facts about the business enterprise. For the United States businessperson, the contract is a very detailed, lengthy document, covering all conceivable contingencies, but often lacking any provision for changing conditions. The more international experience a company has the further its style will deviate through its experience with and exposure to other styles and other cultures.

In Mexico, contracting parties conduct their business with the goal toward establishing relationships between the parties in their individual capacities because the individual party is perceived as the essence of his or her business. The contracting process in Mexico necessarily includes many face-to face meetings with informal social activities interspersed throughout the process. The contracting parties deem it important to get acquainted as individual persons. An extraordinary amount of communication on both personal and business matters is an expected part of the business face-to-face encounter, not just by fax, telephone or courier. Concluding the agreement and signing the contract are not the momentous occasions they are in the United States. Most Mexican business persons see these occasions as beginnings or initial steps in further developing the business relationship.⁴³

Joint Venture or Asociacion en Participacion: In Mexico and U.S., a contractual relationship whereby two or more venturers contribute capital, property or services and agree to share in management, profits and losses of the venture; often used for a specific business venture or relatively short-term project; in Mexico, a joint venture has no separate status as a legal entity and cannot transact business in its own name ( the Mexican company venturer is the participation of its silent foreign venturer, the asociado): in U.S. deemed to be a general partnership and laws applicable to general partnerships apply: in Mexico, limited provision exists for tax treatment, so special written confirmation of tax liability from authorities should be obtained; percent of profits allocated to foreign venturer in Mexican joint venture determines percent of foreign ownership of foreign investment regulatory purposes. In U.S., sometimes used by foreign investors; in Mexico, seldom used by foreign investors.

In some jurisdictions the legal framework for joint ventures is set out in a separate statutory scheme, often called simply a "joint venture law." However in Mexico there is no such special statute. The very limited recognition of the associacion en participacion as contractual joint venture relationship exists under the Mexican mercantile law. The equity joint venture derives its legal framework similarly from the Mexican mercantile law insofar as it sets forth the legal status, requirements, and privileges of the various business entities. Once operational, the Mexican equity company, albeit owned by a foreign investor and a Mexican partner must conform to the local regulations applicable to similar Mexican business entities plus whatever additional requirements may be imposed under the foreign investment if the foreigner has a dominant interest.⁴⁴

A. Legal Issues

Among the legal issues to consider in Mexico,⁴⁵ as the country that will be the site of the joint venture operations, there are certain areas that require more careful attention because of their central role in the potential success or failure of the venture:⁴⁶

1. Foreign investment laws: restrictions on percentage of foreign ownership and requirements for approval, notice or registration;

2. Periodic maintenance: reporting, disclosure, fees, or other regulations;

3. Local laws regarding the location of the business operations: real property ownership or leasing, zoning, environmental compliance, or permits;

4. Labor regulations; special taxes or benefits, union relations, termination restrictions and if applicable, immigration issues;

5. Trade regulation: import/export requirements, duties, quotas, other non-tariff barriers, and transportation and shipping restrictions;

6. Special regulations related to sector products or services: e.g., for cosmetics sector, health or sanitary control regulations, import permits and labeling requirements;

7. Protection of intellectual property: patents, trademarks, trade names or technological know- how.

8. Taxation laws: local taxation of the venture profits and business activity, the venture’s impact on its foreign ventures’s tax situation in its home jurisdiction and special taxes such as value-added tax;

9. Anti-trust and other competition law regulation;

10. Contractual provisions: governing law, choice of forum, governing language and other provision in the joint venture agreement and corollary agreements;

11. Methods of dispute resolution: use of courts and availability of mediation and arbitration;

12. Enforceability of agreements, judgments or arbitral awards and availability of remedies.

Although all of these issues deserve careful attention, five legal issues for the joint venture in Mexico warrant review with Mexican counsel very early in the planning process because each has the potential to become a threshold issues for the viability of the venture: labor laws, foreign investment regulation, protection of intellectual property, trade and taxation issues.

Labor regulation is for more complex in Mexico than it is in the Unites States and the jurisdictions of many other foreign investors as well. The financial and administrative impact of labor laws in Mexico must be calculated at the earliest moment for the venture’s business plan. Low direct labor costs in Mexico should be viewed cautiously in relation to the indirect costs such regulation imposes.⁴⁷

Foreign investment law was triggered historically whenever the foreign venturer had a controlling ownership interest, either in the equity joint venture company or the contractual joint venture⁴⁸

Regulation adopted in 1989 greatly reduced the number of sectors in which a controlling foreign interest necessitated prior approval of the National Commission on Foreign Investment.⁴⁹ The foreign investment law remained in effect, however, and even in the so called unrestricted sectors, foreign controlled venturers were often required to comply with notice and other restrictions.⁵⁰ In such circumstances the new Mexican entity had to give notice to the commission as an article 5 company and was required to formulate a plan to comply generally with the requirements of article 5.⁵¹ The most troublesome article 5 requirement was that of maintaining a balance of foreign currency inflows and outflows during the first three years of the new Mexican company’s existence, creative planning was necessary to fulfill this obligation.⁵² In December, 1993, a new Mexican foreign Investment Law became effective an totally replace the prior law. The new law again significantly liberalized Mexico’s rules regarding foreign investment. Under the new regimen, in all but a few sectors, foreigner’s may own up to 100 percent of the capital stock of Mexican companies. Perhaps more importantly all performance requirements of article 5 of the prior regulations have been eliminated. Furthermore, foreign investors from the U.S. and Canada have the investment provisions of NAFTA on which to rely for additional ease in managing their investments and assurance concerning the stability of the foreign investment regime in Mexico.

Protection of intellectual property in Mexico, although still a matter of special concern, was improved by the adoption of the New Law for the Promotion and Protection of Industrial Property (intellectual property law),⁵³ enacted in 1991 and the subsequent implementation of NAFTA. The law provides for basic protection, extends the periods for patent and trademark registration and abrogates the technology transfer law. Parties may now contract freely to licence technology and intellectual property without either the restrictions of the former technology transfer law, or the need to register the agreement.

The diminishing trade restrictions in Mexico and the advent of NAFTA have somewhat simplified trade issues. However, if the business strategy of the new Mexican joint venture enterprise includes the import or export of goods, it would be unfortunate to discover at a later date that import duties are too high to allow competitive pricing or that trucking the goods is unworkable because of transportation restrictions.

Of substantial importance to any U.S. entity contemplating a foreign joint venture is whether the United states has ratified a tax treaty with the nation in which the venture is to be based. A primary benefit of tax treaties is that they mitigate the problem of international double taxation arising when a venture is subject to tax in more than one county.

The selection of the type of legal entity used to conduct the foreign joint venture is an early decision which must be made by the venturers. In choosing the type of entity, venturers should take into consideration the U.S. tax consequences as well as the foreign tax ramifications. In addition, the venturers will need to determine if a particular legal entity under foreign law will be taxed as a partnership or as a corporation for U.S. tax purposes. For example, an entity which is a corporation under the laws of a foreign country may be considered a partnership for U.S. tax purposes.

The venturers must also determine how the foreign joint venture will be financed. Financing is generally provided by either debt, equity or some combination of debt and equity. Since the selection of either debt or equity will have differing U.S. tax consequences, this question must be fully explored prior to funding the venture.

The legal issues arising from the laws of the United States regarding joint ventures are:⁵⁴ Antitrust law,⁵⁵ taxation, trade laws,⁵⁶ the Foreign Corrupt Practices Act,⁵⁷ and anti-boycott legislation. The extra-territorial reach of U.S. laws in these areas requires U.S. counsel to diligently pursue review of their impact on the venture at the same time as Mexican legal counsel are reviewing the host country legal issues.

Although joint ventures may be conceived and started with every intention to be of permanent duration the time may come, as in any form of business structure, when investors wish to liquidate their position. The financial implications should be considered throughout the steps of planning and implementation.

Each co-venturer should have some way to assure the best possible value for his share if, and when, the need arises to pull out. This is either suggests a sale of one partner’s interest to the other partner; a sale of the interest to a third party; a sale of the entire joint venture to a third party; or some form of total liquidation or dissolution. Complications of many kinds are implied and depend on the nature of the joint venture, its location, etc. For example:

• The availability of any third party with characteristic to relate in harmony with the remaining partner’s interests.

• The patents and proprietary rights which the retiring partner may have contributed and may now wish to retrieve from the joint venture.

• The host country regulation, in the case of a foreign venture, which may have been granted in the context of the technology transfer and long-term implication of continuing infusion of know-how by a non-national who wishes to extricate himself.

• The inability or unwillingness of the other partner to take any steps which would lead to the dissolution of the venture; generally his lack of resources to buy-out the partner who wishes to withdraw.

• The valuation of the shares or assets of the venture

More often than not, timing of a withdrawal coincides with a period when the venture is suffering from some problem such as a decline in product demand or profitability or both. Perhaps equally likely is a change in either partner’s objectives or resources which cause the venture to be incompatible with the partner’s future programs. As much as possible should be done to reflect the entire problem in some specific stipulations in the agreements around which the joint venture is formed.

Pitfalls for unwary venturers are many and often their detrimental consequences cannot be avoided with even the best foresight and planning.⁵⁸ However, perhaps the best planning tool of all is simply knowing the most common pitfalls for multinational joint ventures and then monitoring the new venture to ensure that they are avoided. These are the most common pitfalls.⁵⁹

1. "Surprises" arising from lack of information about partners, markets or cultures;

2. Flawed or insufficient strategic business planning;

3. Incompatibility of partner;

4. Control struggles and decision-making disputes;

5. Deadlocks or delays in decision-making that paralyze the venture;

6. Differences in cultural and management styles;

7. Compromise decisions that dilute decisive or innovative action’

8. Loss of technology control;

9, Lack of communication and the failure to establish a workable relationship between venture partners;

10. Unexpected political or economic risks in the country where the venture business or a venturer is located or unexpected changes in the applicable local laws and regulation;

11. Creation of a competitor (the venture) and competition with it by the individual ventures;

12. Apprehension about lack of recovery or ultimate control of contributed property on termination of the venture;

13. Failure to take into account changes over time in the venture, its context or its partners.

Avoiding these common pitfall of joint venturing depends largely on the partners engaging in a lengthy planning and partnering phase of the venture, establishing a sound relationship and confronting issues with unrelenting honesty. The experienced international legal counsel may play an effective role in this process by warning partners that lengthy preliminaries and often costly planning and preparation are the best routes to a successful venture.

A recent study of cross-border strategic business alliances by a management consulting firm resulted in the following tips.

1. Strive for nearly equal ownership (50/50) as it reflects mutual strength and commitment-- unequal ventures are more likely to fail.

2. Be prepared for disputes, failed communication and other troubles during the first two years. Do not assume from these early difficulties that the venture will fail, for this is part of the maturing partnership.

3. Involve partners’ high executives and the key individuals who negotiated the venture and established the relationship, especially to settle disputes and misunderstandings.

4. Even if ownership is 50/50, be sure one partner has ultimate management control; 50/50 deadlocks are often terminal.⁶⁰

By far the most dangerous pitfall that awaits the U.S. investor venturing in Mexico is the dramatic differences in culture, business customs and attitudes that exist in Mexico. Beyond understanding the differences in culture, there must be a willingness to accept and work within certain fundamental parameter of the Mexican culture and to convey a message of respect and trust in dealing with partners, customers, and other business associates in Mexico.

For the U.S. legal counsel, the best way to avoid legal pitfall in the joint venture is to monitor progress carefully, to be as fully involved as feasible in negotiations and to associate Mexican legal counsel for the project early in the process. It is essential to have access to the detailed knowledge of foreign counsel and the experience with regulatory interpretations and authorities that Mexican counsel can offer. These fundamental principles of multinational joint venturing make joint ventures in Mexico today between foreign investors and Mexican partners an important business option for businesses that make the choice voluntarily based on a long-term commitment.

Potential participants in a joint venture must recognize al the outset the legal ramifications of the formation of the venture. They should know that they are entering into potentially adversarial relationship with one another. The parties may realistically anticipate the legal issues which will arise in the course of the venture. At the outset, they should reasonably formulate methods for dealing with future issues, and for avoiding or resolving internal disputes. They may also anticipate the liabilities the venture will face in terms of outside parties, regulatory agencies and the antitrust laws. These, too, may be resolved at the formation of the joint venture by proper planning and structuring. Having anticipated and planned for external and internal conflicts, the venturers minimize the impact should those eventualities occur.

Although historically the joint venture has been used in Mexico by foreign investors to partner with Mexican business in an effort to comply with ownership restriction on foreign investment, those historic reason have nearly disappeared. Nevertheless there are traditional advantages to the multinational joint venture that remain as valid now in Mexico as they have been elsewhere in the world for decades.

To enjoy the maximum reward with minimum risks, do you work up front. Carefully consider the purpose that you wish to achieved. As with any new business, early planning can only minimize the possibility of costly litigation.

The formation of joint ventures is subject to U.S. antitrust laws and will be analyzed with the same criteria used to evaluate mergers. Joint venture activity which has not impact whatsoever on U.S. commerce, including the import and export markets, is generally beyond the reach of U.S. antitrust laws, except in the case of foreign projects funded by the U.S. government.

Joint venturing can be a complex and difficult undertaking when different cultural, technical, legal, and entrepreneurial values are involved. Because the stakes in this field are often so high and the distances so great, considerable care must be taken to assure that goals can be achieved and if they are not that one party does not suffer disproportionately. The joint venture can often be the best means for penetrating new U.S. markets, but there is a degree of risk that must be assumed as in any venture which presents the opportunity for substantial reward. Advance planning and the anticipation of problems that could frustrate the efforts of the parties can reduce that risk to an acceptable level.

Copyright 2001 National Law Center for Inter-American Free Trade

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