Importance of Local Partnering In Foreign Projects -- Are Local Partners A Necessity For American Investors? E. Relationships Gone Bad
By Mark J. Riedy, Esq.
On the other hand, some American investors sour on their local partners for a variety of reasons.
Frequently, and particularly in developing countries, as local partners become more familiar with the American investor's business, they will make demands such as the reestablishment of the earlier equity arrangement agreed between the partners. In this regard, a minority local partner may demand, after the execution of a shareholders agreement, to amend the contractual relationship to provide the local partner a substantial increase in equity, even to provide it project control without necessarily adding any new value to the joint venture.
Also, an earlier version of this phenomenon has been observed, where a local company initially controls a project, but requires a foreign partner because the local company, alone, is incapable of completing the finance thereto. Despite the need for investment funds, the local company will persist in requiring the foreign investor to "loan" the local "investor" its equity. This mandate is often accompanied with a further requirement to maintain control over the project by requiring that the foreign investor provide it (i) a simple majority equity ownership in the project, or (ii) even a super-majority voting position incapable of being blocked in the event of a vote on a special resolution.
Furthermore, local companies often have a misperception of the value of their equity, or how much money must be paid to them as a promotion (i.e., project entry) fee for a foreign investor to become involved, in a particular project. Local companies sometimes will require exorbitant equity percentages and/or charge large promotion fees to become involved in "their project" despite that their efforts to date are not commensurate with the equity demanded and/or promotion fee required.
A similar example that often sours a potential partnership is where the local company demands that the American investor reimburse it for all or a part of the "expenses" purportedly expended thus far to develop the project. Oftentimes, the local company expects that the foreign investor will make these reimbursements notwithstanding that the local company is unable to fully document the stated expenditures. An American investor has great difficulty making such undocumented reimbursements because it has a legal duty under the FCPA not to reimburse anyone for past expenditures that might otherwise have been an FCPA violation. Such a reimbursement, itself, could fully expose the American investor to FCPA sanctions.