Structuring a Joint Venture

Anxious to meet the deadline to the Airport Authority’s request for proposals (RFP) for a concession operation, a prime concession operator and its politically correct airport concession disadvantaged business enterprise (ACDBE) partner quickly agree to respond to the RFP as a joint venture (JV). The partners execute a basic joint venture agreement; and agree that they will work out the details of the JV if their proposal is accepted. Big mistake. This scenario lays the foundation for decertification of the ACDBE, debarment of the JV, investigation of the JV by the local airport authority, and possible indictment by the feds. Let’s start over.

Responding to a concessions operation RFP as a JV requires planning as to 1) the selection of the right business partners; 2) all the business aspects for operation of a profitable and successful airport concession; and 3) compliance with the 2008 Federal Aviation Administration guidelines on joint venture operations.

The partners must bear in mind that the contemplated venture is essentially a new business with no assets, no capital, and no inventory or management structure. A well thought out business plan addressing the issues of capitalization, governance, and management, along with a well documented JV agreement, will mitigate the risk of failure for the venture. Simply signing the JV agreement will not establish ownership. The bottom line is that ownership will not vest in a joint venture without adequate capital contributions (as discussed below) from each partners’ own resources.

Structure
When responding and bidding on concessions opportunities, the structure of the joint venture and the resulting economic analyses underlying the RFP submission impact more than just the competitiveness of the submission in relation to other bidders. The structure becomes both the blueprint through which your JV will operate and the lens through which regulatory agencies will assess compliance with FAA regulations and guidelines.

Joint venture relationships cannot resemble passive partnerships. The ability of a prime concessionaire to simply include a disadvantaged business as a passive partner will not survive the scrutiny of an audit by the airport authority or regulatory agency.

The first step in structuring a JV is to have the venture properly capitalized. Both partners must contribute equity to the company in an amount equal to their ownership. This initial capitalization is critical.

Partners must engage in analyzing projected cash flow for the business and consider what it will cost to operate the business. Essential costs include, without limitation, company formation, legal and accounting, inventory, working capital, construction, minimal annual guarantee, security deposits, and the training and hiring of employees.

Control; management
After an agreement is reached by the partners on the capitalization structure for ownership, the next crucial steps for the partners to discuss and negotiate are the issues of control and management.

Control as defined by the guidelines sets forth which party is responsible for the day to day operations. The governance structure for management to operate the business must be determined up front in advance of signing the agreement.

FAA guidelines dictate that management and control of the venture should not be monopolized by one owner. The venture must consider management structure very carefully in order to avoid the appearance that the JV is a front for the prime operator, or that the ACDBE partner is participating in the front scheme.

The prime and the ACDBE must exercise control in proportion to its ownership interest. Control is generally demonstrated and exercised by membership and voting power on management committees. The joint venture agreement or operating agreement should clearly address the responsibility for each management committee, the partners participating on the committee, and most importantly the voting structure for the committee.

The management committee may designate an operations manager to run the company’s day to day affairs. However, all major decisions should be the responsibility of the primary management committee. It might serve the partners well to establish an organizational chart as an exhibit to the JV agreement. The organizational chart should clearly delineate the responsibility of each partner, identify each partners’ participation on each management committee, and the responsibility and voting structure of each committee.

All major decisions made by the management committee must be documented in the form of a resolution which reflects the decisionmaking process as well as the final vote on the issue. Major management decisions include, but are not limited to, acceptance of the terms and conditions of a concession lease agreement; the hiring or firing of the operations manager; and the distribution of business profits.

The bottom line is that the prime concessionaire cannot simply run the company with the ACDBE along for the ride. There must be actual hands-on management by both partners. The JV relationship should play to the strengths of each of its partners. The venture will need to determine the responsibility of day to day management components, including branding, marketing, buying, design layout, and employee training.

Updated guidelines
FAA’s 2008 guidelines have changed the landscape of historical joint venture structure and operation. The regulations increased benchmarks for participation by disadvantage business owners. This participation is one of the factors considered by airport authorities when RFP submissions are evaluated.

Among other provisions, FAA restricted a prime’s ability to capture the profits and interests of their JV partner through layered multiple management and administrative fees or specified mandated control targets; and it provided guidance on the management responsibilities of both JV partners.

To ensure compliance with federal guidelines, FAA began auditing concession JV relationships. Federal authorities are not the only agencies monitoring such joint venture relationships — airport authorities now review the three primary aspects of any JV arrangement prior to any award, renewal, extension, or material amendment to a concession agreement.

Because the burden will always be on the venture to demonstrate compliance with any and all FAA regulations, JV airport concessionaires do well by structuring and operating their companies as though they will be audited in the future. That is, one day the concession operation may receive a notice of audit or subpoena from the local airport authority requesting all partnership agreements as well as operational records. If the structure is sound and the necessary systems and documentation are in place, this will save the JV partners a lot of anxiety on the back end and the company will have great confidence in demonstrating compliance to any regulatory inquiry.

About the Authors
Demetrius Carney and Joseph McCoy are partners with Perkins Coie, and Sid Bale is an associate with Perkins Coie, a 700+ attorney law firm. The authors are members of the firm’s Airport Concessions practice and are based in Chicago. For more information, visit http://www.perkinscoie.com/airport_concessions/ or email DECarney@perkinscoie.com.

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