Sharing a new business or project through a joint venture requires prior alignment among the partners involved, not only for the sake of the new venture itself but, crucially, to avoid harming the parties’ respective original businesses.
When joining forces with another company in Brazil to expand into a market, maintaining one’s own commercial and legal identity is a key consideration, particularly to avoid introducing risks to each party’s core business. Consequently, the partnership’s stability depends less on the parties’ intentions and more on the precision with which terms are defined; this requires paying attention to aspects that go beyond the business objective itself.
Here, we highlight 5 points to consider in Brazilian business:
1. Fair Valuation of Contributions: Contributions from each party in a joint venture are rarely identical in nature. Without a clear valuation of each contribution, the distribution of equity and profits can create imbalances that jeopardize the partnership down the line and complicate any future renegotiations between the parties.
2. Intellectual Property Ownership: This is a highly sensitive issue for Brazilian companies. Joint ventures often generate new assets – such as processes, brands, products, or technologies – that did not belong to either party prior to the partnership. A lack of clear rules regarding ownership of jointly developed assets is a primary source of disputes when the partnership ends or when one party decides to pursue a specific line of business independently.
3. Joint Venture Management: Even if the company has clear rules for major decisions, operational management must also be well-defined. This is especially important when management relies on the operational infrastructure of one of the partners, a scenario that can increase the likelihood of impasses and cultural conflicts, which is very sensitive in Brazil.
4. Resolving Deadlocks: Unlike other corporate structures in Brazil, a joint venture typically involves two groups with comparable equity stakes and decision-making power, making the risk of a deadlock more tangible. Establishing specific mechanisms to break decision-making stalemates or defining decision-making authority for specific issues is essential to prevent isolated disagreements from paralyzing operations. In this context, drafting a shareholders’ agreement is crucial.
5. Exit Mechanisms: A lack of clear rules regarding termination is a major source of friction between partners. Defining from the outset how and under what conditions the joint venture may be dissolved – including the division of assets, liabilities, and the potential continuation of the business by one of the parties – protects the company against scenarios involving significant losses.
A joint venture can open up significant growth opportunities for a company in Brazil, but the structure must be carefully crafted, taking into account the specific characteristics of each business and partnership. It is this initial diligence that ensures the partnership delivers on its promises without compromising the strategic interests of the investors involved.
