May 2018

Saudi Arabia Joint Venture Adventures



When joint ventures commence in Saudi Arabia, the partners are holding hands and singing "Kumbaya," knowing that the venture will be profitable and dreams will come true. 

But management disputes are inevitable. The foreign partner will nominate a manager who is expected to toe the foreign partner's line. The ideas of the Saudi partner--we'll call them Contra Via for the purposes of this article-- are treated with the solemnity of the Suggestion Box. That is, ignored. Contra Via isn't supposed to be running the show. The foreign partner did not and never would have agreed to that. 

Contra Via desperately pulls out a copy of the joint venture agreement and looks for the deadlock provision. But there isn't one. Given that at least half of marriages end in divorce, everyone realizes that prenuptial agreements make sense.

"If you love me, you won't have me sign a prenupe," the bride says. And that is why deadlock provisions are rare. To sign is an admission that things could go wrong. When they begin their relationship, there was harmony and a belief that they were always going to be in agreement. What could go wrong? Didn't they start by holding hands and singing "Kumbaya?"

When things do go wrong, there will be no provisions to govern the relationship between the parties. Civility and common sense in these situations, sadly are rare. 

Attack the Manager

So what can the Saudi partner do in these circumstances? Acting up and acting out are common responses, akin to throwing a tantrum. 
Removing the appointed manager from the rolls at the Ministry of Commerce is a common tactic. Bringing criminal charges against the foreign partner's appointed manager is easy to do and little wasta is required for an investigation to be opened.

Of course, the investigation won't find anything because there's nothing to be found. No crime has been committed, after all; the Saudi partner is simply unhappy at the way things have been going, how his suggestions have been routinely ignored. The foreign partner can usually get his appointed manager out of jail, but then there will be a travel ban to deal with. 

"Removing the appointed manager from the rolls at the Ministry of Commerce is a common tactic."

It can take a year or so to restore the manager's ability to travel.
In the meantime, while the partners squabble, who is running the business? Who is trying to make it successful?

No one. 

The Imagined Home Court Advantage

Another common trick, besides attacking the appointed manager, is commencing a Saudi arbitration where the joint venture agreement specifically provides for international arbitration. Eventually, after four or five hearings--or more--the Saudi arbitration will be dismissed. But only at substantial expense. 

Protip: going to an arbitration to protest its commencement because the joint venture agreement provides exclusively for foreign arbitration does not constitute submission to the jurisdiction of the Saudi tribunal and a waiver of any objection to the Saudi arbitration.

Nevertheless, this strange belief and novel legal interpretation is often perpetuated by ex-Floridians who have never been licensed to practice in any jurisdiction but believe themselves nonetheless to be attorneys. Or almost attorneys. 

Fail to File Reports

The third common trick is failing to approve the annual accounting performed by the joint venture's appointed accountants. 

In Saudi Arabia, an annual accounting must be taken and tax returns filed. The foreign partner must pay income tax and the Saudi partner zakat. But the report must be filed. The problem is that even the big 4 accounting firms--you know who you are--will not submit the required annual reports unless the board of directors consents.

Because the Saudi partner is playing games and the board is split 50-50, there is no consent. So the annual report is not filed and tax returns are not filed either. 

What happens? What should happen is that the Ministry of Commerce requires the filing of reports under the threat of the imposition of substantial fines upon the recalcitrant directors. In other countries--even in Myanmar!--this is the penalty for playing such games. But in Saudi Arabia, the Ministry will not do anything. The General Authority of Zakat and Tax should step in and insist that reports be filed and impose penalties where they are not. But they won't. 

The idea that failing to file required tax reports and removing a company's manager is a good strategy for working out problems with your foreign partner is often advanced by ex-Floridians who have never been licensed to practice in any jurisdiction but believe themselves nonetheless to be attorneys. Or almost attorneys. But in fact it is never a good idea and it never works. 

Don't Find Common Ground

One possible solution is to find common ground. There is always common ground with respect to at least some matters. Lawyers--real lawyers, that is--can talk to each other and try to find common ground even if they represent adverse parties. Screaming "I will bury you" at a board meeting is not conducive to a settlement. After all, it didn't work for Kruschev. 

Protip: Speaking with opposing counsel is not corrupt behavior, by the way. That is what attorneys do. That is one of the reasons why you have them around--to help turn down the temperature. It is particularly useful to have attorneys speak to each other when both follow the rule of law; that is, both recognize that when the law requires the annual filing of tax returns that unless an exemption from that rule is sought and obtained, those tax returns must be filed. Unless, of course, your goal is more fauda and liquidation of the joint venture. 

The First Time you put on a New Suit, Pay Attention When a Child Shouts, "The Emperor Has No Clothes."

Let's say a foreign manufacturing company--we'll call them Panaderos, S.A.-- comes to Saudi Arabia with a tempting offer of a long-term agency agreement. Contra Via Investments, the Saudi partner, starts salivating at the thought of juicy, long-term destination commissions. The foreign partner will provide a sales force and trained technical personnel to help with the installation and servicing of the products. All the Saudi partner has to do is sit back and cash the checks. It sounds like a great deal. 

"A buyer and a seller concluding a sale do not constitute a joint venture."

A great deal until Panaderos says, they really don't want such an arrangement after all. What they really want is a joint venture. So Contra Via tells its lawyers to start putting together the joint venture agreement. Strangely, though, Panaderos tells its own lawyer, "don't bother with a jv agreement." Contra Via's lawyers are surprised, until they hear that at the kick-off meeting for the new joint venture, what Panaderos was offering was a supply contract if Contra Via were to spend--what, USD 10-20 million or so--to set up a manufacturing facility. 

Protip: A buyer and a seller concluding a sale do not constitute a joint venture. Calling such an arrangement does not make it so. I buy donuts at the baker's every morning. That does not create a joint venture between myself and the baker, even though I faithfully and daily consume his supply of delicious glazed bakery fare. 

What Happens when there are no Lawyers at the Table

You get into hours-long discussions in an effort to answer the question, "why is a corporation a 'person' and do we need to use the word 'person' in the contract?"

Joint CEO's: Too Many Cooks Spoil the Broth

Let's consider Blackberry. We're in business school, in a class on business law. The professor opens the scenario:
Blackberry was a famous Canadian maker of mobile phones before Apple changed the industry with its iPhone. For a while, Blackberry had joint CEO's, though they don't have joint CEO's any longer.

There's a reason for that. Let's say you're one of the Blackberry CEO's concerned about embezzlement and corruption. The company is receiving regular bills from consultants for $200,000 and up for "services rendered." You decide that an audit is required and so appoint an accounting firm to conduct an audit. You also specify that you will pay no more invoices unless they are itemized. 

Two days later after issuing this fatwa, your fellow CEO fires the accounting firm you've hired to look into the problem. 

What do you do?


What should you do?, the professor asks. 

When the accounting firm protests the termination of the appointment on the grounds they were acting as instructed, the Blackberry CEO's response is:


The professor points out that Blackberry was chosen for this example because the company had, for a while, joint CEO's, but otherwise this is merely a hypothetical. The professor is quick to disclaim any knowledge of such activities at Blackberry.

For a second time: this example has nothing to do with Blackberry.

The professor looks out over the classroom and asks his students, 
"What do you think was really going on?"

And then he asks, "can you think of any other company that has joint CEO's?

The Curse of Tony Clifton

There's a scene in the Andy Kaufman biopic, Man on the Moon, where Kaufman is playing his alter ego, Tony Clifton, a lounge singer. Before Tony can come out and sing, all the patrons of the lounge are ordered to put out their cigarets and cigars because Tony's delicate vocal chords might be affected by second-hand smoke.

Waiters patrol the room to insure compliance. One of the smokers is slow to put out his cigar and protests after a waiter dumps the stogie into a glass of water.

Finally, all smoking materials are extinguished; we're ready for takeoff. The curtain parts. Tony walks out. 

Smoking a cigaret. 

Just because it is done to you doesn't mean that you can do it to others. Without lawyers around to explain, the term "collateral estoppel" will not be well understood.

What will happen if Contra Via's joint venture partner, reading from the same playbook, removes the appointed manager from the rolls and then fails to approve tax return filings and the like?

Contra Via will then complain bitterly about the unethical conduct, until they are taken before an arbitrator or a higher authority, who asks, "wait a minute, weren't you doing the same thing?" 

The above examples are illustrative, for educational purposes only, and any resemblance to any individual, company or concern is purely coincidental. I swear. The picture is of Tony Clifton. I don't know if it's Andy Kaufman's Clifton, or Jim Carey's. Contra Via is an antonym, more or less, for a phrase in Arabic. Reading text written in Spanish might trigger those who assume that "hay moros por la costa" todo el tiempo.