Native content supported by Hammond Partnership.
Joint Ventures – A word of Caution
Entering a new relationship and market is never easy, nor is developing a market in which you have a minimal presence.
Over the time we have been in business we have advised foreign investors both large and small who have looked at the Romanian market with a view to developing their business and marketing their products. The first step in any new venture must be to examine the market and assess its value. Often, prospective investors come and see us with their prospective Romanian partner/contact with whom they have worked previously or who is encouraging them to enter the Romanian market. Often the Romanian turns out to be their preferred partner who they have met and had some dealings with previously or over a period of time. Often though such a person is new to them and they have little or no knowledge about them. They may have met the Romanian partner through another contact or may have been introduced to them through a Chamber of commerce or similar organisation.
Whilst at this stage we will not get involved in the business aspects of the transaction unless specifically requested the most important initial question will be the structure of the business in Romania and perhaps the relationship between the two parties. They come to the initial meeting with the intention that they wish to go into business together but may not have decided on the structure that they want to use to do their business in Romania.
The question that they address to us is what form the relationship should take. In Romania for a business relationship at this level we advise that they have the choice of two common structures. One is a limited liability company (SRL) and the other is a partnership.
The partnership being an unincorporated arrangement where the parties share the profits and losses between them in an agreed manner. Such an arrangement is possible under the Romanian Civil Code (art 1949). A document is prepared which sets out the parties’ obligations and share of profits. The problem regarding a Romanian partnership is that whilst the concept of a partnership is understood the Romanian partners idea of a partnership can be very different from the understanding of the non-Romanian partner. This misunderstanding arrives not from any malicious intent but rather a misunderstanding between the Romanian concept and the foreign concept of partnership.
Under Romanian law a partnership does not have a separate legal personality and the ownership of the assets (and goodwill) is vested in the individual partners for the benefit of the partnership and not the partnership as such. This can cause difficulties in relation to taxation and indeed ownership of assets if one of the partners enters into insolvency. If one of the partners was providing physical assets and they enter into insolvency there is the question of the continuation of the partnership. Whilst the partnership maybe profitable as a partnership the party in insolvency may have no option other than to withdraw. This would have serious consequences.
The SRL is a formalised legal structure that has a separate legal identity from its shareholders. The Romanian limited liability company whilst structured as a company has many of the attributes of a partnership and can be compared in certain respects to a limited partnership. The formalities of running a SRL are simpler than that of a joint stock company. Another advantage of a SRL is that if the parties come to a disagreement there are already certain provisions written into the Romanian companies’ law which will allow disputes to be dealt with either through court proceedings or negotiation.
Another aspect which we try and get the prospective partners/shareholders to focus on is what will happen if there is a dispute – the venture fails - or the partners fall out. This is one of the most neglected aspects in the first meeting and indeed in any joint venture discussion. Unfortunately, not all partnerships are successful. The parties may just be incompatible and therefore a mechanism needs to be clear from the beginning as to what is to happen in this event and the partnership is to be dissolved. Agreement on the terms of what is to happen if the joint venture does not succeed will also help the parties to assess the attitude of the other partner. This could be critical in assessing if the other party is the right joint venture partner.
Many Romanian partners initially expect the foreign partner to be able to resolve non-Romanian matters, just as the foreign partner expects the Romanian partner to resolve Romanian matters. It is very important that the partners expectations are handled at the beginning of the transaction rather than when the relationship has broken down. The non-Romanian partner needs to clearly understand that some of the concepts and business practises that he subconsciously applies are brought about by him applying his own understand of legal concepts which are themselves drawn from his own experience from his own country. The similarities are “false friends” and can bring about costly errors and misunderstandings.
Whilst all the above may sound very pessimistic it is important that all parties understand their respective rights and obligations. The fact that often English is used as a common language of communication does of itself cause many difficulties. A person who speaks English as a first language has a far wider knowledge and nuance of the language than does a Romanian who perhaps has learnt it from school and expanded their knowledge through watching films and television. Their understanding of the words maybe limited to one or two meanings whereas the native speaker may have many more.
During our first meetings with the clients, we try and assess the extent to which the parties really understand each other – not an easy task, but a necessary one. The converse is also true in relation to a foreigner who has knowledge of Romanian and who tries to communicate in Romanian. In both cases the lawyer needs to be aware that the failure to fully comprehend their position by either party can have disastrous results for the parties.
To guard against these possibilities, we advise clients to carefully commit to writing the points that they consider have been agreed. We then review these in the light of our experience, supply a draft and then go through the document with both parties to ensure they clearly understand what they are committing to in relation to the venture.
Most joint ventures in Romania are successful and arise from a common understanding of the parties. As professional advisors it is our hope that when the parties agree on all the terms that we never see them again to discuss any misunderstandings or the document.
It is because of the possible misunderstandings and that the parties need to be professionally and properly advised at an early stage to ensure that the joint venture is successful.
Hammond and Associates trading as Hammond Partnership is a Romanian law Firm based in Bucharest. The Firm Hammond and Associates has been in existence since 2004 and is registered with the Bucharest Bar. The lawyer of Hammond and Associates are all registered with the Romanian bar and are authorised to practise in Romania. The managing partner of the Firm is a solicitor registered with the Law Society of England and Wales and the Bucharest Bar.
The Firms client base is both Foreign and Romanian. Its clients consist of SME’s as well as major companies who have invested in Romania. In addition, it advises individuals both Romanian and Foreign on all aspects of Romanian law as well as providing English law advice when required.
The Firm’s clients come from many fields and countries. Our clients ranging from international banks and companies. It advises clients in the fields of aviation finance, employment, building and real estate, manufacturing, service industries, renewables, IT and computing, agriculture, and shipping .
The Firm advises on M&A and associated transactions including employment matters from the perspective of employees and employers. The Firm deals with comm as well as commercial matters ranging from formation of companies to distributorship and commercial agreements.
NICHOLAS HAMMOND (Author of this article - in the opening picture)
Nicholas Hammond is an English solicitor who has been working in Romania and practising law since 1990. Prior to his arrival in Romania, he managed a major law firm based in the City of London who decide to open an office in Eastern Europe. He opened a law office in Bucharest in June 1990 becoming the first law office to be registered in Romania after the revolution. Subsequently he transferred the Romanian office to leading City of London Law Firm and ran their office in Bucharest for a number of years.
He subsequently decided to open his own law Firm in Romania which he did and has been operating and managing this own office since 2004. The Firm Hammond and Associates trading as Hammond Partnership.
During his time in Romania, he has dealt with all aspects of Romanian law both for Companies and individuals, Romanian and foreign. He is experienced in many fields of law but has concentrated on corporate and all aspects of commercial matters including real estate.
He was for many years a director of the British Romanian Chamber of Commerce and assisted in its development in Romania.
This is native content supported by Hammond Partnership.