If you have a business idea, but you lack the finance and experience to run it, a Joint Venture should be an option you should serious look at. Some business leaders do not see this as a good idea though, however, research have shown that it is a good way to grow your business.
In fact, overall, the value of joint ventures grew 20% annually from 1995 to 2015. Also, a global survey of 253 companies that used joint ventures to spur growth or optimize their product mix, more than 80% of the participants told us that the deals met or exceeded expectations.
The companies that experience success when it comes to joint ventures have developed the talents and routines to make joint ventures successful. You need to have the right foundation in place before the deal is signed, with solid agreement on strategy and ways of working—as well as on how to end the deal when the time is right.
First, let us look at what a joint venture is, its benefits and why you should consider going into a joint venture.
- What is a Joint Venture?
- How does a Joint Venture work
- How to get started with a Joint Venture
- Risks involved in a Joint Venture
- How do You Write a Joint Venture Agreement?
- What Should be in a Joint Venture Agreement?
- Do Joint Ventures Need to be Registered?
- What Are The Disadvantages of Joint Ventures?
- What is an Example of a Joint Venture?
- Who Signs on Behalf of a Joint Venture?
- Is Joint Venture Always 50 50?
- Do Joint Ventures File Tax Returns?
- Why do Companies do Joint Ventures?
- Guide to Joint Ventures
- 6 Tips For a Successful Joint Venture
- How to Structure a Joint Venture
- Types of Joint Venture
- Top 10 Joint Venture Advantages
- Joint Venture Strategies
- How to Form a Joint Venture
- Joint Venture Benefits
- Problems With Joint Ventures
- Real Estate Joint Venture
- How to Set up a Joint Venture in China
- 25 FAQs of Joint Ventures
- International Joint Ventures
- Accounting For Joint Ventures
- Basics of Joint Venture Agreements
- Joint Venture Checklist
- Establishing a Joint Venture in India
What is a Joint Venture?
A joint venture is an alliance between one or more businesses to share thing like
markets, intellectual property, assets, knowledge, and, of course, profits. From this definition, you will notice that a joint venture is difference from a merger because there is no transfer of ownership in the deal.
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Sometimes, companies with similar products and services can decide to go into a joint venture so as to have a stronger penetration in the market. Furthermore, due to local regulations, some markets can only be penetrated through a joint venture with a local business.
Another scenario where a joint venture might come into play is when a large companies forms a joint venture with a smaller business in order to quickly acquire critical intellectual property, technology, or resources otherwise hard to obtain, even with plenty of cash at their disposal.
Now that we know what a joint venture is, it will be very important for us to know how it works. Then you can decide if your companies is in need of a joint venture.
How does a Joint Venture work
Execution is the most challenging aspect of a joint venture, this is because it is easy to overlook the “hows” and “whats” in the excitement of the moment with this new partnership.
No matter how excited you are, it is important to keep in mind that all mergers, large or small, need to be planned in detail and executed following a strict plan in order to keep all the chances of success on your side.
In terms of WHAT, the contract should outline which party brings which assets (tangible and intangible) to the joint venture, as well as the objective of this strategic alliance.
Some business make the mistake of going online to get joint venture legal agreement templates, but is it important for you to seek the appropriate legal advice when entering such a business relationship.
How to get started with a Joint Venture
When starting a joint venture there are a lot of factors to put into consideration before signing the dotted line. To help you with the thinking process, below are some questions you need to give thoughts to according to
thebalancesmb.com.
- What do I sell, and how do I reach my target market?
- Who are my competitors? If they are better at generating revenues and reaching the marketplace than me, what do they have that I don’t?
- Are there geographical areas that will remain beyond reach without local partners, or acquisition costs that are simply too high?
- Do I need to develop know-how which has already been developed by a company or by an individual?
- Is there a logical business partner that could help me develop a vertical or horizontal market penetration?
- Do I have all the human resources I need in marketing, R&D, production, or operations? Is there a company I know which would have resources complementary to mine?
- How do I feel about combining resources? Do I like to lead by myself and act as a solitary business hero, or am I fine with sharing the pie? Do I think it is better to own 20% of a $200 million company or 100% of a $1 million small business?
- Do I have access to the right legal resources to structure the joint venture and ensure all aspects are duly covered?
- Are there local legal regulations I can bypass by partnering with a local business?
- Do I have access to successful joint venturers who can share their experience with me?
- Do I understand that going through the decision process entails sitting down and taking the time to write a full-fledged joint business plan?
- Am I aware that in the vast majority of cases, merging activities, even when not necessarily identical, will result in an inevitable workforce reduction? How do I feel about letting go of some of my most faithful employees?
- Am I looking at partnering because I don’t see another way out of my current business problems? (Joint venturing should not be considered as a last resort action, but rather as one course of action among several others. This decision needs to be taken in a careful and methodical manner.)
- Do I already know of a person or a company that I see has a real interest in partnering? Have I discussed this possibility with this person or with the person in charge of the targeted company? If yes, what is the general feeling? If no, then it is time to start a high-level discussion to gauge the level of interest.
- Is my company in need of more credibility? Do I know of a potential joint venture target, which has the level of credibility I am seeking?
- What are my strengths and weaknesses? What are the threats and opportunities in my target market?
- Do I have all the support I need to go through this major change in my business life? If I am going through personal turbulences, does it make sense to start such a major project?
Risks involved in a Joint Venture
Although a joint venture comes with a lot of benefits, you also need to consider the risks involved when entering into a partnership. The culture of the parties involved might have an effect on the business.
Even with similar strategic goals, two partners who lack trust in each other may lack the willingness to reciprocate. When joint venturing, be prepared to give and take.
A joint venture concept is only effective when there is a true willingness to move forward together. Not even signed contracts have value if mutual trust and acceptance of the terms are not present. Some of the other risk are, you might:
- Waste your time
- Lose money
- Let go of important technology
- Gain nothing of significance in return
- Squander your credibility
Even though these and other risks in joint ventures are present, the rewards can far outweigh pitfalls. So, carry out your research and evaluate the risks involved before and during the process.
You can find a lot of resources online to help you make an informed decision, however, consult with a legal practitioner for some of the legal implications that might come to play with your joint venture partnership.
How do You Write a Joint Venture Agreement?
A Joint Venture Agreement is an agreement between two or more parties for the purpose of embarking on a particular project. The joint venture is simply a partnership between two or more individuals or businesses who intend to accomplish a specific task or business goal. The joint venture is an entity which is separate and distinct from the parties.
This means that the parties maintain their separate identities while participating in the joint venture. The joint venture can registered as a partnership or a limited liability company and can terminate at a specific period of time or upon the accomplishment of the desired purpose or goal.
This document shares similar features with a Partnership Agreement. However, the major distinguishing factor is that while the partnership is an ongoing and continuing enterprise, the joint venture is usually created for a specific purpose and terminates upon the fulfillment of that project.
In addition to this, unlike a partnership, the parties in a joint venture agreement maintain a separate and distinct personalities different from the joint venture.
This document requires the following basic information:
- Names and addresses of the parties. In this document, the names and addresses of all the parties forming the joint venture will be required. Note that the parties to a joint venture may be individuals, companies or other organizations.
- Name of the joint venture. This is the name the parties intend to call the joint venture. Note that, the joint venture can be registered as a partnership or limited liability company.
- Purpose or aim of the joint venture. Every joint venture should have a specific purpose or project it intends to accomplish. For example NNPC (Nigeria National Petroleum Corporation) may form a joint venture with Shell BP for the exploration of crude oil in Nigeria.
- Particulars of initial contribution by the parties. The parties to a joint venture are usually required to make contributions to the joint venture. This contribution may be monetary or any other valuable consideration (for example, real property like building or land, provision of service or any other valuable consideration).
- Profit and loss sharing. One benefit of a joint venture is that only one party does not bear all the losses as losses as well as profits are shared between the parties.
- Duties and obligations of the parties. Every party in a joint venture is expected to have specific tasks or duties they are required to fulfill.
- Management of the joint venture. The document requires information about the person who will oversee the management of the joint venture. Information like the name of the manager, the manager’s remuneration, the procedure for appointing and removing a manager of the joint venture.
- Meetings/Decision making. This includes information about the date, time and location of meetings, the quorum of meeting and the manner of voting for decisions or resolutions to be made at the meetings.
- Term and Termination. Joint ventures are usually created for a fixed period or for the duration of a specific project. This means that it terminates at the expiration of the fixed period or upon the fulfillment of the joint venture’s goal or project. This document also allows parties to include other circumstances that may warrant the termination of the joint venture (for example, the inability of parties to fulfill their obligations).
What Should be in a Joint Venture Agreement?
Here are some of the key items we included that you can use as a jumping-off point to craft your own agreement:
- Simply stated, what will each party be contributing to the joint venture? It’s vital to know if the work will be split 50/50, who’s bringing what to the table, and what you can expect from the other person or company. Laying this out in your joint venture agreement in detail will ensure that you and your partner’s expectations are aligned.
- Who is responsible for the operations of the venture? The day-to-day stuff like managing the mailing list, handling customer service, doling out affiliate payments and keeping track of the overall finances of the project are essential to the project’s success. These duties can pile up, and if you don’t know who’s going to be taking care of them, they can either fall by the wayside or one party can end up resenting the other for the amount of work involved. So figure out how operations will be handled and compensated ahead of time and build it into the agreement.
- What is the term of the arrangement? Is there an end date? Deadlines are always important, but especially in joint ventures. Each party is likely running an entirely other business, so it’s important to have milestones specified throughout the project to keep everyone on track. Deadlines and end dates not only keep the project on track, but also allow each party to plan their other endeavors accordingly.
- Who owns what? Does each party own equal shares of the resulting products, or will the percentages vary? This ties in to the work contribution bit but another consideration is which party has access to a big audience of potential customers. If one person does 80 percent of the work, you need to decide if they’re going to own 80 percent of the product, or if some other measurement is appropriate.
- How can branding, intellectual property, and the products/services created in the joint venture be used by each party outside of the joint venture? (As in, can one of you take the product you both helped to create and sell it in a new market by yourself?) Knowing how the intellectual property and other assets created in the JV will be used ahead of time will cut down on post-project stresses tenfold and make sure everyone is clear on if, how and when they can use the project assets.
- How will finances be handled? That is, when will you guys receive revenue from the venture? What sorts of things are authorized to be deducted from expenses? Will both parties split the initial startup costs 50/50? Money is one of the main stressors in joint ventures, and setting these percentages in stone will eliminate arguments later on.
- What happens if one person can’t perform their duties? Maybe they sign on to another project and aren’t contributing their previously-stated share to the product, or have gotten sick or had a family emergency. In any case, it’s good to know in advance what the consequences will be for backing out or slacking off and whether or not the project will go in and in what capacity.
- What’s the plan if you guys disagree, and the conflict can’t be resolved between you? Even with the joint venture agreement in place, there’s still a chance you’ll have disagreements, but the real problem comes about when you can’t come to an agreeable resolution. Will you consult a neutral third party, such as a mediator, to help you resolve the issue? Or have the option to go straight to court? The plan of action is up to you, but you need to have one.
The list seems long, but for the right partner, it’s worth it. It’s all about preparing to work together; preparing for the investment of both time and money, and most of all; preparing to unleash a product for your clients that is so much better than you could ever create on your own.
Do Joint Ventures Need to be Registered?
No. The word joint venture is confusing. It seems like it must have distinct legal meaning. But, it does not. A joint venture may be just a contractual relationship where two or more parties agree to contribute certain resources toward an end goal, typically servicing a certain geographic area or type of customer.
At times, the parties to a joint venture create a separate entity, such as a limited liability company or corporation. In this case, the entities are registered (formed) with the Secretary of State. Other times, the joint venture will be a simple partnership. In Texas, general partnerships do not need to be registered with the Secretary of State.
What Are The Disadvantages of Joint Ventures?
Joint venture contracts commonly limit the outside activities of participant companies while the project is in progress. Each company involved in a joint venture may be required to sign exclusivity agreements or a non-compete agreement that affects current relationships with vendors or other business contacts.
The contract under which joint ventures are created may also expose each company to liability inherent to a partnership unless a separate business entity is established for the joint venture. Furthermore, while companies participating in a joint venture share control, work activities, and use of resources are not always divided equally.
What is an Example of a Joint Venture?
A joint venture allows businesses to grow and gain access to markets or expertise beyond their existing capability. By teaming up with another company, many small businesses use joint venture agreements to share specialized expertise, such as technical skills or intellectual property, as well as spread the risks and costs of developing a new market or product.
Joint ventures are usually formed by two businesses with complementary strengths. For example, a technology company may create a partnership with a marketing company to bring an innovative product to market. An overseas business could join forces with a local distribution company in order to sell its products in that local market.
Joint ventures can dramatically increase the reach and scale of both businesses while reducing the risk. However, they aren’t without their pitfalls and poorly conceived partnerships can harm both parties. It pays to understand what joint ventures are, as well as their advantages and disadvantages.
The following are examples of Joint Venture:
Example 1
Google’s parent company and the pharma company Glaxo and Smith decided to enter into a joint venture agreement to produce bioelectric medicines the ratio of the ownership was 45%-55%. The joint venture lasted and was committed for 7 years with a capital of Euro 540 million.
Example 2
Another example of a joint venture is the joint venture between the taxi giant UBER and the heavy vehicle manufacturer Volvo. The joint venture goal was to produce driverless cars The ratio of ownership is 50%-50%. The business worth was $350 million as per the agreement in the joint venture.
Example 3
Sony and Ericson’s example is also a good example of a Joint Venture as they joined hands to manufacture smartphones and gadgets. After several operating years, Sony eventually acquired Ericson mobile manufacturing division.
Example 4
The 2008 Joint venture of NBC Universal Television Group (Comcast) and Disney ABC Television Group (The Walt Disney Company). The objective of the joint venture was to create a video streaming application or a website named “HULU”. This product provides streaming quality content which is on computers, laptops, or mobile phones. The product became a huge success with the offering lining upto $1 billion.
Example 5
Another famous example of joint venture formation is the agreement between Kellogg and Wilmar International Limited. Kellogg International entered the market in order to expand its presence in the Chinese market to sell cereals and other snack foods to consumers in China.
Joining hands together with Wilmar resulted in a profitable synergic relationship for both the companies as Wilmar International provided extensive distribution and supply chain network to Kellogg International and also Kellogg managed to enter into a new geography with this agreement and relationship.
Example 6
A limited and B limited have both different skill sets. A has a spare land where also he has manpower and labor supply in abundance. On the other hand, B limited has expertise in the construction of commercial and residential complexes for housing but needs land to construct in upon. Hence this becomes a pure example of a true joint venture where A Limited and B Limited decide to enter into a joint venture agreement and do business.
Who Signs on Behalf of a Joint Venture?
Joint venture agreements are accommodating and can be drafted to merge companies of any size on specific projects. Doing so allows targeted outputs to be delivered more efficiently and effectively. The contract ensures that all parties understand their rights, responsibilities, and limitations.
The steps below outline how joint-venture agreements work:
- Step 1. Discuss opportunities with potential partners
- Step 2. Hire business lawyers to offer legal advice
- Step 3. Select the correct type of joint venture
- Step 4. Draft the first iteration of your joint venture agreement
- Step 5. Pay your taxes correctly and promptly
- Step 6. Seek ongoing advice to maintain legal compliance
- Step 7. Enter JV agreement amendments as necessary
Although JV agreements are similar to a partnership agreement , there are still several differences. A joint venture agreement is used in the commission for a single activity for a specified period. Partnership agreements indicate an ongoing, long-term relationship.
Is Joint Venture Always 50 50?
In a joint venture between two corporations, each corporation invents an agreed upon portion of capital or resources to fund the venture. A joint venture may have a 50-50 ownership split, or another split like 60-40 or 70-30. The majority corporate owner or investor usually has more control in decisions and earns a great share of the partnership earnings.
While you can form domestic joint ventures, many joint venture partnerships are formed by companies in different countries. As a U.S. business, you might form a venture with a foreign company to market your products to an emerging or highly motivated foreign customer market.
Do Joint Ventures File Tax Returns?
Joint ventures are formalized by the signing of a joint venture agreement, a contract specifying the rights and responsibilities of each party. Since many joint ventures are created for manufacturing or other for-profit purposes, some may wonder whether a joint venture agreement is required for tax purposes.
Because any profits made from a joint venture flow through to the individual members of the venture, the portion of the profit that each member receives is claimed on that member’s individual or corporate tax returns.
The venture itself does not make a tax filing on any of the funds that flow through it. Like general partnerships, the IRS does not consider joint ventures as a business structure and does not require a copy of the joint venture agreement or other proof of the venture’s existence.
Why do Companies do Joint Ventures?
Forming a joint venture is a common business strategy used among companies seeking to achieve a common goal or reach a specific consumer market. Entering into a joint venture involves two or more businesses coming together under a contractual agreement to work together on a specific project for a certain period of time. Businesses work as partners and pool resources to make the project profitable for all parties involved.
When a joint venture is successful, participating companies share in the profit as agreed upon in the initial contract. Likewise, a failure in a joint venture results in all participating companies realizing their portion of the losses. Forming a joint venture has unique benefits that make it an attractive option for some businesses.
Shared Resources and Responsibilities
More often than not, a company enters into a joint venture because it lacks the required knowledge, human capital, technology, or access to a specific market that is necessary to be successful in pursuing the project on its own. Coming together with another business affords each party access to the resources of the other participating company without having to spend excessive amounts of capital to obtain it.
For example, let’s say that Company A may own the facilities and manufacturing production technology that Company B needs to create and ultimately distribute a new product.
A joint venture between the two companies gives Company B access to the equipment without purchasing or leasing it, while Company A is able to participate in the production of a product it did not incur costs to develop. Each company benefits when the joint venture is successful, and neither is left to complete the project alone.
Flexibility for Participating Companies
Unlike a business merger or an acquisition, a joint venture is a temporary contract between participating companies that dissolves at a specific future date or when the project is completed. The companies entering into a joint venture are not required to create a new business entity under which the project is then completed, providing a degree of flexibility not found in more permanent business strategies.
Also, participating companies do not need to give up control of their businesses to another entity, nor do they have to cease ongoing business operations while the joint venture is underway. Each company is able to maintain its own identity and can easily return to normal business operations once the joint venture is complete.
Shared Business Risk
Joint ventures also provide the benefit of having exposure to problems spread among participating companies. The creation of a new product or delivery of a new service carries a great deal of risk for a business, and many companies are not able to manage that risk alone.
Under a joint venture, each company contributes a portion of the resources needed to bring the product or service to market, making the heavy financial burden of research and development less of a challenge. The risk of the project failing and having a negative impact on profitability is lower because the costs associated with the project are distributed among each of the participating companies.
Guide to Joint Ventures
Introduction: A Joint Venture or JV is an arrangement between parties wherein two or more entities come together, bringing a specific skill, expertise, know-how, funding, approvals or other recourses etc., to run a business in collaboration with each other, with a common motive of achieving commercial benefits.
Purpose: A Joint Venture can be created for various reasons like:
- Leveraging resources especially technological, intellectual property (IPRs), know-how, infrastructure etc.;
- Combining capabilities and skills;
- Financial collaboration;
- Sharing risk and liabilities arising out of new venture;
- Accessing new markets;
- To attain business diversification especially non-core businesses.
Types: A Joint Venture can be in form of Structural like JV Company and JV LLP, JV Partnership (unstructured but contractual) or Contractual Obligation.
Company: In case of JV Companies, the parties to JV would hold shares in agreed percentage and on shall decide on terms and conditions defining the rights and obligations of the parties. The charter document of the Company i.e.
Memorandum and Articles of Association (MOA&AOA) alongside the JV Agreement should capture all the agreed terms and should be in consonance with the provisions of Companies Act 2013 and rules and regulations thereunder. It is not always necessary to incorporate a fresh JV entity and JV entity can be created by the acquisition of shares of the existing company by the JV Partner and making necessary amendments in the MOA & AOA of the company.
LLP: In the case of JV LLP, likewise to the company, the holding or sharing ration between the parties has to be agreed upon alongside other terms and conditions to be recorded in LLP deed (to be in terms of LLP Act 2008) as well as JV Agreement. The LLP gives the benefit of limited liability and separate legal entity to the parties involved and alongside give the flexibility to organize internal structure as partnership basis the mutual agreement.
In case of a JV Company and JV LLP, an already existing Company or body corporate can directly become a party.
Partnership: A partnership firm (governed by Partnership Act 1932) can also be created for the purpose of JV giving more flexibility in terms of ease of arrangement, no or very few compliances and simpler understanding between the parties. A partnership essentially represents a contractual relationship between the parties to carry on a business and share profit.
A JV partnership is more of fusion of Structural and Contractual JV form. The Partnership JV mode has limitations like unlimited liabilities of partners and no separate legal recognition to the firm and are most suited for smaller projects.
Contractual JVs: Contractual JVs are in form of cooperation agreements or strategic alliances/collaborations. Under this kind of JVs parties can collaborate for specific projects or
assignments and may work as independent contractors. These types of JVs are generally project specific or for short term assignments and give flexibilities to parties not to bind themselves in a more permanent or stringent structure.
The objective of the parties is to generally earn profit on completion of the common target or purpose. These JVs are generally in nature of purchase agreements, distribution agreements, technology transfer agreements, promotional collaborations, intellectual advice or sharing etc. Also, it is quintessential to deliberate upon applicable tax provisions and tax implication before entering into any such strategic alliance agreement.
Documents to be executed: In case of JV Company, the parties would require to execute a JV Agreement (JV) or a Shareholder’s Agreement (SHA) along with AOA and MOA. Likewise in case of LLP, a LLP Deed will be required. Other ancillary agreements like employment, trademarks/patents licensing or assignment, technology transfer agreement etc. may be needed depending upon the nature of the Transaction.
Key Clauses: While each JV differs from another and have range of terms and conditions and clauses, but there are certain critical clauses that are covered in almost all the JV Documents.
- Object Clause defining the purpose and scope of JV;
- Shareholding, sharing & distribution of profits, risk and liabilities;
- Parties Contribution in form of funds, technology, know how etc.;
- Future fund raising either by way of equity, loan, anti dilution etc.
- Composition of Board of Directors and Management rights and responsibilities and affirmative rights in case of Board meetings and shareholders meeting;
- Exit or Transfer of Shares any restrictions thereof including right of first refusal (ROFR) and Tag along and drag along rights;
- Non-compete provisions;
- Confidentiality clause;
- Force Majeure clause;
- Dispute resolution etc.
Statutory & Contractual considerations: While deliberating a JV, parties must take into consideration the applicable statutory and regulatory provisions and restrictions. Contractually parties have liberty to negotiate and agree on terms and conditions but contractual rights cannot supersede statutory provisions. There are certain key statutory provisions, which requires deliberation, while discussing and strategizing a JV formation and stricture.
Companies Act: In case of JV Company, the shareholding of the parties plays a crucial role in deciding the control and decision making of the JV entity. The restrictions and thresholds are majorly governed by Companies Act. The decision making in companies are governed by board of directors and shareholders and the actions/decisions have to be in compliance with provision of the Companies Act.
For matters to be decided by shareholders have to be either through ordinary resolution (approval of 50% shareholders present voting required) or special resolution (approval of 75% shareholders present and voting required).
Thus as a statutory right any JV partner holding more than 25% in JV Company would be able to exercise certain amount of control and the ones holding more than 50% would be able to exercise total control. Legally the provision can be made stringent and therefore contractually special rights can be accorded to the JV partner in form of veto rights in shareholder’s as well as management decisions.
Likewise, as a statutory right, any JV partner holding 10% or more shares can exercise minority rights like requisitioning a shareholder’s meeting, withholding consent to call general meeting at shorter notice or initiating action of oppression and mismanagement.
FDI: Foreign investment in JV companies can be made under Automatic Route or Approval Route. FDI is sector-specific wherein now almost in all sectors 100% FDI is allowed under Automatic route although in some sectors limits are prescribed (Sectoral caps). Under Automatic Route only intimation is required to the Regional Office of RBI within 30 days of receipts of funds.
For investment beyond sectoral caps, prior permission is required to be obtained from Foreign Investment Promotion Board (FIPB). It is easy to procure FDI in JV Company whereas in case of LLP, FDI is permitted only under government approval route and also LLPs with FDI are not eligible to make downstream investments.
FPI Regulations: In case of listed companies, any investment by Foreign Institutional Investor (FII) or Qualified Foreign Investor (QFI) will have to comply with the provisions of SEBI (Foreign Portfolio Investment) Regulations 2014 (SEBI FPI Regulations).
Competition Commission Act 2002 (CCI Act): Formation of any JV which causes or is capable of causing an appreciable adverse effect on competition is void under CCI Act. Hence the terms and conditions of a JV agreement needs to be drafted carefully in a manner that it is not oppressive of competition. Also, combination (mergers or acquisitions or JVs) of value above the prescribed thresholds require prior approval of CCI.
Special Acts Governing Specific Industry: While negotiating and structuring JVs of specific sectors like Telecom (TRAI), Insurance(IRDA) etc. the sector specific laws and governing provisions and approvals are also to be kept in mind. In case of listed companies, regulations of SEBI and stock exchange approvals etc. are also to be mindful of.
6 Tips For a Successful Joint Venture
A clear agreement is an essential part of building a good joint venture relationship. Here are some additional key considerations.
1. Plan carefully
Every partnership should begin with careful planning. Review your business strategy to see if a joint venture is the best way to achieve your aims. Use our SWOT analysis example to consider the strengths and weaknesses of both businesses and see if your partner is a good match.
2. Communication
Communication is a key part of building a relationship. Make sure that everyone involved understands the basics of the joint venture agreement, as well as the fine details, including goals, financial contributions, human resources and expected length of the deal. It’s usually a good idea to arrange regular, face-to-face meetings for all the key people involved in the joint venture. In some cases, you may have to legally inform and consult your employees.
3. Build trust
Sharing information openly, particularly on financial matters, helps build trust and credibility, and can prevent partners from becoming suspicious of each other. The more trust there is, the better the chances that your relationship will work.
4. Monitor performance
It’s essential that everyone knows what you are trying to achieve and works towards the same goals. Establishing clear performance indicators lets you measure performance and set targets and can give you an early warning of potential problems.
5. Be flexible
With two companies making decisions, things can get complex even with simple projects. You should aim for a flexible relationship. Regularly review how you could improve the way things work and whether you should change your objectives.
6. Find a way to deal with problems
Even in the best relationship, you’ll almost certainly have problems from time to time. Approach any disagreement positively, looking for ‘win-win’ solutions rather than trying to score points off each other. Your original joint venture agreement should set out agreed dispute resolution procedures in case you are unable to resolve your differences.
How to Structure a Joint Venture
Common legal structures used in joint ventures are:
A limited company
This is a company whose members have limited liability. Liability can be limited by shares or limited by guarantee. In the case of a company limited by shares, liability is limited to the amount, if any, unpaid on the shares held by the company’s members. In the case of a company limited by guarantee, liability is limited to the amount that the members say they will contribute to the company if it goes into liquidation.
What are the benefits of choosing a limited company?
Benefits of choosing a limited company to be the joint venture entity is that this is a well-known structure underpinned by well-established principles for financing and investment, governance and accountability. Plus, there are clearly trodden paths to go down in the event of disputes or insolvency, all of which investors might think are positives when considering any investment into a joint venture entity that is independent from the joint venture partners.
This type of structure also provides the parties to a joint venture with the tools to limit their risk as the joint venture company will most likely enter into its own contracts, invest and borrow by itself and incur liabilities and rights by itself without the joint venture partners being directly involved.
Having said this, a limited company and its board of directors will have to comply with obligations under the Companies Act 2006 which can be time-consuming (and costly if they are not undertaken correctly or on time). The directors of a company will have personal liability to act in the interests of the company and its shareholders as a whole.
So the joint venture parties should be clear on directors’ responsibilities and what is expected from a governance perspective before setting up a company. Setting up and maintaining a company can be a big commitment and so this type of structure is more suitable to high-value projects, or projects that are ongoing in time, or projects that require some other form of significant investment from the joint venture parties.
A limited liability partnership
This is a form of partnership that must comply with the Limited Liability Partnerships Act 2000. A limited liability partnership is legally separate from its members and so in most circumstances, the entity will be liable and not its members. It can enter into contracts and hold property.
This type of structure is useful where there are multiple individuals involved in the project. This form of legal structure is often used by individuals in professional services such as accounting and law as it provides the tax regime of a traditional partnership while at the same time limiting the liability of its members.
One factor to consider however is that in a partnership, profits will go directly to the partners, whereas in a company, the parties can receive dividends – this distinction may have tax consequences for a party and is one of the reasons why it is important to get tax advice before a legal structure is chosen.
A legal partnership
This is a form of partnership that must comply with the Partnership Act 1890. It is not a separate legal entity and will often be governed by a partnership agreement between the joint venture participants. The creation of a legal partnership means that the partners will have some legal obligations that they will have to comply with.
But compared to the well-established procedure for establishing a company, establishing what counts as a ‘legal partnership’ can depend on the facts of the specific project. There may be certain tax advantages for being recognised as a legal partnership and the parties should investigate this further.
The potential risks of using a partnership include the fact that partners will be jointly liable for the other partners’ actions on behalf of the partnership without any limit on that liability. This in itself may be a risk that joint venture partners do not want to take.
Assets that are contributed or transferred to the partnership will be committed to the partnership but are often dealt with in accordance with the partnership agreement and so it is advisable to take legal guidance on the drafting of the partnership agreement to ensure that your interests are protected.
How to structure your management team in a joint venture
In a joint venture that is operating through a separate legal entity, the structure of the management team will be broadly set out in statute through default provisions.
(Either in the model articles of association or otherwise as set out in the Companies Act 2006 in the case of a limited company, or as set out in the Limited Liability Partnerships Regulations 2001 (SI 2001/1090) (as amended) in the case of a limited liability partnership.)
In both these regimes, however, parties are able in large part to agree their own arrangements for the management and control of the entity on a day-to-day basis. The size and complexity of the management team will depend on the scale and independence of the joint venture (for example, whether it has any employees and customers of its own).
How a management team will be structured will depend on how equal the parties’ bargaining power is. For example, a party that is contributing most of the funds to a venture or whose commitment or presence in the project is important for its success, may expect to have more control and rights over how the venture is run.
This can take the form of a majority shareholding in the case of a company limited by shares or provisions for additional or superior voting rights or veto rights when decisions relating to the project have to be made (sometimes called ‘reserved matters’) being included in the joint venture agreement or shareholders’ agreement.
Who the parties nominate to the venture’s management team can also depend on whether each party is allowed to nominate candidates they already employ or are familiar with or whether the nominations are independent appointments?
Usually, joint venture parties are allowed to have their own representation on the management team but the joint venture may also have independent representatives too, to assist with any disputes between the parties and to make sure that the interests of the project as a whole are being considered.
Types of Joint Venture
Following are the types are as follows:
![Types of Joint Ventures 2](https://i0.wp.com/cdn.educba.com/academy/wp-content/uploads/2020/05/Types-of-Joint-Venture-2.jpg.webp?w=640&ssl=1)
1. Project Joint Venture
This is the most common form of joint venture. It could be created for purposes like creating a toll road or an office complex and so on. Key characteristic is that the purpose is defined and limited to the completion of the single project as per the agreement of the venture. Once the project is completed, the Joint Venture comes to an end.
Recently, in Feb 2020, Trilogy metal and South 32 completed a joint venture in Vancouver, and formed the company Ambler metals LLC, with the purpose of advancement of Arctic & Bornite projects & exploration of the Ambler mining district.
2. Functional Joint Venture
This is a format in which both the companies come together because each has expertise in one or the other business functions and therefore they wish to create a symbiotic environment for each other and benefit from the synergies so developed.
For example, if a company has owned fleet of transport while another has extra storage space, both can help each other out in inventory management and save each other’s costs of having individual fleets or storage spaces and use them in their idle time.
3. Vertical Joint Venture
As in the vertical M&A, the Joint venture is between two business entities in the same supply chain. This is done when one of the entities produces a particular kind of good for which it needs a raw material of specialized nature. For this purpose, it can invest with the supplier to develop and maintain the capacity of such production and avoid the uncertainty arising due to unavailability of this input material.
This is the case when the production company wishes to maintain a certain level of secrecy or the demand for this input is low however the demand for the final product is very high. A real life example would be a particular kind of computer chip that is used in production of certain patented technology items. This is even the case when the costs can be saved for example Marks & Spencer has its sweat shops in south east Asian countries because it is cost effective.
4. Horizontal Joint Venture
Similarly, this form of Joint venture is between two business entities producing the same goods or services. The benefit of this is that one of the companies can enter into a new market such as a geographical region.
The local partner has the know-how of the local country such as an established distribution network while the foreign partner can have the economies of scale. Further, at times regulations demand the involvement of a local company and therefore Joint venture is one of the possible modes to enter such markets.
Top 10 Joint Venture Advantages
A joint venture offers several advantages to its participants. It can help a business grow faster, increase productivity, and generate additional profits.
1. Shared investment
Each party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company.
2. Shared expenses
Each party shares a common pool of resources, which can bring down costs on an overall basis.
3. Technical expertise and know-how
Each party to the business often brings specialized expertise and knowledge, which helps make the joint venture strong enough to move aggressively in a specified direction.
4. New market penetration
A joint venture may enable companies to enter a new market very quickly, as all relevant regulations and logistics are taken care of by the local player. A common joint venture arrangement is one between a company headquartered in country “A” and a company headquartered in country “B” that wants to obtain access to the marketplace in country “A”.
With the formation of the joint venture, the companies are able to expand their product portfolio and market size, and the country B company obtains easy access to the marketplace in country A.
5. New revenue streams
Small businesses often face having limited resources and access to capital for growth projects. By entering into a joint venture with a larger company with more financial resources, the small business can expand more quickly. The larger company’s extensive distribution channels may also provide the smaller firm with larger and/or more diversified revenue streams.
6. Intellectual property gains
Advanced technology is often difficult for businesses to create in-house. Therefore, companies often enter into joint ventures with technology-rich firms to gain access to such assets without having to spend the time and money to develop the assets for themselves in-house.
A large firm with good access to financing may contribute their working capital strength to a joint venture with a firm that has only limited financing capabilities but that can provide key technology for the development of products or services.
7. Synergy benefits
Joint ventures can offer the same type of synergy benefits that companies often look for in mergers and acquisitions – either financial synergy which lowers the cost of capital, or operational synergy where two firms working together increases operational efficiency.
8. Enhanced credibility
It typically takes a significant period of time for a young business to build market credibility and a strong customer base. For such companies, forming a joint venture with a larger, well-known brand can help them achieve enhanced marketplace visibility and credibility more quickly.
9. Barriers to competition
One of the reasons for forming a joint venture is also to avoid competition and pricing pressure. Through collaboration with other companies, businesses can sometimes effectively erect barriers for competitors that make it difficult for them to penetrate the marketplace.
10. Improved economies of scale
A bigger company always enjoy the economies of scale, which again is enjoyed by all the parties in the JV. This refers back to the notion of operational synergy.
Joint Venture Strategies
A strategic joint venture is a business agreement between two companies who make the active decision to work together, with a collective aim of achieving a specific set of goals and increase their respective bottom lines.
Through this arrangement, the companies effectively complement one another’s strengths, while compensating for one another’s weaknesses. Both companies share in the returns of the joint venture, while equally absorbing the potential risks involved. Strategic joint ventures may be seen as strategic alliances, though the latter may or may not entail a binding legal agreement, while the former does.
Unlike mergers and acquisitions, strategic joint ventures do not necessarily have to be permanent partnerships. Furthermore, both companies maintain their independence and retain their identities as individual companies, thus allowing each one to pursue business models outside the partnership mandate.
There is a multitude of reasons why two companies might choose to enter into a strategic joint venture. For one, strategic joint ventures let companies pursue larger opportunities than they could attempt autonomously. For example, such partnerships let companies establish a presence in a foreign country or gain competitive advantages in a particular market.
To cite a more specific example, strategic joint ventures have helped many companies enter emerging markets that would be otherwise difficult to break into, without the benefit of local intelligence and connections to on-the-ground operatives in the region.
In such arrangements, one company typically contributes more to the operational costs, while the other company contributes know-how and operational experience. The share of the venture owned by each company largely depends on their individual contributions. But the most successful strategic joint ventures are those where each founding member firm winds up with an equal stake.
How to Form a Joint Venture
The most common reasons for businesses to decide to enter into a joint venture include gaining access to new markets, increasing market power, and sharing resources. Unlike a partnership or merger, each of the businesses in a joint venture maintains its independent business identity and simply agrees to work together in a limited and specific way to achieve a common business goal.
Choose Your Joint Venture Partner
To create a joint venture, the first thing you’ll need to do is choose a joint venture partner. Having a well-defined business objective in mind will allow you to look for and identify a co-venturer that complements your business and can help you achieve your goals.
Perhaps you have developed an exciting new technology but lack adequate resources to access the right market for your product. You might look for a company with a good market presence in that area and then you could jointly sell, promote, and distribute your product.
Once you’ve identified a company that is a good match with your business goals, you’ll want to spend time focusing on whether your two companies are a good fit. To create a successful alliance, your businesses–and the key players in each company–will need to be able to work well together. Spend time getting to know the people you’ll be working with and the core values of the business.
What is their attitude toward collaboration? Do the business leaders share your level of commitment? Will the corporate cultures of your two companies mesh? How financially secure is your potential partner? What kind of management team do they have in place? How is the company performing in terms of production, marketing, and personnel? Most importantly, are the people in charge people you can trust? Without trust and some shared core values, it will be more difficult to make decisions and work effectively together.
Decide on the Type of Joint Venture You Want
There are two basic ways you can set up your joint venture arrangement with another party. One alternative is to form a new separate legal entity for the joint venture business with each party having an ownership interest in the new entity. For example, the two parties to a joint venture might decide to form a corporation, partnership, or limited liability company, and the joint venture’s business would be conducted through the new entity.
Alternatively, you might decide to establish your joint venture through a contractual relationship. Under this type of arrangement, the parties would enter into a contract setting forth the terms of the business relationship. This is generally a less expensive option.
The main considerations for choosing one form over the other are:
- the complexity of your proposed business venture
- how much liability protection you want for your joint venture business, and
- the amount of money you want to spend establishing the joint venture.
If the venture is relatively small, the costs associated with creating a separate legal entity may not be justified. On the other hand, if liability is a concern, you may want to have the extra protection you get by doing business through a corporation or limited liability company.
Draft Your Joint Venture Agreement
Once you have identified your co-venturer and thought about what type of joint venture you want, you can start putting in writing some basic terms of your proposed arrangement. There are a variety of ways to do this. If you’re in the preliminary stages, you could start by creating a term sheet or letter of intent.
A term sheet is a document that outlines the material terms and conditions of a business transaction. A letter of intent also summarizes the principal terms and conditions (both agreed upon or to be agreed upon) relating to the proposed joint venture. Unlike term sheets however, letters of intent are signed by the parties and may be binding.
Some people skip term sheets and letters of intent and proceed directly to drafting their joint venture agreement. Joint venture agreements can be lengthy and complicated depending upon the proposed business venture and relationship between the parties.
The key business people in the deal and their lawyers and accountants will need to work through the threshold issues, including how profits and losses will be divided, the formation and governance structure, the contributions by each party, the venture’s tax treatment, its commercial arrangements, and exit strategies for the parties. The agreement usually also has a business description.
This should be carefully considered by both parties as it can highlight differences in opinion regarding the scope and type of activities in which the venture should engage. You may want to form a deal team that has the assigned responsibility of navigating through these issues and executing the deal.
Joint Venture Benefits
One of the most important joint venture advantages is that it can help your business grow faster, increase productivity and generate greater profits. Other benefits of joint ventures include:
- access to new markets and distribution networks
- increased capacity
- sharing of risks and costs (ie liability) with a partner
- access to new knowledge and expertise, including specialised staff
- access to greater resources, for example, technology and finance
Joint ventures often enable growth without having to borrow funds or look for outside investors. You may be able to:
- use your joint venture partner’s customer database to market your product
- offer your partner’s services and products to your existing customers
- join forces in purchasing, research and development
Another benefit of a joint venture is its flexibility. For example, a joint venture can have a limited lifespan and only cover part of what you do, thus limiting the commitment for both parties and the business’ exposure.
Joint ventures are especially popular with businesses operating in different countries, eg within the transport and travel industries.
Problems With Joint Ventures
Joint ventures can pose significant risks relating to liabilities and the potential for conflicts and disputes between partners. Problems are likely to arise if:
- the objectives of the venture are unclear
- the communication between partners is not great
- the partners expect different things from the joint venture
- the level of expertise and investment isn’t equally matched
- the work and resources aren’t distributed equally
- the different cultures and management styles pose barriers to co-operation
- the leadership and support is not there in the early stages
- the venture’s contractual limitations pose a risk to a partner’s core business operations
Partnering with another business can be complex. It takes time and effort to build the right business relationship and, even then, it can be difficult to completely avoid all the issues.
Real Estate Joint Venture
A real estate joint venture (JV) is a deal between multiple parties to work together and combine resources to develop a real estate project. Most large projects are financed and developed as a result of real estate joint ventures. JVs allow real estate operators (individuals with extensive experience managing real estate projects) to work with real estate capital providers (entities that can supply capital for a real estate project).
The basic principle surrounding a Real Estate Joint Venture can be illustrated through the following example. Company X owns a plot of land in the city of Los Angeles. However, Company X is based out of New York.
John was born in Los Angeles and grew up there. In addition, John lives next to the plot of land. Company X wants to develop the land and build an office block there. Company X gets into a Joint Venture with John where Company X takes care of the capital and John provides the expertise.
A real estate JV agreement involves the following factors:
1. Distribution of profits
An important distinction to make when drafting the terms for a joint venture is how the members will distribute profits generated from the project. Compensation may not necessarily be equally distributed. For example, more active members, or members that have invested more into the project may be compensated better than passive members.
2. Capital contribution
The JV agreement needs to specify the exact amount of capital contribution expected from each member. In addition, it must also specify when this capital is due. For example, a capital owner may agree to contribute 25% of the required capital but only if this contribution is made at the last stage of the development process (last money in).
3. Management and control
The JV agreement is expected to specify in detail the exact structure of the JV and the responsibilities of both parties regarding the management of the Real Estate JV project.
4. Exit mechanism
It is essential for a JV agreement to detail how and when the JV will end. Usually, it is in the best interest of both parties to make the dissolution of the JV as economical as possible (i.e., avoid legal fees, etc.). In addition, the JV agreement must also list out all the events that might allow one or both parties to trigger a premature dissolution of the JV.
How to Set up a Joint Venture in China
Joint Ventures (JV) are one of the corporate structures available to foreign investors to invest in and have access to the Chinese market.
Differently from WFOEs (Wholly Foreign-owned Entity) and Representative Offices, a joint venture involves at least one Chinese partner which can be either an individual or a corporate.
Although local partnerships are not needed for many sectors which are now open to foreign investment, China has a Negative List Approach against the previous Investment Catalogue, there are several reasons why a joint venture in China could still make sense.
For example:
- Entering a new or emerging market with a local ready-made structure
- Increasing efficiency by combining assets and operations
- Sharing risk in complex and bureaucratic investment projects
- Approaching skills, capabilities, and other tangible benefits that only a local structured partner could offer
In short, a Joint Venture in China is a limited liability company that is created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, rewards, and the management of the joint venture.
Establishment Procedures
The incorporation process of a JV normally takes 5 to 6 months as it can be a complex corporate vehicle.
Before moving forward, it is important to determine if the foreign company is qualified to create a JV under China’s Negative List.
Serving as an entry guide for foreign investors in China, the Negative List refers to a comprehensive manual outlining certain areas where foreign investment and businesses are prohibited or restricted.
For industries listed under “restricted” terms, foreign companies are still allowed to invest in China but must meet specific conditions such as limit equity ratio and remaining shareholding under 51%.
Though there is no minimum registered capital required, the proportion of the investment contributed by the foreign investors shall generally not be less than 25% of the registered capital of the company.
For the Service industry, it should be no less than USD 100,000, and the manufacturing industry is no less than USD 150,000.
Once the partners are chosen, several documents need to be drafted or obtained, including the following:
1. Letter of Intent
After the foreign and Chinese counterparts reach an agreement on establishing a joint venture together, a letter of intent (LOI) should be drafted. The LOI is a non-binding document and normally states the prerequisites and conditions of co-operation in the Chinese market.
2. Project Proposal
Following the letter of intent, the Chinese partner is responsible for the preparation of the project proposal. The project proposal should contain the overall assumptions of the structure in which both sides will be stated as investors.
3. Feasibility Study
When receiving the approval of the project proposal, a feasibility study shall be prepared by both parties. As an indispensable step before investment decisions and a basis for further work, it analyzes the viability of the idea and meanwhile it gives a reality check to the future cooperation between the two or more investors.
4. Name approval of the JV
The local Administration of Industry and Commerce (AIC) in the municipality which is responsible for the registered address of JVs normally requires a list of potential company names to be submitted and holds the final say in whether one of those names is approved or not. JVs should apply for the name registration within 30 days upon receiving the approval of the project proposal.
5. JV Contract & Articles of Association
The purpose of a JV contract and Articles of Association is to lay down the principles of the organization, its methods of operation, and management rules or principles to be adopted. Both documents need to be in written forms and must be signed by all partners.
6. Leasing Contract of the JV
While preparing the incorporation steps, investors need to select a leased office space for future business operations and to domiciliate the corporate entity. The need for a registered address and the assignment of entities to commercial or industrial locations depends on the specific business and industry that the JV will target.
7. Certificate of approval of the JV
Once the above documents are ready and accepted by the AIC, the Municipal Commission of Commerce (MOC) will issue a formal approval letter in favor of the Joint Venture incorporation assigning the entity an enterprise code. An approval certificate is usually issued within 10 days, closing the first phase of the incorporation process.
25 FAQs of Joint Ventures
1 What is a Joint Venture?
A “Joint Venture” is a structure where two (or more) businesses create a separate Joint Venture business to pursue a common goal. But any kind of collaboration with another company could be described as a Joint Venture.
2 What types of Joint Ventures are there?
There are many examples of collaborations between businesses – common ones are the following structures where two or more people share resources and risk:
- setting up a separate Joint Venture company where each party has a shareholding and can appoint directors to carry out a specific (and often finite) project such as development of a new product
- contractual arrangements such as entering into a distribution agreement
- forming a partnership
- merging two businesses.
The rest of this article covers the first structure above where each person in the Joint Venture has a shareholding and appoints directors
3 Who will be part of the Joint Venture?
The people contributing the assets to the Joint Venture, or JV, will all be parties to the Joint Venture Agreement.
4 Will the Joint Venture company or other vehicle itself be a party to the Joint Venture agreement?
Usually, Yes so that shareholders can enforce against the company.
5 What issues do I need to consider when looking for a Joint Venture partner?
Look for a JV partner with complementary strengths: eg a software product which you can distribute through the Joint Venture.
Take time to understand fully what your partner’s purpose and objectives will be from the JV. You will need to be able to agree objectives that suit both of you.
You will also need to reach agreement on a whole range of other issues as well as the JV agreement.
Consider at the outset what happens when the JV comes to an end. This can make it difficult to collaborate with a competitor or with a business that is likely to compete with you in the future.
6 How do I start negotiating a Joint Venture?
- You can ask for a period of exclusive negotiation so you do not waste time and costs negotiating the JV if the other party pulls out?
- You can agree a Confidentiality Agreement (know as a Non-Disclosure Agreement or NDA in the US) to ensure all negotiations are kept confidential.
- You can undertake a feasibility study and/or valuation first.
- You can negotiate a Heads of Terms first.
7 How do I negotiate Heads of Terms?
The Heads Terms document sets out the main principles for the Joint Venture and the steps and documents required to get it set up.
8 How do I protect myself while I am negotiating a Joint Venture?
You should:
- First – agree a Confidentiality Agreement (NDA) :
see 6 How do I start negotiating a Joint Venture? - Second – agree a Heads of Terms document:
- Third – agree the Joint Venture Agreement
see: 14 What legal agreements are needed to set up a Joint Venture?
9 What is the Business of the Joint Venture?
You and your Joint Venture partner should agree answers to these questions:
- What will be the nature of the activities carried on by the Joint Venture ?
- Is the purpose of the Joint Venture to carry out a specific project or a continuing business?
- What is the likely turnover or market share?
- Where will the business be based?
- Will there be geographical limitations placed on the Joint Venture’s operations?
- What are the parties’ objectives?
- When do the parties want to exit and how?
- What regulatory consents, approvals and licences will be required for the formation and business(es) of the Joint Venture ?
10 What is the best way to structure a joint venture?
- Usually the JV parties form a separate limited company for the Joint Venture so each has limited liability (up to amount of share capital invested) should the Joint Venture not work and become insolvent.
- However the tax position must be assessed to start with because transferring significant assets into the Joint Venture can have unwanted tax consequences. You should check with your tax advisers.
- Sometimes a partnership or a limited liability partnership is used instead.
- If you do not require management involvement in the Joint Venture, it may be best to use contractual arrangements rather than to create a separate Joint Venture entity. For example, a designer could simply license his or her intellectual property rights in the design to another business to exploit in return for royalty payments.
- You should identify what other agreements are needed between the Joint Venture and the shareholders – eg licences to use software, brand names, premises, secondment of staff etc?
11 What about financing Joint Ventures
You and your Joint Venture partner will need to agree:
- What proportion (if any) of the initial finance will the parties themselves provide and how much will be provided from external sources.
- If third party funding is being sought, what security and/or recourse to the parties themselves will the lender(s) require.
- Will the parties’ initial investment be in cash and/or by contributing assets.
- If the funding will be through debt rather than equity, or vice versa.
- What arrangements will there be for funding, on a continuing basis:
- the working capital requirements
- losses incurred by the joint venture; and/or
- development and expansion costs
- Will each party be required (or entitled) to contribute to continuing calls for funding, pro-rata to its original investment or otherwise
- What happens if one of the parties defaults.
12 What assets can be put into Joint Ventures?
- Any asset can be put into a Joint Venture e.g. employees, intellectual property, offices, customers and suppliers and their related contracts.
- Contributions can be by outright transfer, or by a lease or licence to the Joint Venture for a fixed or indefinite term. Separate documents will be required for the transfer of each asset to the Joint Venture .
- The contributed assets will need to be valued and agreed with the Joint Venture partner.
- You will need to agree if all contributions of assets can be made simultaneously, if you need any regulatory approvals or consents third parties (including lessors, licensors and lenders) or how required for any transfer. If not, the availability of all or any particular asset(s) can be a condition precedent to the establishment of the Joint Venture.
13 What due diligence is needed in Joint Ventures?
Due diligence will include checking:
- your Joint Venture partner’s legal status,
- that they have the right to enter the Joint Venture,
- that they own assets they will be putting into the Joint Venture
- that they have enough funding to complete the Joint Venture
- that they have the knowledge and experience you need for the market in which the Joint Venture will operate.
More broadly, due diligence aims to ensure that any agreements you enter into are valid, and to minimize risk of future legal problems. So,
14 What legal agreements are needed to set up a Joint Venture?
If you are forming a new Joint Venture company, a Joint Venture Agreement and the new company’s articles of association are crucial. Points that may be covered in these documents or in separate agreements include:
- the financing arrangements for the Joint Venture
- agreements not to compete with the Joint Venture
- arrangements for licensing or transferring intellectual property in inventions, brands, designs or copyright works such as plans or manuals to the Joint Venture
- agreements on any services or supplies you will provide to the Joint Venture
- confidentiality agreements
- how any disputes will be handled
- how the partners can exit the Joint Venture
- any agreements that will continue after the Joint Venture is terminated.
15 What is a Shareholders Agreement?
A Shareholders Agreement can be another name for the Joint Venture Agreement. It sets out the agreement between the shareholders showing how they will operate the Joint Venture, how they will make decisions and vote as the shareholders and directors.
16 What are non-compete or non-competition or restrictions on Joint Venture parties?
These prevent the shareholder from competing with the Joint Venture. The shareholders will need to agree on answers to these questions:
- Will the parties be prohibited from competing with the Joint Venture ? If so, what geographical or other limitations should apply?
- Will the parties be prevented from soliciting customers and employees from the Joint Venture ?
- How will the business of the Joint Venture be defined for the purposes of such restrictions?
- Will the parties have obligations to refer business to the Joint Venture?
Usually the parties agree in the Joint Venture Agreement what restrictions apply to each of them, to prevent the scenario where the Joint Venture is set up and then the parties immediately compete against it.
17 What is the Board of directors in a Joint Venture?
- The board of directors includes representatives of each Joint Venture partner. The Joint Venture Agreement will state:
- What rights each party will have to appoint directors (and if the board or company in general meeting have rights to appoint any additional directors)
- What quorum and notice requirements will apply for directors’ meetings
- What particular matters will be reserved for decision by the board itself (and be incapable of delegation) or to the shareholders?
- What particular voting arrangements will apply to matters specifically reserved to the board and/or to any other matters
- What will be the specific requirements concerning the frequency and/or location of board meetings
- How the appointment of the chairman will be determined and if the chairman has a casting vote or not, or other special powers or rights
- Who will determine the appointment of any managing or other executive directors
- If the directors will have the power to resolve conflict, or potential conflict situations of a director or should such power be reserved for the shareholders.
18 What are the shareholders rights in a Joint Venture?
The shareholders will need to agree:
- How will ownership of the Joint Venture will be divided and what voting rights the parties will have as shareholders
- If there will be separate classes of shares – eg because each class of shares will have different ownership, dividends and or voting rights
- If shares of the same class will be capable of being held by more than one person
- If there will be any special voting rights attached to any or all shares
- What quorum and notice requirements will apply for shareholder meetings
- if there be any limitation on possible locations for shareholders’ meetings
19 What is minority shareholder protection in a Joint Venture?
If a shareholder owns less than say 50% of the Joint Venture it may want to protect itself in the following circumstances:
- The majority shareholder forcing through voting on certain important issues at shareholder meetings ( e.g. changing the business, adding new shareholders, issuing new shares, buying new businesses or selling parts of the business)
- Similar protections and any remedies can apply to board and/or director level voting as well.
20 What are restrictions on transfers of shares in the Joint Venture?
The Joint Venture parties will need to agree:
- Should shares be transferable or not
- What happens if any one party wants to sell out
- If transfers are permitted, should other parties have pre-emption rights (rights of first refusal) before any sale to a third party takes place
- To what extent will the identity of any third party purchaser be relevant to arrangements for permitting transfers or the terms of any pre-emption rights?
- Should any transfers (for example, intra-group transfers or transfers to family trusts) be permitted free of pre-emption rights
- Are any special terms appropriate, for example:
- “shotgun” or “Russian roulette” provisions, by which other parties can elect either to purchase from, or to put their own shares on, an intending transferor; or
- “drag-along” or “piggy back” (“tag along”) provisions, by which the intending transferor must endeavour to require a potential third party purchaser to acquire the other parties’ shares in addition to its own
- How will shares be valued for the purposes of the transfer provisions
- Will any new shareholder be required to become a party to the Joint Venture agreement
- Will the Joint Venture’s name have to be changed if shareholdings are transferred
- What will happen to any arrangements between a leaving shareholder and the Joint Venture (such as intra-group loans, intellectual property licences, supply agreements, management services, and so on)
It is common for shareholders to agree that shares may only be transferred in certain circumstances. If a shareholder wants to transfer shares it has to offer the shares first to the other shareholder(s) – this is called a pre-emption right. The shareholders will try and agree the price for the transfer of the shares. If they cannot agree on the price it is common for an independent valuer (accountant), experienced in valuing companies in their industry, to value the shares.
21 Can intellectual property be transferred to a Joint Venture?
Yes. A separate licence or transfer agreement will be agreed. The agreement will need to answer the following questions:
- Are any intellectual property rights to be given to the other Joint Venture party?
- Who will own the intellectual property rights developed by the Joint Venture and (if any) by the Joint Venture parties?
- Who will undertake exploitation of the intellectual property, including both production and distribution? Will there be any compensation for this?
- To what extent will the parties have access to, or rights over, confidential information, know-how and other intellectual property rights concerning or accruing or belonging to the Joint Venture itself?
- What will happen to the intellectual property rights on termination of the Joint Venture?
- Will any of the parties require a licence of any intellectual property from the other, following termination?
- Will there be different methods of dealing with intellectual property rights depending on the exit route used?
22 Can Employees be transferred to a Joint Venture?
Employees can be transferred to a Joint Venture for a short term (secondment) or permanently. The parties will need to agree answers to the following questions:
- Will the Joint Venture need employees and, if so, how will it get them?
- Will the employees be seconded from any of the Joint Venture parties and, if so, will it be necessary to make any changes to the terms of their employment?
- If the employees are to be transferred from any of the Joint Venture parties, will the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply ? If so, will it be necessary to make any changes to the terms of employment of the transferring employees? (It is only possible to make changes to the employees’ terms on a TUPE transfer in certain circumstances.) How will any liabilities relating to the employees be apportioned? Will there be any consultation obligations?
- If the employees are to be new recruits, are there particular individuals with key roles in the Joint Venture calling for special treatment?
- Is any particular form of management structure envisaged?
- What (if any) share option or incentive schemes are proposed?
- What pension arrangements will apply?
- Will any of the Joint Venture parties have to make redundancies as a result of the creation of the Joint Venture? If so, how will the cost be borne by the parties?
23 Can the shareholders continue to provide assets or services to the Joint Venture?
Yes. The parties will agree the answers to these questions:
- Will any of the parties second staff to the Joint Venture and, if so, on what terms? (Read over Can Employees be transferred to the Joint Venture? above)
- Will any of the parties be responsible for providing the Joint Venture with office or other accommodation, support services or facilities, or training for staff?
- Will there be continuing trading arrangements between any of the parties and the Joint Venture (for example, distributorship agreements or agreements for the supply of goods, materials or services)? If so, will these be independently audited?
- How do continuing arrangements between the Joint Venture and any of the parties impact on:
- the entitlement of each of the parties to the profits of the Joint Venture, or responsibility for its losses?
- the business risks and legal liabilities assumed by each of the parties in relation to the Joint Venture ?
- the rights of the Joint Venture and/or the parties to assets or revenues over which any one party maintains direct control or ownership?
- What will be the procedure for the flow of information and for reporting from the Joint Venture to the parties?
24 How do I terminate or end a Joint Venture?
The parties can agree to end the Joint Venture either by following the process they have agreed in the Joint Venture Agreement or by agreeing a new procedure. It is important to agree:
- Is the Joint Venture for a fixed term or indefinite in duration?
- Are there any circumstances in which the Joint Venture will automatically terminate, for example:
- the loss of any regulatory approval;
- the loss or destruction of a particular asset;
- the insolvency of any party;
- loss of software licence; or
- the transfer of any party’s shares?
- Are there any circumstances in which any party will be entitled to terminate the Joint Venture, for example:
- a change of control of any other party;
- a material breach of the Joint Venture agreement by another party;
- by notice of termination given after the expiry of a minimum fixed term?
- What arrangements will apply on termination for:
- the distribution of the assets, including intellectual property and know-how of the Joint Venture ;
- the discharge of outstanding contracts of the Joint Venture; and
- the assumption or discharge of any other liabilities of the Joint Venture?
Usually, one partner will buy out the other. The key is to plan for the termination of the Joint Venture from the outset. For example, the original agreement can include provisions that allow you to force your partner either to sell you their stake or to purchase your stake from you.
25 How do we take profits from the Joint Venture?
Profits from Joint Venture companies are commonly distributed through dividends.
Of course, the ability of the Joint Venture to pay dividends will depend on its cashflow position. Depending on the circumstances, there may also be other more tax-effective ways of realizing part of the value of your investment in the Joint Venture. Where a Joint Venture is structured as a partnership, profits are automatically shared between the partners as specified in the partnership agreement. The partnership agreement should also specify what cash payments partners can take from the partnership. If there is no separate joint venture entity, there will be no need to ‘take’ profits from the joint venture – the profits will, in any case, arise within your (or your Joint Venture partner’s) business.
International Joint Ventures
An international joint venture (IJV) occurs when two businesses based in two or more countries form a partnership. A company that wants to explore international trade without taking on the full responsibilities of cross-border business transactions has the option of forming a joint venture with a foreign partner.
International investors entering into a joint venture minimize the risk that comes with an outright acquisition of a business. In international business development, performing due diligence on the foreign country and the partner limits the risks involved in such a business transaction.
IJVs aid companies to form strategic alliances, which allow them to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. International joint ventures are viewed as a practical vehicle for knowledge transfer, such as technology transfer, from multinational expertise to local companies, and such knowledge transfer can contribute to the performance improvement of local companies.
Within IJVs one or more of the parties is located where the operations of the IJV take place and also involve a local and foreign company.
Accounting For Joint Ventures
The accounting for a joint venture depends upon the level of control exercised over the venture. If a significant amount of control is exercised, the equity method of accounting must be used. In this article, we address the concept of significant influence, as well as how to account for an investment in a joint venture using the equity method.
The key element in determining whether to use the equity method is the extent of the influence exercised by an investor over a joint venture. The essential rules governing the existence of significant influence are noted below.
These rules should be followed unless there is clear evidence that significant influence is not present. Conversely, significant influence can be present when voting power is lower than 20 percent, but only if it can be clearly demonstrated.
If a joint venture reports a large loss or a series of losses, it is possible that recording the investor’s share of these losses will result in a substantial decline of the investor’s recorded investment in the joint venture. If so, the investor stops using the equity method when its investment reaches zero.
If an investor’s investment in a joint venture has been written down to zero, but it has other investments in the joint venture (such as loans), the investor should continue to recognize its share of any additional joint venture losses and offset them against the other investments, in sequence of the seniority of those investments (with offsets against the most junior items first).
If the joint venture later begins to report profits again, the investor does not resume use of the equity method until such time as its share of joint venture profits have offset all joint venture losses that were not recognized during the period when use of the equity method was suspended.
Basics of Joint Venture Agreements
If all parties completely trust one another, a joint venture could theoretically be arranged through a simple handshake. But all business entities that decide to pursue a JV would be wise to outline the terms of the venture in a signed contract that was created with legal assistance.
A joint venture agreement often includes the following items:
- The parties to the agreement
- The JV’s management structure and members
- The parties’ percentages of ownership
- The distributive share—the percentage of profit or loss—allocated to each party
- The bank account the JV will use
- A list of resources
- The employees and/or independent contractors who will work on the venture
- How administrative records and financial statements will be produced and retained
- Which state’s laws will apply to the JV
Joint Venture Checklist
The checklist that follows covers some of the usual matters that parties wishing to venture together in a business enterprise must consider. Two-party and multi-party ventures will have different considerations in relation to certain matters, e.g. voting majorities and deadlock.
The parties are advised to take independent professional advice on partnership or limited liability company formation aspects and procedures for tax and liability purposes, and there may well be questions of law regarding mandatory equity holdings of nationals in certain overseas jurisdictions.
The likely documents that will be necessary are a shareholders’ (or joint venture) agreement and the statutes of the joint venture vehicle.
INITIAL MATTERS
1. The Parties
Who are the parties and how will they contract, e.g. via themselves (as individuals or existing companies), through a new company, or through a partnership?
2. Confidentiality
Do the Parties wish to maintain the confidentiality of their proposal to joint venture and any confidential information that they may exchange? If so, then a confidentiality agreement should be entered into between them.
Note: Document No. A105 and A119 are among the confidentiality agreements on our website.
3. The Joint Venture Vehicle
Is this to be a partnership or a limited liability company?
4. Nature of the Business
What business is it that the Parties propose to undertake, and are any particular licences, consents or professional qualifications required to undertake it? In what territory will the business operate?
5. Capital
5.1 What is the capital of the joint venture to be and how and when will it be contributed? See paragraph B.4 below for further more detailed funding issues.
5.2 In what percentages will the Parties hold equity in the joint venture?
6. The Name
The name of the venture is often of significance and is also often available only subject to compliance with local business laws and regulations.
MORE DETAILED ISSUES
1. Competition
Is competition by one or more of the Parties with the new joint venture to be restricted and if so, for how long after termination of the joint venture arrangements should the anti-compete provisions endure and in what location?
2. Duration and Termination
2.1 When will the joint venture terminate? Is the joint venture to be for a limited or open ended period?
2.2 Should it be open to a Party to bring the joint venture to an earlier conclusion?
2.3 Should the joint venture terminate on the insolvency of a Party?
2.4 What are the consequences of termination to be? Should the Joint Venture be wound up or should the Parties have the right to buy the others’ shares?
3. Law and Disputes
3.1 What law is to govern the joint venture relationship?
3.2 In the event of a dispute would the Parties prefer to arbitrate the issue or simply proceed in the Courts?
3.3 In what jurisdiction would the Parties wish disputes to be dealt with?
4. Funding
4.1 How is the joint venture to be funded? Will it be by way of cash injections from the Parties in proportion to their respective equity participation?
4.2 Are there to be any shareholder or third party (e.g. bank) loans and if so, is any security to be provided?
4.3 If security is to be given what form will it take? Will it be by way of a charge over the assets of the joint venture, or will the Parties be required to provide personal guarantees?
5. Business Plans, Budgets and Feasibility Studies
Are these to be prepared, and if so by whom?
6. Contributions other than in cash
6.1 Is any particular contribution to the joint venture, e.g. specialist expertise or intellectual property, to be made by any one or more of the Parties?
6.2 If contributions are to be made other than in cash, how will they be valued?
7. Premises
From where will the business operate and will the premises be leased or purchased?
8. Management
8.1 In the case of a limited company will there be a board of directors? How many will there be? How will decisions be made? Will the chairman have a casting vote? What should the quorum for meetings be? How will they be appointed?
8.2 In the case of a limited company what issues should specifically be reserved for a decision by the shareholders (rather than by the directors)?
8.3 In the case of a limited company should any shareholder have weighted voting rights and what percentages are required for the passing of ordinary and special resolutions?
8.4 What will be the quorum and notice period for shareholders’/members’ meetings?
9. Profits and losses
9.1 How should these be shared? Directly in proportion to equity participation or in some other ratio?
9.2 Is there to be a minimum annual distribution of profits?
10. Transfers of shares in the Joint Venture
10.1 Are there to be pre-emption rights which oblige the Parties to offer their respective shares to the others before a disposal to third parties?
10.2 How is the value of a Party’s share in the joint venture to be ascertained; by agreement of the Parties, or by the auditors, and is a precise formula to be used?
11. Auditors/Accountants
Who are to be the auditors or accountants?
12. Pre-commencement expenditure
How is this to be borne – by the Parties in their proposed equity shares, or by the Party incurring the expenditure?
13. Employees
Are the Parties to second to the joint venture any of their own employees?
14. Matters reserved to shareholders
The Parties venturing through a limited liability company with a board of directors or managers may wish certain matters to be determined not by the directors or managers but by the shareholders themselves in General Meetings. These matters might include:
- a change in the nature of the business or its territory of operation;
- the issue of new shares and new shareholders;
- the obtaining of loans and the grant of security;
- the employment or dismissal of senior employees;
- the entry into other joint ventures.
Establishing a Joint Venture in India
In sectors where 100 percent FDI is not allowed in India, a joint venture is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market.
All companies registered in India, even those with up to 100 percent overseas equity, are considered the same as local companies.
Corporate joint ventures are regulated by the Companies Act, 2013 and the Limited Liability Partnership Act, 2008.
Corporate JVs will also be subject to the country’s tax laws, The Foreign Exchange Management Act of 1999, labor laws (such as Code on Wages Act, 2019, Industrial Disputes Act, 1947, and state-specific shops and establishment legislation), The Competition Act of 2002, and various industry-specific laws.
A JV may be formed with any of the business entities existing in India.
Choosing a good home partner is the most important tool to the success of any joint venture.
Once an associate is selected, normally a memorandum of understanding (MoU) or a letter of intent is signed by the parties – stressing the foundation of the future joint venture agreement.
An MoU and a joint venture agreement must be marked after consulting a chartered accountant firm well versed in the Foreign Exchange Management Act; Indian Income-tax Act, 1961; the Companies Act, 2013; international laws and applicable Indian rules, regulations, and procedures.
Terms and conditions should be properly assessed before signing the contract. Negotiations need an understanding of the cultural and legal background of all the involved parties. The JV union should obtain all the required governmental approvals and licenses within a specified period.
Read Also: 8 Places to find Investors for your Startup
Foreign companies no longer require a no-objection certificate (NOC) from the Indian associate for investing in the sector where the joint venture operates.
Overseas firms in existing joint ventures can function independently in the same business segment. Previously, they needed prior approval from their Indian partners.
Companies in India are grouped into two categories – companies owned or controlled by foreign investors, and companies owned and controlled by Indian residents.
Before signing a joint venture contract, the below points must be properly assessed:
- Applicable law;
- Shareholding pattern;
- Composition of board of directors;
- Management committee;
- Frequency of board meetings and its venue;
- General meeting and its venue;
- Composition of quorum for important decision at board meeting;
- Transfer of shares;
- Dividend policy;
- Employment of funds in cash or kind;
- Change of control;
- Restriction/prohibition on assignment;
- Non-compete parameters;
- Confidentiality;
- Indemnity;
- Break of deadlock;
- Jurisdiction for resolution of dispute; and,
- Termination criteria and notice.
Last Words
So we understand that the Joint venture is most of the time a limited period agreement between two or more business entities but at times it may not be time-bound. The purpose of the venture is clearly defined and the risk and reward sharing ratio is clear in the agreement to the joint venture.
Further, Joint Venture is more or less another form of a business combination such as mergers and acquisition and in theory even in they are defined distinctly, in practice, they tend to have a lot of overlaps.
In the case of very short-run or single project joint ventures, the venture is not given any name to avoid the related paperwork and the disclosure requirements of a joint venture are relatively low. In some countries, the JV is the only means of entering certain markets as per the rules and regulations of the country and therefore a useful tool.