A new breed of legal support

Powering up Tanzania joint ventures: Key legal issues

2018-08-04 08:31:46

By Paul Kibuuka

The Citizen's front page story “How locals lose out to foreign players in mega projects” published on Monday (30 August, 2018) has motivated me to pen this article.

Concentrating on joint ventures, I highlight the benefits and describe the key legal issues for forming Tanzanian joint ventures. I argue that joint ventures offer a convenient, flexible alternative to local Tanzanian firms seeking a slice of the pie in mega projects without foregoing the benefits accruing from foreign investment capital and expertise. Evidence from the Association of Southeast Asian (ASEAN) countries is consistent with the argument.

While there are many different structures of joint ventures, the main goal of the ventures is to expand networks and to share knowledge, experience, technical expertise, risks and resources. Working under the Swahili adage “umoja ni nguvu” (English: unity is strength), joint ventures bring exciting opportunities for local Tanzanian firms that lack funds or expertise to join forces with foreign investors to undertake mega projects. Foreign investors benefit from the local firms’ understanding of local cultural nuances and on-the-ground experience and know-how in Tanzania.

Joint ventures also bring certain legal challenges. Below I describe six key legal issues for local firms and foreign investors evaluating joint venture partnerships in today’s Tanzania—aimed at the uninitiated and refreshing the mind of the initiated.

Ownership and governance is one of the key legal issues. As experienced Tanzanian business owners and executives reach retirement age, what critical aspects of joint venture documentation should be fused to ensure that ambitious young Tanzanians are up to speed on leadership and business management? These include reinforced clauses on board composition, conflicts of interest, deadlock, corporate compliance, and organizational opportunity.

From tax, accounting and operational standpoints, does the local Tanzanian firm or foreign investor anticipate or need to “control” the joint venture? It is important to clarify which party needs adequate control to negotiate for the joint venture; wishes to combine its share of the joint venture’s revenue with its own revenue; and desires to treat joint venture income as tax exempt.

Regarding competition, will the local firm and the foreign investor conduct the same or related business activities separate from, and possibly in competition with, one another or the joint venture? If yes, quite a number of issues arise from the Tanzanian Fair Competition Act, 2003. 

Intellectual property (IP) is another important legal consideration. Will the local firm or the foreign investor make IP available to the joint venture? Tanzania’s Copyright and Neighbouring Rights Act, 1999; Patent (Registration) Act, Cap 217; and Trade and Service Marks Act, Cap 326, are pertinent to key issues, such as, appropriate valuation of the IP, defining the terms of use of the IP, and clarifying rights related to any improved IP that may be developed during the lifespan of the joint venture. This sounds simple, but in reality it is complex.

In terms of registration and licensing, will the joint venture be a licensed provider and how will the local Tanzanian firm and foreign investor get paid? The joint venture may require approvals and/or licenses by Tanzanian regulatory authorities to provide certain products or services. If the venture will render professional services, Tanzanian law mandates ownership or control of the venture by licensed individuals.

Exit strategies and termination provisions are always important for joint ventures. How can the local firm or the foreign investor unwind or exit the venture?  Will either of the partners have an option to call ownership interests, or to forcefully dissolve the joint venture?  If an opportunity to sell the joint venture will arise in future, do the partners have ‘tag-along’ or ‘drag-along’ rights?

Carefully drafted joint venture agreements, which take into account the key legal considerations that I have described above, offer a flexible alternative for local Tanzanian firms to undertake mega projects and to complement existing government initiatives aimed at spurring agricultural productivity and industrialisation for economic growth and job creation.

However, it is particularly challenging to manage joint ventures successfully. Because trust is bestowed upon a partner on a “gut-feel” basis, a lot of hard work is needed to keep the joint venture together and increase value for project off-takers and customers.    

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. This article was published in The Citizen on Saturday, 4 August 2018

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