GLOBAL BUSINESS MANAGEMENT

Economics and International Business Law

LAW ASSESSMENT LEGAL RELATIONSHIPS

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INTRODUCTION
This essay is aimed to provide a legal report for an enterprise based in an EU member
state that wants to expand its operation to Russia. There are two sections in this report;
the first section focuses on addressing the different types of legal relationships such as
agency, distributor, and joint venture. This section clearly explains the features,
advantages and disadvantages of the different types of legal relationships. The section 2
addresses the important terms that should be in the joint venture agreement with the
best interests of the organisation.

Agrilait
Agrilait is a dairy Co-operative located in Cesson-Sevigne near Rennes. The company was
created in 1949, it specializes in fabrication and commercialization of milk. It has over
110 employees. Very strong brand reputation in the local region Brittany. The products
offered are low priced. The company has a constant growth. The main channel of
distribution is through supermarkets.

Russian Market Analysis: Liquid Milk Consumption

Russia the 10 largest populated country in the world. There is an upward trend n retail
sales in Russia. An alarming revelation by USDA is that there is further 2.1% decline in
the milk industry in the country in 2016 followed by 2015. The government is willing to
help to improve the industry. The milk consumption in Russia is below global average
consumption because Russia largely imports dried and condensed milk from Belarus
which is largely used as Russian enterprise to produce milk. But Russian federation has
forecasted that there will be a huge demand of liquid milk supply during the period of
2017-2021 and that demand will be met by imports. As milk is a dairy product and good
for health there is no specific target market, the concept will be to reach as much as its
possible.

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SECTION 1 TYPES OF LEGAL RELATIOMSHIPS

Agency Pros and Cons

A proper business model can be used by companies in order to stabilize direct exporting
system. Few companies own a separate department for working on exporting strategy.
The companies not owning a separate department for exporting activities establish their
sales offices in the market. Such sales offices help the companies to experience an
effective distribution and marketing activities on their product (Varghese 2014).
Companies have got the opportunities to employ their own overseas sales personnel in
the target market without making any investment in the sales offices. Companies which
are new to the market should get assistance from distributor or any agents to export their
product instead of involving in it directly. Agents in the market are ready to assist the
companies on the basis of commission. They involve in promotional activities in order to
publish the deals of the company. Agents take the responsibility of selling the products
but they never take the role as the customer of the company.
Initial step taken by companies while getting into export process is involving an agent in
their process. Agents can either be an individual or an organisation who sign with the
company for marketing the companys product on behalf of them on the basis of
commission. Agents involve in the business of more than one organisation. Agents are
found to be the source with controlled options and at lower cost. In order to globalize the
products companies should have direct control over their products. Targets should be
fixed by the companies on their agents. Companies should be beware on the conflicts
because chances are there for their agents to work for their competitors too in the market.
Both distributors and agents are similar in character except for the distributors also hold
the ownership of the companys product. They take incentives from the companies for
marketing their product. Except for this the role of both agents and distributors are same.
The companies will experience the following pros by involving an agency with them. If
the company employs an agent exclusively to work for them the cost will be higher but
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the level of sales will be high. The company can also conduct an interview and select a
person who has ample knowledge on their product and their industry sector. In order to
secure the knowledgeable person the company can provide base salary, shares in their
equity and commission to the agents.
The companies will also experience certain disadvantages by involving agency with them.
The agents may lose the interest in the product and lack in marketing. It might take
certain time for the company to understand that the person is not right for the job. The
company never has a direct control towards their agency because they work from some
other part of the world (Dawei 2008).
Distributors Pros and Cons
There are certain advantages and disadvantages in including a distributor in the business.
Distributors are inexpensive when compared with the agency. Distributors are the
easiest and the quickest method to access the market. The distributor minimizes both
liability and exposure of the company by purchasing the goods. Companies can set targets
for a specific time and also sell the product at fewer prices for incentivising the
commitment. The disadvantages includes that all the distributors are not found to be
meticulous on their work so the company should be aware while signing the contracts.
Distributors expect high discounts from the company. The company will face a real risk
when the distributor loses his interest (Dawei 2008). The company never has its control
on the marketing strategy and price because once the goods are shipped the distributor
will fix the price and market them according to their strategy. It becomes difficult for the
company to understand the wish and demands of the end users who use their products.
Joint venture - benefits and risks
Joint ventures can be done by business of any size in order to enhance their business.
The Benefits of successful joint venture are that the company can access the markets that
are new to them and also involve in the distribution networks. Its Capacity can be
increased to a great extent. Both risks and costs can be shared among partners. The
company can access more resources that involve experienced staff, high finance and
advanced technology. Joint ventures are more flexible. Joint ventures are common among

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transport business because they own their business in various parts of the country
(Stewart, & Maughn 2011).
It becomes a difficult task to partner with an unknown business. It consumes more time
to build a better relationship with the partner. Following the risk factors involved in joint
ventures: Each individual involved in the venture are not 100% clear with the objectives.
Each partner may construct their own objectives in joint venture. Imbalance is often in
case of investment, assets and expertise in joint venture. Fusion of different styles of
management and culture may result in bad cooperation (Morschett, Schramm-Klien, &
Zentes, 2011).
Joint venture can result in success when it relies on proper research work and a better
analysis on both aim and objectives. The success of a joint venture also demands a proper
communication of the business plans to every individual involved in the business for the
growth of the business.
International joint ventures (IJV) are found to be more beneficial because such joint
ventures pave way for faster and affordable price for accessing global markets. Such
advantages cannot be enjoyed by commencing a new company or by owning an existing
company. Various distribution channels can have easier access to IJV. It also helps the non
residing partner to have an easier access and gain knowledge on the local market. This
helps in the success of the joint venture. The resident partner can maintain a better
relationship with his suppliers, customers etc by means of IJV. These benefits can be
enjoyed only by the companies that are IJVs. Small companies or newly commenced
companies will fail to achieve these benefits unless they have capital resource, experience
etc. The reputation and credibility of IJVs partner will grow faster in both local and global
market (Varghese 2014).
International joint venture demands proper plans and strategy unless it will face a great
fall in the market. It becomes a challenging task for IJVs to anticipate uncertainties,
technical issues, development in the market, changes in the economy, etc which lead to
failure of IJV. Profits gained through IJVs are shared among its partners. IJVs pave way for
management issues which happens due to adaptation of various management
philosophies by different partners. To avoid such disputes IJV should follow a proper
mechanism. Expectations of the partners are not always satisfied by IJVs. It should also
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be understood by the partners of IJV that the terms involved in such business are not
flexible to change according to their wish (Wolf 2000).
Capitalizing as an entity becomes a challenging task in joint ventures in case of debt due
to its definite duration and lack in consistency. IJVs should be capitalized adequately or it
should be guaranteed by the partners. If the partners of the International joint ventures
fail to guarantee they should face high level of risk in IJVs.
The most important disadvantage of IJV is growth of competitor or efficient rivals in their
own company in the form of joint venture partner. Such discomfort can be avoided by
means of signing a proper joint venture agreement where issues like non competition,
confidentiality and non solicitation are clearly discussed.
For our company Joint venture will be a better choice.

SECTION 2 JOINT VENTURE AGREEMENT

Let us assume that our Company has entered into a joint venture agreement with XYZ
Corporation in Russia. To begin with entering into a joint venture agreement might
initially require the Russian partner to get certain approvals. A thorough check must be
made to see that these approvals have been sought for to avoid the contract turning void
in future. There is no model suggested by the Russian authorities for a joint venture
agreement and hence our company should draft the document at our own risk.

Management of the venture

As per the Russian legislation there are two management bodies. The executive body
looks into the day to day operations of the company whereas the shareholders are incharge of the main business decisions through general body meetings. The formation of
management bodies and the responsibility of each should be clearly stated in the charter.
The decision making procedure should also be agreed upon by the participants in the
agreement to avoid any future obstacles.

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Deadlock Resolution
A deadlock situation is one where the participants in a JV fail to agree on a certain strategy
which threatens the further existence of the venture itself. The participants of the joint
venture should agree in the contract the method to settle the deadlock situation. The
various options available are:

Pacific settlement where the company can decide on the basis of the vote cast by
its directors, or on the basis of an expert panel of arbitrators opinion.

Buy or sell method where one of the participants sells their share to the other.

Winding up the business on the basis of certain conditions. A joint sale where the
participants might agree to sell the venture to a third party.

Russia's stringent legal framework does not allow the participants to use all the deadlock
options and hence agreeing on the suitable option in the contract is advisable.
Shareholders Agreement
In the Russian context, the participants of Joint Venture have the right to enter into
shareholder's agreement. But the concept of shareholder agreement is new in the
corporate world of Russia and hence there are restrictions on many important provisions
in the agreement. In the Joint venture contract the company should clearly state the rights
available to them as per the legal and corporate framework to avoid any future
complications.
Distribution of Profits
The time and procedure of distribution of profits should be agreed upon in the agreement.
In Russia a 'limited liability company' and 'Joint Stock Companies' have different profit
distribution procedures, which can be agreed upon at the time of entering into the
contract.
Limitation of Liability
The liability of the participants in a Joint venture is limited to the charter capital that they
have subscribed for. But there are certain exceptions to this principle. They might be held
liable for the action of a subsidiary company or for their unpaid part of the share. The

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terms stating the scope of the company's liability and the risk associated should be clearly
mentioned.
Put/Call option agreements
'Put option' refers to the right of one participant to ask the other participant to buy their
shares whereas the 'call option' refers to the right of the participant to ask the other
venturer to sell the share. The use of these kind of instruments to hedge the risk has
certain limitations in Russia's legal framework. The various conditions and terms under
which such an option can be put to use should be documented.
Termination
The provisions for terminating the venture, when needed must be mentioned in the
charter. The Russian rule does not allow a company to use all the available options for
termination. Hence, it is important to get the termination procedure documented and
approved by the participants.
Licensing agreement
The Russian company might be using the intellectual property rights of our company. It
should be ensured that all the trade marks, patents and rights are registered in Russia
and are fully protected under the Russian Law.
Employment Agreement
The labor activities performed by the company in Russia are governed by the Russian
Labor Law. The process of recruiting an employee is highly structured in Russia and
requires a proper drafting and timely submission of documents. Russian immigration
rules and regulations should be considered while employing a foreign national. The
process of dealing with the workforce should be clearly stated in the document drafted.
Currency control laws and regulations
The entities incorporated outside Russia and holding a joint venture agreement with a
Russian firm are considered to be non-residents. The penalties for not complying with
the currency laws are severe in Russia and hence the terms of financial transactions must
be clearly stated in the document.
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Double Taxation Agreements

Russia has a double taxation agreement with various countries which includes France as
well and hence it should be mentioned while structuring the Joint Venture agreement.

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LIST OF REFERENCES
Campbell, D. (2009) International Joint Ventures, Austria: Kluwer Law International
Dawei, G. (2008) Internationalisation and entry strategy of enterprises: A case study of
Chinese

firm:

Huawei

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available

from

<http://hh.diva-

portal.org/smash/get/diva2:238972/FULLTEXT01.pdf> Accessed 2nd December 2015

Morschett, D., Schramm-Klien, H. & Zentes, J. (2011) Strategic International Management:
Text and Cases, London: Springer
Stewart, M., & Maughn, R. (2011) International Joint Ventures, A practical approach
[online] available from <http://www.dwt.com/files/Publication/1b841dbe-3453-498397cd-d6f5b44e5b2f/Presentation/PublicationAttachment/47d38fc0-1cc3-4c3e-b91fd8aacd2ce6d1/International%20Joint%20Ventures%20Article_Stewart.pdf> Accessed
2nd December 2015
Varghese, A. (2014) Pros and cons of using agents vs. distributors in your international
market

entry

strategies

[online] available from <http://www.tradeready.ca/2014/fittskills-refresher/proscons-using-agents-vs-distributors-international-market-entry-strategies/> Accessed 2nd

December 2015
Wolf, R. (2000) Effective International Joint Venture Management: Practical Legal Insights
for Successful Organization and Implementation, London
Russia Double Taxation Prevention Treaties - The WorldWide-Tax.Com, Russian Tax
Treaties. 2015.Russia Double Taxation Prevention Treaties - The WorldWide-Tax.Com,
Russian

Tax

Treaties.

[ONLINE]

Available

at:

http://www.worldwide-

tax.com/russia/rus_double.asp.

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