Importance of Local Partnering In Foreign Projects -- Are Local Partners A Necessity For American Investors? C. Early Partnership Documentation
By Mark J. Riedy, Esq.
Many project structuring decisions also may have a direct impact on the partnering process, such as potential liabilities (e.g., environmental) brought to the transaction by a potential partner and requiring special advance protection for the partnership. Other considerations include, but are not limited to, minimum internal rate of return, allocation of project risks and future liabilities, project control/voting rights (including breaking deadlocks), ownership percentages, partner roles (duties and obligations), project financing and equity requirements, prior project expense reimbursement, trade secret/intellectual property protection, exit strategies, termination rights, and assignability of rights, among other important considerations. All of these issues can be contentious if not resolved up front in a new relationship.
During the early phases of a potential infrastructure project joint venture, the American investor and local partner generally will execute a confidentiality agreement in order to share all information, including that deemed most sensitive. They also likely will memorialize their initial arrangement through either a Letter of Intent ("LOI") or a Memorandum of Understanding ("MOU"). An MOU can provide more of a "binding" arrangement between the potential partners to memorialize important considerations for further memorialization in later agreements. However, an MOU can be drafted in a non-binding manner except for exclusivity among the parties, the percentage sharing of costs and certain other matters.
Following the execution of an LOI or MOU, potential partners often will enter into a Joint Development Agreement which establishes generally the initial management, expense cross-sharing/budgets and the respective duties and obligations up through financial closing on the project. Similarly, the parties will execute a Shareholders Agreement, along with the formation of their project company, in order to establish the management, voting rights, respective percentage rate of return on investment, costs, and the duties and obligations during the life of the project. Frequently, this Shareholders Agreement will be effective upon financial closing or at some earlier time upon the expiration, or superseding, of the Joint Development Agreement.