Collaborate for opportunities in oil

Tuesday May 04 2021
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By Denis Kakembo

As Uganda’s oil project passes critical milestone on the road to commercial production, it is a key objective of the government to entrench local participation in the sector employment and supply chain opportunities. This is intended to maximise the economic benefits of oil development for the people of Uganda. It is, however, inevitable that some of the supplies will be sourced abroad because they are not locally available. Though this positions international enterprises better for these opportunities, they must bid in conjunction with local firms to conform to national content requirements. This article highlights some of the key issues that need to be considered in setting up such joint ventures between local enterprises and the international companies.     

Structure

JVs are either incorporated or unincorporated.  A new legal entity separate from either of the partners may be incorporated to undertake JV activities and business. Incorporated JVs are suitable where the JV is expected to engage in multiple projects over a long period and most likely is the form most aligned with the requirements of Uganda’s local content rules. Unincorporated JVs can be used for a single project and are based on a contract between the parties defining a specific set of activities associated with that. No separate legal entity is created and there is no need for a separate management structure to be established. 

For the smooth operation of JV activities, include a clear definition of the respective ownership interests of the parties to determine contribution to capital and entitlement to profits. The parties must also agree on the procedure of appointment of key management for the JV. There must also be in place a dispute resolution mechanism.

The JV partners must also have clear agreement on the provision of resources to the JV to conduct its business. This may include providing assets, transferring employees and providing finance.  In the case of an unincorporated JV, this is likely to be simply a case of designating resources to be used for the joint activity. It will be necessary to identify the legal nature of each provision of resources for a JV company.  For example, assets may be sold to the JV Company, leased to it or contributed as consideration for the issuing of shares.  Where assets are transferred, the value will need to be agreed between the parties which could be tricky in the case of specialised assets such as intellectual property. 

The JV partners will also require means to monitor performance of the JV. Financial reports may be required quarterly or monthly with timely access to JV management to monitor performance against budget.  The partners should also be involved in budgeting processes.   

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Dissolving joint ventures

Both parties should have a clear exit strategy when the time comes to wrap up the JV.  This is likely to be straightforward in the case of an unincorporated JV as the parties will simply terminate the agreement and continue with their respective businesses. 

 For Ugandan businesses considering this for the first time, get the advice before establishing a JV.

Joint Venture Partnership

Though the technical ability to deliver is dominant in choosing a Joint Venture (JV) partner, there are other qualitative factors to consider. Most important is whether an effective working relationship has been established between the key decision makers on both sides. There may also be differences in business culture a potential minefield for disagreements in the future. Therefore, both parties should undertake due diligence on each other prior to formalising a JV relationship.  

The author is the managing partner at Cristal Advocates.

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