Germany: German Energy Markets Enter A New Era - Joint Ventures As A Vehicle For Development And Distribution Cooperations

Last Updated: 19 September 2011
Article by Ronald Meissner

With the political decision to pull out of nuclear power until 2022, a new era of power generation has started in Germany. Chancellor Angela Merkel said the phase-out of plants would give Germany a competitive advantage and the transformation would bring opportunities for exports, developing new technologies and jobs. The race for developing new technology of power generation, storage and transport, as well as power efficiency measures and, in particular, bringing them to the market, will now be critical for the success of the market players. Enterprises are often unable to achieve this with only their own areas of competence; in this case a joint venture (JV) with a partner can be the method of choice. However, countless legal aspects have to be taken into consideration in this respect.

Financing and the JV are frequently only inadequately regulated. The requirements placed upon the contractual structuring of the cooperation between the partners of a JV increase parallel to the degree of consolidation of the collaboration and are at their strictest if the cooperation is to take the form of a separate corporate legal shell, irrespective of the legal form. In this case, not only is a detailed agreement required on which assets or financial resources should be made available to the JV by the partners and in what manner, but also on how the operative management of the JV and its monitoring should be organised.

One must ensure that none of the partners is in a position to hinder the development of the JV. The boilerplate catalogues of consent and veto rights that tend to be agreed only inadequately accommodate this. Also, the JV's financing above and beyond the initial capital and liquidity funding is often regulated only inadequately . Usually during the initial phase, none of the partners will be willing to commit themselves to unlimited future financing. The lack of a binding agreement, however, harbours considerable potential for dispute.

Especially in the structuring of JVs between industrial partners, one can frequently observe a certain reluctance to address the event of the collaboration's failure. On the one hand, however, the partners should consider possibilities of alternative dispute resolution, such as mediation proceedings, for example. On the other hand, the structures should allow a partner who is no longer willing or able to promote the JV company in a reasonable manner to be bought out of the JV in return for an appropriate compensation.

Agree on practicable IP protection

The protection of know-how and intellectual property rights (IP) plays an important role. Things can turn malicious if one partner contributes already existing IP and at a later date wants to 'retrieve' this IP and the newly developed IP from the JV. The IP at issue must be described as precisely as possible: who may do what with such IP, for what purpose and for how long, and what the other party is to receive in consideration. A clear regulation is also required as to whether and which use of third-party IPs may also be undertaken after the contract expiry.

When structuring contracts one must bear in mind how the actual collaboration can work. The use of drawings, for example, beyond the term of the JV may be contractually excluded. However, this is not necessarily of any help if the partner actually has the possibility of using the drawings. Frequently, the knowledge, evidence and/or possibilities of legal protection are lacking. Outside the scope of research and development projects, the risk of the outflow of know-how also exists in case of distribution and production cooperations.

Disputes frequently arise after the end of JVs. A sensible measure would be to agree on contractual penalties or at least lump sum damages in the event of infringements of IP rights after contract expiry. The damage arising from the infringement of IP rights is often difficult to determine.

Antitrust examination as early as possible In particular, JVs between competitors should be checked as early as possible as to their permissibility under antitrust law. A JV must be notified to the German Federal Cartel Office (Bundeskartellamt) if the joint worldwide turnover of the controlling parent companies during the last business year exceeds €500m, one shareholder in Germany has generated turnover of over €25m and the other of over €5m. This also applies if the JV itself had not generated any own turnover to date.

JVs between competitors can also restrict the competition between the parents. A restriction of the research and development competition can also violate antitrust law if it is not justified by so-called efficiency advantages. This is generally the case if the joint market share is no greater than 25%.

Think ahead in terms of tax law

The chosen tax structure should ultimately accommodate the expected developments. Specifically in the research sector, it can be beneficial to attribute the customarily accruing initial losses to the partners of the JV via a partnership . Since this is not possible for trade tax purposes, however, a precise assessment is required. The participation of each partner in the JV generally exceeds the threshold of 25%. For this reason, special requirements for cross border service relationships between the JV and the JV partners apply. All services must be reasonably remunerated; and such remuneration must also be documented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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