This article is written by Ayush Sahay, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.

Introduction

 Every Hollywood movie has shown us the apparent bliss a glass of the finest wine and a charcuterie board can give an individual after a tiresome week at work. In this article, we look into 2 of India’s finest wine producers and what could be the advantages they could benefit from if they were to form a joint venture, (while in reality, York Winery has decided to merge with Sula vineyards). This article will also explain a few important clauses that every drafter must definitely put in a Joint Venture Agreement (JVA) to make sure either party is benefitting from the established joint venture (venture)

Who are Sula vineyards and York winery? 

Sula vineyards

Sula Vineyards (Sula) is a Nasik-based winery and vineyard that is the leading winery in India, holding almost about 65% of the wine market in India. It was also because of Sula’s initiative that Nasik has become the Wine Capital of India since the time it was established in 1999. Sula and its resorts have the highest market numbers when wine tourism is talked about in India where they have around 15,000 visitors during their 2 days annual Sula Fest. In the year 2000, Sula was the first Indian winery to produce Sauvignon Blanc and Chenin Blanc, later in 2005 they opened India’s first tasting room at a winery and in 2013 they were the first Indian wine brand to have been listed at Marks and Spencers, a UK based retail chain. Sula, though having a great market share, has one big competitor in the Indian wine market, the Grover Zampa Vineyards (Grover), which was established 11 years earlier to Sula’s establishment. 

York Winery

York Winery (York) is, when compared to Sula, smaller both in terms of its market share as well as market holding in the Wine business in India and is also a family-based winery, unlike Sula. York is a fairly new player in the wine market since its establishment in 2006. 

Why would Sula vineyard require to make a joint venture agreement?

As mentioned earlier the only competitor that can give a good competition to Sula is Grover. This comes because Grover has been able to excessively establish itself in different sectors of the wine business by acquiring a stake in Chateau d’etroyes in Mercurey, a subregion of Burgundy which is a premier French winery. Grover has also been able to purchase either stakes or the entire business of 3 other wine brands 

(i) Four seasons, 

(ii) Myra Vineyards, and 

(iii) Charosa with the guidance of an independent French national of Indian origin.  

Sula which bought Heritage Vineyard in 2017 would benefit deeply if it were to get into a Venture with York Winery because they would get access to a similar wine portfolio with a similar targeted customer base of wine in the price range of Rs. 700-1500. It gives them access to partnerships with Good Earth and Trinity Vintners, for which York Winery has the contracts for producing and marketing wine. The location of the York winery, which is merely 1 km away from Sula, not only offers logistics collaboration while also helping Sula in owning an even more majority stake in the Indian wine industry. 

What is a joint venture agreement(JVA)?

A JVA is entered into when 2 or more entities decide to come together for accomplishing a specific project by incorporating a new entity while agreeing to bring on all their respective resources (assets and liabilities) and share the control of this newly incorporated entity between the 2 parties depending on the consensus reached to. Ventures are usually entered into to allow smaller businesses to take advantage of the markets where the bigger business caters to their goods or services. A venture can be of 2 types:

• Incorporated joint venture

In this equity-based venture, a new entity is formed or created according to all the terms and conditions of the signed JVA between the parties, where all these parties hold joint ownership.

The most common way of entering into this types of venture are;

1. Subscribing to the shares on an agreed term: Parties subscribe to the shares of the company in an agreed ratio
2. Transferring business or technology: Parties incorporate a new limited liability partnership (LLP) where one of the parties transfers all their business or technology to the other company instead of shares. 
3. Collaborating with the partners of an existing entity: This means either buying from existing shareholders or becoming a new shareholder of the target company. 

• Unincorporated joint venture 

The establishing of a new entity is not required and the working of the parties will be decided on the terms and conditions of the JVA. 

Companies can, depending on their requirements from this project decide whether which kind of a Venture do they want to incorporate, and after their goal for which a Venture was incorporated has been achieved, they then proceed to dissolve it, either entirely or by surrendering/ selling their shares in the venture. A very famous example of a Venture being formed into and then shares of it being surrendered can be found in the case of Sony Ericsson. The 2 companies having a great share in the technological field decided to come together and form a venture which aimed at becoming the leader in the mobile phones industry. After many years of this venture, Ericsson decided not to renew their 10-year term of the JVA and exited from the Venture while Sony bought all its shares for €1.05 billion ($1.47 billion). 

What are the important clauses in a JVA? 

A really important aspect before entering into a JVA is the process of signing a Memorandum of Understanding (MoU) which will work as a non-binding document to prove what the intention of this joint venture is for all the parties, after which the parties will perform due diligence. Due diligence acts as a deciding factor before finally signing the JVA because this allows for the parties to scrutinize the documents of the other party. 

Other than the already important and boilerplate clauses in any contract which can be viewed here, in a JVA there are a few clauses that need to be given an extra eye of detail for the incorporated Venture to work seamlessly. They are:

• Structure of the venture

This clause will provide an insight into the structure the joint venture will function in and will be decided upon by the parties mutually. 

• Role and contribution of each party

This clause will contain all the information regarding the contribution of each entering the venture. 

• Management of the company, voting rights, and quorum

This will usually contain the clauses which will define representation on the board of directors depending on the roles and contribution made by each party. It will focus on how the directors for the board will be appointed, what their roles and duties will be, what will be the composition of the board, etc. This clause will also mention the methodology in which the voting rights work and what other regulations will the board be subjected to. 

• Rights and obligations of parties

Depending on the contributions made and stakes owned while forming the venture the parties will be subjected to different rights and obligations which they will have to comply with.

• Non-compete 

A critical clause of a JVA is a non-compete clause that restricts any party which no longer is a party to the venture to enter into the same sector of producing service/product as the venture did. But this restriction is subjected to Section 27 of the Indian Contracts Act, 1872 which states that in case the agreement has an indefinite or unnecessarily long time period until which the exited company can’t provide service in the same sector, then the entire agreement will be void. 

The parties agree that at no time during the term of this agreement will they engage in any business activity which is competitive with the venture or work for any company which competes with the venture.  

For a period of one (1) year immediately following the termination of the agreement, no party will, for themselves or on behalf of any other person or business enterprise, engage in any business activity which competes with the Company within 100 kilometers of the facility in which the venture functioned.

• Confidentiality

During the time due diligence is done, a lot of sensitive information with regards to trade secrets or intellectual property or technology that the company has been working on is also available for the other party to look into. In these cases, it is important for both the MoU and the JVA to contain a confidentiality clause because this protects the said sensitive information from being available in the public domain. It is also important to ensure that this confidentiality clause is applicable even after the term of the JVA or even after any of the parties decide to terminate the JVA. 

The parties acknowledge and confirm that any oral or written information exchanged among them with respect to this Agreement constitutes confidential information.  The parties shall maintain the confidentiality of all such information.  Without the prior written consent of the party who had provided such information, none of the parties shall disclose any confidential information to any third party, except in the following circumstances: 

(a) such information is or comes into the public domain (through no fault or disclosure by the receiving party); 

(b) information disclosed as required by applicable laws or rules or regulations of any stock exchange; or 

(c) information required to be disclosed by any Party to its legal or financial advisors regarding the transactions contemplated hereunder, and such legal or financial advisors are also bound by duties of confidentiality similar to the duties set forth in this Article.  

Disclosure of any confidential information by the staff or employee of any party shall be deemed as disclosure of such confidential information by such party, for which the party shall be held liable for breach of this agreement.  This article shall survive the termination of this agreement for any reason

• Deadlock resolution

A major concern that arises in a Venture is that when the parties have equal control over it and a dispute arises because the parties are not able to meet minds and neither of the parties is willing to change their decision then the working of the Venture becomes difficult and it is also important to resolve this dispute in a given time frame, otherwise the parties have the right to terminate the JVA. So to ensure that the JVA is not terminated a few measures that can be looked at are:

The vote of the chairperson who heads the board of directors, so that in case of disputes the decision taken by them is the final one. Suggesting applicable mediation and conciliation techniques. The parties shall ensure that all possibilities of avoiding a deadlock situation where a decision cannot be reached to, in such cases the decision made in a board meeting through amicable discussion will be final. Parties have a responsibility to settle such an issue within 15 (fifteen) working days, which can be extended with mutual consent. 

• Transfer of shares

It is important to define the shareholding of each party in this clause, the factors that play a role in determining the shareholding in this venture are the contributions, market share, and net worth of each party. It’s possible for the shareholding of each party to be equal as well. No party to the agreement shall neither directly nor indirectly be allowed to transfer, assign or sell any of their shares or their rights and obligations to any third party without receiving prior consent from the other parties. Notwithstanding anything to the contrary contained in these agreements, no party shall sell, transfer or assign any of their shares in favor of any party competing with another party.  

• Exit rights/ termination

In cases one or more parties wish to exit the Venture, they are given a few options. The existing party can sell it to their remaining parties if others still remain to be a part of the Venture. They may also be allowed to sell their shares to a 3rd party, allowing them to liquidate their shares, but the same shall be done with consultation of the remaining parties

• Events of default 

Since the idea behind entering into a Venture is to complete an objective it is an evident fact that the venture will not exist for long, but incases one of the parties is at fault which results in damage to the Venture the non-defaulting party can terminate the Venture or seek damages for the same, depending on the terms they have agreed to in the JVA. 

• Jurisdiction and dispute resolution 

It is necessary to mention which governing laws, which will prove to be the backbone of the entire JVA and will determine the applicability in cases of legal proceedings. The possibility of disagreements in a venture is quite high since there are different sets of people coming together to work on a particular objective, meaning there will be a difference of opinion. Therefore a clause that allows for the parties to enter into dispute resolution settings. The most popular of it being Arbitration, which is governed by the Arbitration and Conciliation Act, 1996. All the disputes arising shall be settled in compliance with the provisions of this Agreement, and in any case, if the parties are unable to settle the matter between themselves, the matter shall then be resolved by the method of alternate dispute resolution (“ADR”). The sole arbitrator shall be appointed by the International Center for Alternative Dispute Resolution and will also conduct the Arbitration process. The venue and seat for this Arbitration shall be New Delhi and the proceedings will take place in English.

Conclusion 

For every business to grow it has to be able to make tough decisions. It takes companies or in this case winery’s years to perfect the taste to cater to the taste of their consumers and if in cases during a joint venture formation such sensitive information comes out in the public domain or is usable by the other party then the entire structure if the business is in the fear of losing it market share. So to make sure that such unfortunate events don’t happen every drafter must ensure to keep the clauses drafted without any foreseeable loopholes. 

The issues that pertain to the post-formation of a venture are that many times the minority partners in a joint venture tend to be ousted in the decision-making process, be it day-to-day or big deals because the majority have a higher desk in the says. So for any drafter who represents the minority partner in a Venture, they must ensure to protect the rights of a minority partner. This can be done in ways of ensuring their representation in the quorum of the board, framing provisions that increase the threshold required to pass a certain resolution. 

Though the JVA is quite flexible and can be amended while before being entered into as per the requirements of the parties, the very basic principle that stays while drafting this agreement or any other would be to refrain from keeping it ambiguous because if it is then either party can take undue advantage of the other party. 

References

1. https://www.ukessays.com/essays/business/history-of-sony-ericsson.php#:~:text=Joint%20Venture%20of%20Sony%20Ericsson,the%20mobile%20phone%20manufacturing%20industry. 
2. https://blog.ipleaders.in/important-clauses-joint-venture-agreement/.
3. https://blog.ipleaders.in/joint-venture-agreement/.
4. Practical Guide to Commercial Contract Drafting by Bhumesh Verma.

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