Union Leader: KNOW THE LAW – Joint Venture with a Distributor – 03/2010

March 22, 2010

This question was answered by M.L. Geffert of the McLane Law Firm

Q:  My company installs equipment throughout New Hampshire and connects the equipment to regional and national networks.  The president of the largest regional distributor of the equipment my company installs called me to see whether I wanted to enter into joint business venture.  The distributor wants to exit its minimal installation operations and focus on distribution, with my company expanding its territory to all of the northern New England.  How do I respond? 

A:  If a joint venture with the distributor seems a like a good idea, before you start real discussions, protect your business information and prospects.  Then, as you proceed to negotiate, base your approach on good information, with an eye toward avoiding the potential for antitrust issues. 

As a threshold matter, your business and the regional distributor should enter into a confidentiality agreement before negotiating anything.  The purpose of a confidentiality agreement is twofold: to protect the confidential information and good will of each business and to enable access to that information.  Ideally, a confidentiality agreement should protect confidential information both from disclosure and, importantly, from use, except in connection with the joint venture.  In the context of a joint venture, a confidentiality agreement also may include standstill/no-shop provisions – neither party will engage with another potential collaborator for an agreed-upon period – and non-solicitation provisions with regard to employees.

Understanding a joint venture partner’s business is a necessary element of meaningful joint venture negotiation.  Once a confidentiality agreement is in place, the parties can and should investigate all aspects of each other’s business, including financial health, material contracts (credit arrangements, key customer and vendor agreements and employment, compensation and benefit agreements), organizational structure, intellectual property, history of disputes and business culture matters, including operating practices and relationships with creditors, suppliers, customers and employees.  Joint ventures that are not founded on a complete understanding of the parties involved often fail after a brief period, despite the parties’ best intentions at inception. 

Also, please be careful that your discussions comply with antitrust laws that apply to joint ventures. In negotiating the joint venture, try to include structures, that enhance, rather than squash, competition and that avoid historically ‘per-se’ antitrust law violations, such as agreements between competitors  to fix prices, regulate output, rig bids or share or divide markets by allocating customers.  Although probably not an issue given the local/regional nature of the businesses involved, if the value of the proposed joint venture equals or exceeds $63.4 million (as of February 2010) or if the value of your company or the distributor exceeds certain thresholds, the parties will have to comply with the requirements of the Hart-Scott-Rodino Act. 

Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
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