What is Joint Venture
An association of group of persons, be it natural or legal entities, coming together to form an arrangement in order to do business together or to carry out a specific assignment, is called a Joint Venture. In case of Joint Venture, entities forming association do not lose their independent constitution.
Joint Venture has the benefit of unlocking probable business opportunities and thereby providing new learning experiences to all the business entities coming together for a common purpose. A Joint Venture further helps mitigate the risk factors involved when entering into a new business environment. It also helps in minimizing the costs which entities may have to incur on entering a new line of business independently. Joint Venture is especially helpful for a foreign entity which plans to enter in emerging countries like India. For example, Maruti Suzuki India Limited is a joint venture between Maruti Udyog Limited and Suzuki Motor Corporation. The success of the joint venture led Suzuki to increase its equity from 26% to 40% in 1987, and to 50% in 1992, and further to 56.21% as of 2013.
Shares can be issued either in the form of cash or in kind, in case of company JV. However, in the case of issuance of shares against consideration other than cash, there must be an adequate valuation certificate of the issuance. Further, a foreign entity in a JV must comply with the Foreign Exchange Management Act 1999 (FEMA) and should supply an adequate valuation certificate by a chartered accountant or Securities and Exchange Board of India (SEBI)-registered merchant banker in case of investment via contribution in kind.
Property, Intellectual property rights, Assets, Import of capital goods, Conversion of import payables, pre-incorporation expenses, technical know-how, etc. are some other ways of capital contribution by JV parties apart from cash.
How to Enter into a Joint Venture Agreement?
Entering into venture with a good local partner is critical to the success of any joint venture. Having done that, parties sign a Memorandum of Understanding or a Letter of Intent to highlight the basis of the future joint venture agreement.
There are always some risks involved due to different cultural and legal background of the Joint Venture parties. In order to mitigate those risks it is imperative that parties to the Joint Venture agreement thoroughly discuss and negotiate the terms and conditions of the agreement to avoid any misunderstanding at a later stage. All the understanding must be obtained before signing the agreement. To make it more lucid the following must be properly addressed before signing a Joint Venture Agreement:-
- Dispute resolution agreements
- Applicable law
- Force Majeure(unavoidable accident)
- Holding shares
- Transfer of shares
- Board of Directors
- General meeting.
- Management Committee
- Important decisions with consent of partners
- Dividend policy
- Change of control
- Break of deadlock
Note:- Co-venturers must obtain all necessary governmental approvals and licenses within specified period in order to hold Joint Venture agreement valid.
Forms of JV
- Equity JV/Corporate JV- An arrangement under which the parties carry out their objective through a separate incorporated legal entity is an Equity JV. The parties agree to provide money or capital in some other form as their contribution to the assets. This structure is best suited to long-term JVs. Corporate JVs comprise JV companies and JV limited liability partnerships (LLPs).
- Contractual JV- There can be ventures for a project involving a temporary task or a limited activity, or is for a limited time period. In such cases, creation of a separate legal entity is not feasible or the establishment of a separate legal entity is not required. In that case, contractual JV is preferred.
Within those broader categories, the most common structures employed to constitute a joint venture are:
- Contractual JV. This is the fundamental form of the joint venture, which is purely based on the mutual agreement between the joint venture parties. The parties agree to pool resources as independent contractors rather than shareholders in a company or partners in a legal partnership. The business relationship between the JV parties is in continuance of the common purpose or actions of a profitable venture, the proceeds of which are shared in an agreed ratio. Especially, for the parties intending not to be bound by the formality and permanence of a corporate vehicle, this type of agreement is perfect.
- Under contractual JV, parties mutually agree on the rights, duties and obligations between themselves and third parties, and the duration of their legal relationship. Parties to the Joint Venture are bound by the contract and in case of any breach by one party will give the right to the other party to seek legal recourse against the defaulter.
- Partnership JV- This type of JV is created under the Partnership Act 1932. This is something between a corporate JV and a contractual JV. A partnership represents a relationship between persons who have agreed to share the profits of business carried on by all or any of them acting for all.
- Company JV. The parties to the JV arrangement proceed with their objective through a company incorporated under the Companies Act 2013. The most common ways of creating a company JV are:
- Incorporation of a new company: A new company is incorporated and shares of the company are subscribed (as per the mutually agreed proportions and terms) by the Joint Venture Parties. The advantage of this route is that it allows structural flexibility in terms of creating an entity which is specially made to suit the stipulations of both parties. The documents of incorporation are drafted to reflect the parties' rights, intentions and obligations;
- Collaboration with the promoters of an existing company: The new JV party acquires shares of the existing company either by subscribing to new shares or purchasing shares of the existing shareholders. The existing company's incorporation documents are modified suitably to include the considerations between the new JV party and the existing company's promoters.
- Limited liability partnership (LLP) JV. This is similar to a company JV. The parties to the JV proceed with their objective through an LLP incorporated under the Limited Liability Partnership Act 2008. Like a company JV, a LLP JV can be formed either by incorporation of a new LLP by the JV parties, or by transfer of one partner's stake in an existing LLP to the JV partner.