Issues Between Store Norske Spitsberger Kulkompani Corporation
1. Store Norske is considering using Coal India Limited to assist them in their international business operations. What issues will Store Norske have to address with respect to any business transactions between Store Norske and Coal Inida Limited. Discuss.
Store Norske’s manner of partnering with Coal India to assist them in their international business operations is called international joint venture. This is the most common way to go into international business to a) reduce the risk in venturing into a new operation, and b) takes the favorable opportunity of using the skills and assets of the new business partners. Nevertheless, the decision to enter into a joint venture requires the consideration of several issues such as political, currency, business, legal and cultural factors that can have an impact on the operations.
Political Risks. Store Norske should consider the stability of the government where it plans to operate the joint venture. Questions on the frequency of public disturbances, labor strikes and government support and its cost should be raised. Moreover, Store Norske should take into consideration that the business laws in Nigeria are constantly evolving, such as its foreign exchange regulations that can highly impact cross-border transactions (Nelivigi et al, n.p). Based on the experience of foreign companies, Store Norske’s plan to enter into a joint venture with Coal India Limited must be done with thorough planning. The parties must agree on the “details of their business plans, and determine upfront the manner in which day-to-day operations, corporate governance and government relations will be conducted” (Nelivigi et al, n.p).
Currency Risk. There is also a need for Store Norske to consider the convertibility and stability of the local currency. There is the possibility that future exchange rates can have a negative impact on the economic growth of the venture, thus, mitigating measures should be considered to cushion the impact of volatile exchange rates. There are three types of currency risk exposure: transaction, translation and economic exposure (Kapila & Hendrickson, 188). Accordingly, as a means to safeguard the company from worst case scenarios such as losses in currency exchange, Store Norske may opt to enter to forward exchange contract hedges. The advantage of going for this scheme is the reliance on foreign exchange forward rates that can hedge itself from the risks that is associated with foreign exchange, though it also eliminates the possibility of earning from the exchange rate should it turn out profitable (Kapila & Henrickson, 190).
Tax Laws. It is also empirical that Store Norske examines the tax consequences of entering into a joint venture with Coal India Limited because there are almost always tax implications in the establishment, operation and even the termination of business. Moreover, the tax implications in other counties may differ from the taxes imposed in Norway. Some of the tax issues that should be addressed before proceeding on the venture are the income taxes, related value added and sales taxes, and employee taxes among others. The help of a tax expert is recommended as a means to achieve tax efficiency in the business operation in another country.
Capital Contribution. Another key factor to consider in entering into a joint venture is the determination of capital contributions of each party in lieu of the business. Store Norske and Coal India Limited may contribute both tangible and intangible assets and they should come up with a common agreement on the valuation of the respective assets. Further, it should be noted that the parties’ contributions, whether they are in the form of cash, tangible and intangible properties as well as technical know-how must be subjected to local law considerations (Baker & McKenzie, 30). Some of the considerations with regard to capital contribution in a joint venture are as follows:
The existence of local laws concerning the percentage to be owned by nonresidents;
Stipulation on profit sharing and share in the assets in case of dissolution;
The minimum capital contribution;
Transfer taxes due on the contributions;
Does the joint venture necessitate future funding, and if so how much should be required to be contributed by each party? Further, both parties should establish the policy in instances when the funding obligation is not met (Baker & McKenzie, 31)
Management. The board of directors will have the responsibility for the overall management of the new corporate entity. Some of the issues to be considered are the representation of each party based on the composition of the board, selection of the chairman as well as the role of each member of the board in relation to the organization. As provided for by Baker & McKenzie, the board of directors “makes extraordinary decisions on behalf of the joint venture as well as a slate of officers or managers who oversee the day-to-day business of the joint venture” (35).
Termination. Early in the phase of the joint venture, the duration and purpose as well as the termination concerns are dealt with accordingly. Despite the fact that most joint ventures are intended to last for a long period of time, there are instances when early termination of the venture can happen. This calls for the need to negotiate and document the terms of termination should either of the parties will no longer want to be part of the joint venture. Some termination issues to consider are a) transfer of interest, b) sale or dissolution, c) intellectual property considerations, and c) non-competition (Baker & McKenzie, 45). In some instances, one of the party may choose to leave the venture, but the business will push through its operation, thus the exiting party may provide transition services for the remaining party.
Dispute Resolution. Despite careful and planning during the early stage of the venture, there are cases when a dispute between the parties may arise such as conflicting decision in terms of its operation. Therefore, the parties should stipulate in the agreement the terms of how best to amicably resolve dispute that may arise during the operation.
Provisions on non-competition. It is inevitable for large entities such as Store Norske and Coal India Limited to participate in other business ventures. To promote the interest of the joint venture, the parties may agree on prohibiting acts that appear to compete with the business.
Employee Transfers and Benefits. A significant factor to further consider when forging the agreement are the people that will comprise of the staffs, and management as well as the benefit issues. For instance, the parties must determine who will be the people to be employed and instances of employee transfer to the joint venture (Baker & McKenzie, 55).
2. Store Norske is considering purchasing a majority interest in Coal India Limited to make it easier to utilize Coal India Limited in their operations. What issues will Store Norske have to address with respect to this decision? Will this situation alleviate any of the issues addressed in 1) above? Discuss.
Purchasing a majority interest in Coal India Limited is considered a business combination through acquisition. In this instance, there are several factors to consider such as the determination of the acquisition date and the recognition and measurement of identifiable assets acquired, the liabilities assumed and other non-controlling interest that remains to the acquire. There is also a need to recognize and measure goodwill that may arise from the acquisitions.
Acquisition Date. Store Norske should determine the acquisition date, which shall be the date when Store Norske as the acquirer will take control of the Coal India Limited. The determination of the acquisition date is important because IFRS 3 “requires that the measurement date for equity securities transferred as consideration is the acquisition date” (Deliotte, 32). Moreover, the acquisition date do not only serve as a reference date, but also as a guide for subsequent transactions, such as in instances when the share is offered to the public, for private transfer transactions.
Recognition and Measurement of Identifiable Assets. The international financial reporting standard 3, provides the basic principles in the recognizing and measuring of identifiable assets acquired, liabilities assumed, as well as the minority interest (Deliotte, 34). In meeting the recognition principle, the Store Norske acquirer shall determine and provide for the classifications of the identifiable assets “on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date” (European, 3). Some of the classifications at the acquisition date includes, a) classification of resources as at fair value through profit or loss, available-for-sale or held-to-maturity; b) classification of obligations as at fair value through profit or loss; c) designation of a derivative as a hedging instrument; and d) assessment of whether an embedded derivative should be separated from a host contract (Deliotte, 35).
Post-Combination Accounting. Accounting for the business entity after the acquisition must be done according to the existing and applicable international financial reporting standards. IFRS provides the specific guidance to be used by the entity subsequent to the acquisition.
The business combination through acquisition between Store Norske and Coal India Limited will result in the elimination of some factors had they pushed through with option 1. For example, there will no longer be a need for both the parties to consider the capital contribution of each because the transaction is already built around the realm of business combination through acquisition. In addition to that, the business combination can proceed without the need to consider dispute resolution as Store Norske, having the controlling interest will have the upper hand in terms of the management aspect of the business. The same can also be said about the management, termination and employee transfer. In the case of management, the acquirer will have the final decision as to who will become part of the management team, including the board of directors. Employee transfers will also be out of the picture, because, technically, they remain to be part of the same entity.
3. Store Norske is considering forming a joint venture company with Coal India Limited, jointly owned 50% each. What issues will the new company have to address in doing business assuming the joint venture will be located in the Nigeria? Discuss.
Many lawyers tend not to favor a 50/50 relationships in terms of joint ventures, however, research reveal that there are 50/50 joint ventures that work better than others (Stewart & Maughan, n.p). Should Store Norske and Coal India proceed with this form of joint venture and operate in Nigeria, both of them will have an equal interest in the operation of the business. Both will address some issues that may not concern the power overlaps, but more so on how best to promote the business operation.
In managing the joint venture in Nigeria, the new entity will have to consider such factors as the governance and control, internationalization and cultural differences among others. Governance and control should be discussed between the parties, and this should be done during the early earlier phase of the joint venture, as it would be more difficult to make adjustments when the operation has already pulled through. Another factor that should be considered by the new entity in its expansion in Nigeria is the internationalization where they retain strategic control yet both partners were allowed “access to local knowledge concerning markets and business practices” (Stewart & Maughan, 84). It is therefore important that Store Norske and Coal India Limited acquire the needed local knowledge about business operation in Nigeria to increase the probability of a successful venture. In addition to that, the new entity and its people must learn about the Nigerian culture, so as to make communication, decision making and management more efficient despite the new environment (Stewart & Maughan, 86).
Works Cited
Baker and Mackenzie International. International Joint Ventures Handbook. http://www.acc.com/chapters/gny/upload/International_Joint_Ventures_Handbook.pdf, n.d. Print.
Beamish, Paul, and Nathaniel Lupton. "Managing Joint Ventures." Academy of Management Perspectives. N.p., n.d. Print.
Deloitte Touche Tohmatsu. "Business combinations and changes in ownership interest." N.p., 2008. Web. <http://www.casplus.com/pubs/files/0807ifrs3guide.pdf>.
European Commission. "International Financial Reporting Standard 3: Business Combination." N.p., Web. <http://ec.europa.eu/internal_market/accounting/docs/consolidated/ifrs3_en.pdf>.
Kapila, Prashant, and Chris Hendrickson. "Exchange Rate Risk Management in International Construction Ventures." Journal of Management in Engineering (2001): n. pag. Web. <http://www.cmu.edu/gdi/docs/exchange-rate.pdf>.
Nelivigi, Nandan, John Olivieri, Aloke Ray, and Dipen Sabharwal. "Navigating India: Lessons for Foregin Investors." White and Case. N.p., 2014. Web. <http://www.whitecase.com/publications/insight/navigating-india-lessons-foreign-investors>.
Stewart, Milton, and Ryan Maughn. "International Joint Ventures: A Practical Approach." Davies Wright Tremaine. N.p., 2011. Web. <http://www.dwt.com/files/Publication/1b841dbe-3453-4983-97cd-d6f5b44e5b2f/Presentation/PublicationAttachment/47d38fc0-1cc3-4c3e-b>.
