Joint Ventures – A Word of Caution

Entering a new market is never easy, nor is developing a market in which you have a minimal presence.

Over the years we have advised many foreign investors who have looked at the Romanian market with a view to developing their business and marketing their products. Often, they come and see us with their prospective Romanian partner/contact with whom they have worked previously or who is encouraging them to enter the Romanian market. The Romanian is their preferred partner whom they have met and had some dealings with previously or over a period of time. They may have met the Romanian partner through another contact or may have been introduced to them through a Chamber of commerce or similar organisation.

Whilst at this stage we will not get involved in the business aspects of the transaction unless specifically requested the most important initial question will be the structure of the business relationship between the two parties. They come to the initial meeting with the intention that they wish to go into business together but may not have finally decided on the structure that they want to enable them to do business in Romania.

Initially, in Romania they have the choice of two common structures. One is a limited liability company (SRL) and the other is a partnership. The partnership being an unincorporated arrangement where the parties theoretically share the profits and losses between them in an agreed manner. Such an arrangement is possible under the Romanian Civil Code (art 1949). A document is prepared which sets out the parties’ obligations. The problem regarding a Romanian partnership is that whilst the concept is understood, the Romanian partners idea of a partnership can be very different from the understanding of the non-Romanian partner. This misunderstanding arrives not from any malicious intent but rather a misunderstanding between the Romanian concept and the foreign concept of partnership. Under Romanian law the partnership does not have a separate legal personality and the ownership of the assets (and goodwill) is vested in the individual partners for the benefit of the partnership and not the partnership as such. This can cause difficulties in relation to taxation and indeed ownership of assets if one of the partners enters into insolvency.

The SRL is a formalised structure and has a separate legal identity from its shareholders. The Romanian limited liability company whilst a company has many of the attributes of a partnership and can be compared in certain aspects to a limited partnership. One other advantage of a SRL is that if the parties come to disagreement there are already certain provisions written into the Romanian companies’ law which will allow disputes to be dealt with either through court proceedings or negotiation.

Another aspect which we try and get the prospective partners/shareholders to focus on is what will happen if there is a dispute – the venture fails – or the partners fall out. This is one of the most neglected aspects in the first meeting. Unfortunately, not all partnerships are successful. The parties may just be incompatible and therefore a mechanism needs to be clear from the beginning as to what is to happen in this event and the partnership is to be dissolved.

Many Romanian partners initially expect the foreign partner to be able to resolve non-Romanian matters, just as the foreign partner expects the Romanian partner to resolve Romanian matters. It is very important that the partners expectations are handled at the beginning of the transaction rather than when the relationship has broken down. The non-Romanian partner needs to clearly understand that perhaps some of the concepts that he subconsciously applies are brought about by him applying his own understand of legal concepts which are themselves drawn from his own legal experience from his own country. The similarities are “false friends” and can bring about costly errors and misunderstandings.

Whilst all the above may sound very pessimistic it is important that all parties understand their respective rights and obligations. The fact that often English is used as a common language of communication does of itself cause many difficulties. A person who speaks English as a first language has a far wider knowledge of the language and the nuances of the language than does a Romanian who perhaps has learnt it from school and expanded their knowledge through television. Their understanding of the words maybe limited to one or two meanings whereas the native speaker may have many more.

During our first meetings with the clients, we try and assess the extent to which the parties really understand each other – not an easy task, but a necessary one. The converse is also true in relation to a foreigner who has knowledge of Romanian and who tries to communicate in Romanian. In both cases the lawyer needs to be aware of the failure to fully comprehend by either party can have disastrous results for the parties.

To guard against these possibilities, we advise clients to carefully commit to writing the points that they consider have been agreed. We then review these in the light of our experience and then go through the document with both parties to ensure they clearly understand what they are committing to in relation to venture.

Most joint ventures in Romania are successful and arise from a common understanding of the parties. As professional advisors it is our hope that when the parties agree on all the terms that we never see them again to discuss any misunderstandings. It is because of this that the parties need to be professionally and properly advised at an early stage to ensure that the joint venture is successful.

About Nicholas S Hammond

Nicholas is an English solicitor who has been practising in Romania since 1990. He has been a partner in a number of law firms in Romania as the principal partner. Hammond and Associates trading as Hammond Partnership is the culmination of many years experience. View all posts by Nicholas S Hammond →