To limit risk in a joint venture, you will need to make sure you conduct a thorough due diligence on the partnered company. Prior to formalizing any joint venture documents, make sure you request corporate documents and have an attorney analyze through the documents to see if the company is compliant with laws and up to date on taxes. Additionally, you should also have a strong joint venture agreement that protects you from any possible liability that arises from action pre-dating the partnership.
What are the specific risks involved in a U.S. joint venture for a foreign institution?
As a Chinese private equity fund weighing the options for expanding our portfolio in the United States, we are concerned about the potential risks involved in a joint venture. We want to be involved and active in our investment, but with minimal risk. Our greatest concern is the risk of being liable for a partner's tax liability, even for actions pre-dating the partnership. What other concerns can we be aware of?
While there are risks involved in entering into a joint venture, steps can be taken to mitigate the risk with due diligence and structuring. The most important thing is to trust your venture partner. Even though we can draft buy-sell rights or put rights, there is always dislocation and the risk of prolonged litigation. There are ways to search the history of a prospective partner, including payment of taxes, which i would certainly recommend. Another way of getting comfortable is to be introduced to the partner by a trusted third party. In any joint venture I set up, both entities must set up new entities to become venture members. The venture must have capital, which can be provided by the managing member or the general partner, or can consist of the equity in a new property which the venture owns. I address these issues on a case-by-case basis. A new entity should have two members, so a financial problem affecting one of the entities will not affect the viability of the new entity. Most parties use limited liability companies ("LLCs", which I would recommend for your investment), which, under the law, protect the members from personal liability. Unlike limited partnerships, the managing member has no fiduciary duty to the other venturer. A general partner, on the other hand, is liable for the acts of the venture and, under Delaware law, has a fiduciary duty to the other members. A fiduciary duty includes liability if the member takes advantage of a venture opportunity for itself. I can also build into the venture agreement rights to buy out the interests of the other venturer in the case of a failure to agree on a course of events over a period of time, the failure to perform obligations under the venture agreement, fraud or defalcation as well as other events that may be applicable. We can obtain additional protection if you purchase an interest in a property already owned by the co-venturer by obtaining a non-imputation endorsement from a reputable title insurance company. I always provide the non-managing party with significant voting approval rights. You may want the right to co-sign checks over a certain dollar threshold (if you have someone resident in the jurisdiction). There is insurance available for payroll obligations. If the other venturer is in charge of construction or significant alterations, we would get a guaranty of completion. This is a very important and complicated subject, which I would appreciate the opportunity to discuss with you. I believe we can devise a structure that will provide sufficient protections to mitigate the risk of dealing with a third party. Furthermore, I am meeting with a developer in January who would like to connect with a platform like yours. You can contact me directly via my profile.
With respect to the specific risk of being liable for a partner's tax liability, you are able to contract around this in the operating agreement or entity governing documents. As for other risks, depending on the size of your investment in comparison to the overall project size, my advice is to receive access to books and records, and to perform thorough legal and business due diligence before funding. After closing, make sure you have a Board of Director seat or veto rights to "Major Decision" so that your role in the company is active, and not as a passive investor. Happy to discuss further on a call. You can contact me directly via my profile.
Due to variations in regulations amongst the States in addition to federal, you should investigate your responsibilities for: (1) the State your partnership is incorporated in; (2) the State where your business is operating and (3) the State your partner is based in.