A joint venture with another company in Japan can be an excellent opportunity to grow your own business without the complexities of making an outright purchase of another company.
In Japan, a joint venture is the structure permitted under Japanese Law that enables Japanese and foreign companies to combine their knowledge and resources to work as a single team. The joint venture gives partners the opportunity to leverage each other’s strengths while compensating for any weaknesses.
In one type of joint venture, both parties enjoy the benefits of remaining as independent businesses and choose to enter into a contractual agreement only to collaborate in a limited way over a pre-determined time span.
The other option is to create a separate joint venture company in order to complete a specific project or contract. In this option, both partners own shares of the company and direct its management.
Established overseas businesses may identify opportunities to enter the Japanese market through joint ventures. However, the success of a joint venture depends on a well-planned strategy, strong partners, equal contribution, effective execution of the agreement, and fast and efficient integration of work processes.
This involves commitment and respect for the other company’s work culture and a clear understanding of each one’s responsibilities and accountabilities in the partnership.
Types of Joint Venture in Japan
Equity:
- The parties contribute capital and share the ownership of the new entity. Profits and loses are distributed according to the agreed ownership percentages.
Contractual:
- Parties collaborate through contractual agreements without establishing a separate legal entity. This is common for specific projects or short term partnerships.
Legal Structure of a Joint Venture in Japan
- Joint ventures must be registered with the relevant Japanese authorities.
- Depending on the preferences and goals of the parties involved, the joint venture may take the form of a separate legal entity such as a limited liability company (LLC) or a joint-stock company.
- Some industries in Japan have restrictions on foreign ownership or require government approval for foreign investment.
- Joint ventures may be impacted by antitrust laws in Japan. Being aware of this is important when starting a joint venture.
Advantages of a Joint Venture
A successful joint venture can help both companies gain access to new opportunities and is an effective strategy to grow and generate profits faster. Advantages of a successful joint venture are:
- Access to knowledge and resources such as capital, staff and technology;
- Access to new opportunities such as new markets or greater distribution reach; and
- Shared exposure to risks, financial responsibility and workload.
An advantageous joint venture is one in which the strengths and weaknesses of one partner complements those of the other partner.
Risks for a Joint Venture
A large number of joint ventures fail because of the many risks involved and the complexity of integrating operations and work culture of two different companies. Here are some of the issues that may arise when entering into a joint venture in Japan:
- Setting unrealistic objectives that may not be completely clear in advance and not aligned to a common goal;
- Coping with differing cultures, management styles, and working relationships that prevail in each company;
- Managing communication with senior managers and employees in both companies so there’s a consistent understanding of the objectives of the joint venture; and
- Making poor tactical decisions caused by a misunderstanding of the roles of each company.
Summary
Building a successful joint venture with Japanese partners can be challenging. It requires time, commitment and effort from both involved parties.
Before entering into a joint venture, both partners must have a clear understanding of the objective of collaboration. This understanding must be translated into a simple written agreement that defines each partner’s accountabilities in the joint venture.
Evaluating the strengths and weaknesses of the Japanese partner company and your own can help in building on each other’s strengths. Building a strong alliance with the right partner can result in fast growth of the business and profitability.
Here are few legal considerations relevant to joint ventures in Japan:
Proper due diligence is critical: you should engage experienced external advisers who are able to advise on the legal risks associated with undertaking a proposed transaction in Japan. Navigating Japanese law and legal documents, as well as Japanese language, without the help of experienced advisers is risky.
Negotiation, decision making and execution: negotiating and executing a deal in Japan often takes longer than other markets, but, once a Japanese counterpart agrees to do a deal, it will generally stick to its word. Legal documents can be negotiated in English, although it is not uncommon for bilingual or Japanese-language only documents to be used.
- Decision-making in Japan often relies in consensus building, which can take time.
- Defining the terms of the joint venture is essential. Specify each party’s responsibilities, division of profits, losses and dispute resolution mechanisms.
- Specify the joint venture’s duration and include renewal or termination provisions.
- Plan for different exit strategies such as dissolution, buyout options, and handling of assets.
- Anticipate language barriers and plan to use translators when necessary.
Integration: integrating a newly acquired Japanese business or newly founded Japanese joint venture into a UK company’s global business can be complicated by unique legal and cultural considerations, such as corporate governance and internal control structures. You should assume integration will be a long and occasionally painful process.
Last updated November 2023: Steve Crane OBE
