What is a Joint Ventures (JVs)?/Nature of a Joint Venture/

 Joint Ventures (JVs)

1. What is a Joint Venture?

A JV is a legal organization that takes the form of a partnership between two or more persons by which they jointly undertake a transaction for mutual profit.

Generally each person contributes assets and share risks.

Like a partnership, JVs can involve any type of business transaction and the ‘persons' involved can be individuals, groups of individuals, companies, or corporations.

2. Nature of a Joint Venture

In order to form a JV, the parties to it must agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise.

The venture can be for one specific project only, or a continuing business relationship. This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement.

JVs are formed in the following ways:

a. Two parties, (individuals or companies), incorporate a company. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.

b. Two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.

c. Promoter shareholder of an existing company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash.

Joint Ventures can take place between locals amongst themselves or they may involve locals and foreigners. However, they are commonly used by foreign companies to gain entrance into local markets. Foreign companies form joint ventures with domestic companies already present in markets the foreign companies would like to enter. The foreign companies generally bring new technologies and business practices into the joint venture, while the domestic companies already have the relationships and requisite governmental documents within the country along with being entrenched in the domestic industry.

3. Rationale for forming Joint Ventures

Internal reasons

a. Build on company's strengths

b. Spreading costs and risks

c. Improving access to financial resources

d. Economies of scale and advantages of size

e. Access to new technologies and customers

f. Access to innovative managerial practices

Competitive goals

a. Influencing structural evolution of the industry

b. Pre-empting competition

c. Defensive response to blurring industry boundaries

d. Creation of stronger competitive units

e. Speed to market

f. Improved agility

Strategic goals

a. Synergies

b. Transfer of technology/skills

c. Diversification

4. Form of a Joint Venture Agreement (JVA)

Joint Ventures are achieved through Joint Venture Agreements (JVAs). The Encyclopedia of Forms and Precedents (4th Edn, Vol 22) defines a ‘joint venture agreement' as being in the nature of a partnership between enterprises by which they seek to achieve, by mutual cooperation, a greater coordination of their separate activities.

5. How to enter into a Joint Venture Agreement

a. Selection of a good local partner is the key to the success of any joint venture.

b. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement.

c. Negotiation of the terms of the joint venture agreement. The terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. The negotiations will focus on issues such as:

· Dispute resolution agreements (Negotiation, arbitration, conciliation etc).

· Applicable law.

· Force Majeure: (What does it mean in the context of the subject agreement?). ‘Force majeure, as used herein, shall mean acts of God, laws or regulations, industrial disturbances, acts of the public enemy, civil disturbances, explosions and any other similar cause of equivalent force not caused by, nor within the control of either party, and which neither party is able to overcome. As soon as possible after the occurrence of the force majeure and within not more than 15 days, the Supplier shall give notice and full particulars in writing to the Federation of such force majeure if the Supplier is thereby rendered unable, wholly or in part, to perform its obligations and meet its responsibilities under this Purchase Order. The Federation shall then have the right to terminate the Purchase Order by giving in writing seven days notice of termination to the Supplier, and the Supplier shall return any deposit paid by the Federation'.

· Holding shares (Percentages.

· Transfer of shares.

· Board of Directors.

· General meeting.

· CEO/MD.

· Management Committee.

· Important decisions with consent of partners.

· Dividend policy.

· Funding.

· Access.

· Change of control.

· Non-Compete.

· Confidentiality. ‘All materials prepared as well as all data collected and processed in the course of your work under the terms of this contract become the property of the International Federation to dispose of as the International Federation deems suitable. They cannot be used for any purpose without prior written permission from the Secretary General. You hereby assign to the International Federation all intellectual property rights to the material prepared in the course of your work under the terms of this contract. Any information you become aware of during this assignment must remain confidential and not be divulged outside the Federation Secretariat and its field delegations, except where such information is publicly available'.

· Indemnity. ‘The Supplier shall indemnify, hold and save harmless, and defend, at its own expense, the Federation, its officials, servants, and agents from and against all suits, claims, demands, and liability, of any nature or kind, including their costs and expenses, arising out of any acts or omissions by the Supplier, or the Supplier's employees, officers, agents, or sub-contractors, in their performance of this Purchase Order. The obligations under this provision do not lapse upon termination of this Purchase Order and do not prejudice any other remedies available to the Federation'.

· Assignment. ‘The Supplier shall not assign, transfer, pledge or make other disposition of this Purchase Order or any part thereof or of any of the Supplier's rights, claims or obligations under this Purchase Order except with the prior written consent of the Federation'.

· Break of deadlock.

· Termination. ‘Without prejudice to other remedies, either Party may cancel a Purchase Order immediately by providing written notice to the other in the event that (i) the other party commits a material breach of the Purchase Order and fails to remedy that breach after being required to do so by notice in writing from the party seeking to terminate the Purchase Order specifying the breach complained of and stating its intention to terminate the Purchase Order if such breach is not made good, (ii) the other Party becomes insolvent, (iii) termination is permitted in accordance with the specific terms hereto'.

· Legal compliance. The JV agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period. ‘The Purchase Order is conditional upon the obtaining of any export license or other governmental authorization that may be required. The Supplier shall inform the Federation beforehand of such restrictions and shall obtain such license or authorization. In the event of refusal thereof, through no fault of the Supplier, the Purchase Order will be annulled and all claims between the parties automatically waived. The Supplier shall be responsible for any expenses or losses due to incorrect, incomplete or late documentation'.

6. How to Draft a Joint Venture Agreement

A good Joint Venture agreement is one which provides a comprehensive road map of the duties and obligations of both the parties. It minimizes complications when disputes arise.

Before finalizing a Joint Venture Agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties.

Before signing a Joint Venture Agreement the following must be properly addressed:

· Applicable law.

· Force Majeure.

· Holding shares.

· Transfer of shares.

· Board of Directors.

· General meeting.

· CEO/MD.

· Management Committee.

· Important decisions with consent of partners.

· Dividend policy.

· Funding.

· Access.

· Change of control.

· Non-Compete.

· Confidentiality.

· Indemnity.

· Assignment.

· Break of deadlock.

· Termination.

· Security and confidentiality.

· Legal compliance.

· Fees and payment terms.

· Proprietary rights.

· Auditing rights.

· Events of Defaults and Addressing.

· Dispute Resolution Mechanism.

· Time limits.

· Location of Arbitration.

· Number of Arbitrators.

· Interim measures/Provisional Remedies.

· Privacy Agreement.

· Non-compete Agreement.

· Confidentiality Agreement.

· Rules Applicable.

· Appeal & Enforcement.

· Be aware of local peculiarities.

· Survival terms after the termination of the Joint Venture agreement. The expiry or termination of this agreement shall be without prejudice to any rights which have already accrued to either of the parties under the Agreement. Things which need to be done under it to continue as if the Contract was in force.

· The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.

· Every Joint Venture agreement should be modified as applicable under different circumstances. One brush should not paint all the painting.

7. International Joint Venture Agreements

Joint Venture Agreements structured with in-country partners will be different from those meant for international partnership.

The greatest risks for International Joint Venture come from some emerging countries that are early entrants into Joint Venture, or those that have limited governmental support, ineffective legal enforcement, immature infrastructure, limited or nonexistent intellectual property protection or lack an understanding of foreign laws.

The most important areas to protect through an international Joint Venture agreement are security and confidentiality, legal compliance, fees and payment terms, proprietary rights, auditing rights and dispute resolution process. The legal systems in some countries might claim jurisdiction over any agreement regardless of which system the agreement specifies, and that other legal systems might have little respect for intellectual property rights.