Shekhar K. Agrawal
A Joint Venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. The new entity is called a Joint Venture.
Joint ventures are either incorporated or unincorporated. An incorporated joint venture is one in which all the parties hold joint ownership by establishing a separate business entity, which can be in the form of, among others, a public company, private company or LLP. These have their constitution documents like Memorandum and Articles containing terms of operation of such entity. They also have distinct advantages like limited liability, perpetual succession, separate entity with favorable tax treatment and ease of raising funds etc.
In case of unincorporated joint venture, there is an arrangement to collaborate without creating a jointly owned separate entity. Such contractual joint ventures are typically project specific and are closed down after task is accomplished. Such cases are wholly governed by the joint venture agreement, which stipulates all terms of the understanding between the parties, including their rights and obligations.
Joint ventures are popular method of setting up a business, as it offers various inherent advantages. Firstly, it allows pooling of resources of two or more parties – both human and financial, secondly, in technology intensive sectors, local businessmen usually tie up with another, mostly foreign partners having technical knowhow, thirdly, expansion of business in new geographies becomes easier with local partner taking care of local laws, infrastructure and other requirements. New incorporated joint venture also limits risk and liability of each partner. Further, in large infrastructure projects, Public –Private Partnerships (PPP) model is becoming popular wherein the central or state government collaborates with private entities (domestic or international) and offer concessions to construct, develop and operate the projects by becoming partner and sharing revenue. It is typically for a limited period, after which asset is transferred to Government. For a Foreign Company, Joint Venture is popular route to establish presence in India. Sector specific rules of FDI – either automatic or case by case approval are required to be followed.
Joint Venture Agreement are negotiated and drawn up between the parties and this forms the basis of their relationship. As such, parties should take it in all the seriousness to capture their understanding fully. They should also provide for all contingencies. In incorporated joint ventures, terms of JV Agreement are also incorporated in constitution documents and such JV Company is also made a party to the agreement by formally adopting it or signing it post incorporation, so as to make it binding on the JV Company too. Important clauses usually included in the JV Agreement are:
Interpretation / Overriding effect of J V Agreement of the company
Constitution of the JVC
Scope of Business of the JVC
Status of the Company i.e. Private Ltd. / Public Ltd. Co. (Listed / Unlisted)
B) Capital Structure
Capital of the company
Shareholding percentage of the parties
Subscription and interest on delayed subscription
Transfer - Minimum holding period of share - Transfer to affiliate and to third parties - Notice or consent of other party - Conditions to share transfer, if any
Right of Assignment, if any
Valuation of shares
Right of first refusal
Put and / or Call option
Transferee’s Undertaking / Deed of Adherence
C) Governance and Operation
Management of the Company - Board of Directors - Management
Right to nominate Directors (Nos.)
Right to nominate Chairman/CEO/CFO etc. & if they are rotational
Matters on which Affirmative voting rights are available to partners
Bank Account and its Operation
Budgets and accounting
Staffing policy for the Company
Intellectual Property Rights including Brands
Royalties and lump sum fees for technology collaborations and the license or use of trademark or brand name
Dividend and Reserve Policy
Services to be provided by each partner of the JVC
Steering Committee / Contract Oversight
Quarterly Financial Statements
Right to Accounts and Special Audit
D) Termination and Dispute Resolution
Representations and Warranties by the parties
Events of Default and Remedies
Waiver and Consequential losses
Dispute Resolution Mechanism - Internal mechanisms, such as reference to senior officials of JV Partners - Mediation and conciliation - Arbitration or litigation in Court
Termination and Exit provisions
The list is indicative only and not exhaustive. Additional clauses are to be provided or removed based on requirement and understanding reached.
Considering the disputes that may arise between the Joint Venture partners, it is important that sufficient care is taken while drafting the JV Agreement so as to capture true and complete understanding between Joint Venture Partners.