Sample Joint Venture Negotiation

© Christopher P. Wells 1993-1996

This is a complete term-long problem involving the negotiation of a complex cross-cultural joint venture. The problem is intended to be handled using opposing teams of negotiators from relevant countries who have a reasonable level of international commercial negotiation experience.

The first six memoranda linked below are for presentation during the development of the curriculum for Western students and comprise internal (multinational ) corporate memorandum primarily addressed to in-house counsel. Students (in teams) are expected to generate a draft Letter of Intent (Heads of Agreement, etc.) after reviewing the first six Memoranda. (This results in a mid-term grade equal to 1/3 of the course grade). The first negotiating experience with the opposing team is based on this draft LOI. The problem includes the instructions for the opposing team at the neogtiation session (see links below).

The remaining memoranda clarify certain further issues culminating in the negotiation of a complete joint venture agreement (in two sessions lasting one day each). These take place at the end of the term and are the basis for the performance element of the final grade (also 1/3 of the final grade). The remaining 1/3 of the final grade is based on a two (or three) hour final examination which tests for basis negotiating skills taught during the course (see sample examination below).

In the problem, it is the job of the in-house counsel to try to sort out what is going on and to develop a coherent negotiation strategy for the joint venture. This entails understanding personalities, business realities, the motivations of the foreign venturers executives and business culture (as well as his own), etc.--in other words, all of the frustrations of the professional negotiator in circumstances where large sums of money are being invested and the personalities are strong.

This is a complex and difficult exercise intended for businesspersons with sufficient familiarity with the relevant commercial environment to make the problem meaningful in education terms. The role of the teacher is to help individual students understand their strengths and weakensses as negotiators as illustrated by their performance in the overall negotiation. As is true in real life, there are many good solutions, but not "optimal" ones.

This curriculum is only for students with strong egos accostomed to constructive criticism. I have found that for the most part, law students are generally too commercially unsophisicated (and/or insecure) to be able to handle the problem in a meaningful manner (with generally poor results).

If you use this problem in classroom circumstances, I would very much appreciate receiving helpful feedback regarding its structure and implementation is a teaching context.

Background Regarding the Companies

UT:

Universal Tools (ìUTî) is a Fortune 500 (number 146) which, for the year ended December 31, 1993, had profits of approximately U.S.$250,000,000 on gross revenues of approximately U.S.$2,500,000,000 (¥250,000,000,000 at ¥100=$1). UT is a publicly traded company on the New York Stock Exchange with 100,000,000 common shares outstanding, no preferred shares and a debt to equity ratio of 35%/65%. UT common stock has traded recently between U.S.$23 and U.S.$28.

UT was established in 1938 by John Alexander, Sr. (a 1937 graduate of the California Institute of Technology in Mechanical and Electrical Engineering) to supply machine tools to the automotive and related industries. In the late 1940s the company modified its business aims to focus on the business of the manufacture and sale of automated machine tool products. In the late 1960s UT teamed up with IBM to become one of the first makers of computer controlled machine tools. During this period and the following period in which semiconductor and computer manufacturing technology developed at a rapid pace, UTís developing electronic component segment supplied United States manufacturers (such as RCA, Motorola, Texas Instruments, Tandy and Zenith) with precision manufacturing tools for the cutting, mounting and finishing of semiconductor and related products. During the 1980s UTís specialization in precision manufacturing to some extent insulated the company from foreign competition in machine tools although the non-speciality tools segment of its business was hard hit by such competition. In response to this challenge, UT abandoned the manufacture of low margin industrial machine tools and has specialized in automated precision manufactory technologies.

For the fiscal year ended December 31, 1992, revenues from industrial machine tool products accounted for approximately 40% of total revenues and 20% of pretax profits, revenues from automated precision manufactory accounted for approximately 30% of total revenues and 40% of pretax profits, revenues from electronics manufactory products accounted for approximately 20% of total revenues (and 25% of pretax profits) with the remaining 10% of revenues (and 15% of profits) arising from miscellaneous other sources.

The current Chairman and Chief Executive Officer of UT is John Alexander, Jr. (65) who succeeded his father in that office in 1977 and has spent his whole career with UT. Day to day operation of UT is divided among five Senior Vice Presidents: SVP-Finance (Allan Ketchi, 48), SVP-Marketing and Sales (Elizabeth Uri, 45), SVP-Operations (George ìDocî Handy, 62), SVP-International (A. Perkins (ìPerkyî) Kensington, III, 42) and SVP-Personnel (James Gladhand, 55). As John Alexander nears retirement and becomes less actively involved in the day to day management of the company, active competition to succeed him has broken out between Mr. Ketchi and Ms. Uri.

The General Counsel of UT is Thomas Blackacre (58) who spent several years as an associate in a major New York law firm before joining the company and has been general counsel of UT for the past 20 years. There are eight lawyers in the Office of the General Counsel (3 litigators, 2 domestic corporate lawyers, 1 intellectual property lawyer, and 2 international counsel (one for Europe and one for Asia). UT uses a variety of outside counsel in its domestic and international business operations.

Yasuda Trading Corporation:

Yasuda Trading Corporation (ìYasudaî) is the third largest Japanese integrated trading house in Japan with fiscal 1993 (ending March 31, 1994) revenues of approximately ¥15 trillion (U.S.$15 billion at ¥100 =U.S.$1) and pretax profits for the same year of ¥75 billion (U.S.$750 million). Fuyoís revenues and profits have been in serious decline over the past several years both as a result of the decline of the role of Japanese trading houses in the Japanese economy and international trade, and because of the serious recession in the Japanese domestic economy which has continued from the second quarter of 1991. Yasuda currently employs approximately 10,000 employees.

Yasuda traces its history back to the establishment in the Sannomiya District in Kobe of a dry goods store in 1788 by Yasuda Sanjuro. Yasudaís modern commercial history commenced in 1885 when the head of the Yasuda trading house, Baron Yasuda Toshiro, obtain the exclusive ten year commission to provide dry and other supplies to the nascent Japanese Imperial Navy. This was followed at the turn of the century by similar commissions and the formation as subsidiaries of a number of related industrial and financial companies (including Yasuda Bank, Yasuda Heavy Industries, Yasuda Shipping Lines, Yasuda Cement, Yasuda Chemicals, Yasuda Construction, Yasuda Insurance Co., Ltd., Yasuda Paper, Yasuda Oil Company, Etc.). Following World War Ii, at the order of SCAP, the Yasudaís business combine (zaibatsu) was broken up and the various components thereof were sold to the public to raise capital for the post-war government. During the ten year period following the end of the occupation in 1954, various Yasuda companies succeeded in acquiring a portion of each otherís shares and formed the industrial group whose name is recognized throughout the world today. Yasuda Trading Corporation has been at the center of this modern industrial grouping (keiretsu).

The International Operations of Yasuda Trading Corporation are under the direction of Mr. Isao Hosomi, a Senior Managing Director of Yasuda. Operational direction and control of international operations involving North American counterparties is under the direction of Yasudaís General Manager-Americas, Mr. Tomoo Nakagawa. His staff handling business in the machine tools and precision manufacturing business areas (on a functional basis) is comprised of Mr. Akira Nishikawa, the Section Manager for Machine Tools Section and Mr. Tetsuya Shimazaki, the Section Manager for Precision Machinery and Manufacturing Sales (actually a section Manger of the International sales Division I). Each of these Sections has a staff of ten employees and clerks. A separate Senior Managing Director, Mr. Hiroshi Suzuki, is ultimately responsible for Yasudaís domestic machine tools and precision manufacturing sales operations. The line of authority for this business line is handled through Mr. Noritaki Kimura, the General Manager-Electrical Machinery Division, and Mr. Tomatsu Tanaka, the Section Manager for Precision Manufacturing section of that division. Senior management of Yasuda has recently determined that while the companyís trading and financial activities must be maintained at current levels, the company must diversify into high margin manufacturing and sales operations in high technology areas using the marketing and technical expertise in these areas built up through the companyís trading activities.

There is no General Counsel for Yasuda. Legal matters are handled largely in-house by business persons trained in the law with the assistance of the Legal Affairs Division (which has 10 staff members) of the General Affairs Department of Yasuda. Two of these staff members are graduates of masters programs of United States law schools and are admitted to practice in the State of New York. Matters involving machine tools and precision manufacturing products are handled by Mr. Ichizo Hamada, who holds a masters degree from Harvard Law School (granted in 1989) and is a member of the New York Bar. Mr. Hamada has been with Yasuda for 10 years.


Joint Venture Problem Supporting Documentation

First Memorandum: Setting the Stage with the Chief Executive

Second Memorandum: Counsel Is Instructed

Third Memorandum: The View From Personnel

Fourth Memorandum: The View From Operations

Fifth Memorandum: The View From Finance

Sixth Memorandum: The CEO Speaks: Instructions for Preparing and Negotiating the LOI

Seventh Memorandum: Instructions for Japanese Negotiation Participants for Letter of Intent

Eighth Memorandum: CEO's Instructions for Negotiating the Joint Venture Agreement

Ninth Memorandum: Instructions for Japanese Negotiation Participants For Joint Venture Agreement


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