In this article, Shreya Mazumdar, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses key considerations in a Joint Venture Agreement.
This article only analyses the important clauses in the Joint Venture Agreement as well as the importance of Joint Venture Agreement, it reflects the clauses that is required during the time of drafting the agreement, in order to prepare for client consultation. Importance and the change of situation when there is a presence of Joint Venture Agreement. This may help in the due diligence exercise of the company.
The process of establishment can be relatively simplified if a proper planning, market research, and partner assessment are complied with. In order to have a successful Joint Venture, there has to be a specific and measurable objective, identifying and critically assessing potential partner as well as a target market and a channelled and proper format of Joint Venture.
Joint Ventures Agreement
Joint Venture Agreements is believed to have a major priority in a company and such document is supreme. The Article of Association and Memorandum of Association change according to the Joint Venture Agreement, if the Joint Venture Agreement provides such clause.
While drafting the agreement the parties should clearly mention their intention as Joint Venture Agreements are mostly drafted to attain a purpose. In order to achieve the true purpose of the Joint Venture Agreement, it has to be properly drafted by the parties.
The methodology used is doctrinal by analytical research. The researcher has analyzed the existing laws and regulation with respect to the Joint Ventures in India. The researcher has analyzed various documents reflecting the scope of the company through the Memorandum of Association, Article of Association as well as Joint Venture agreement on the ministry of corporate affairs website.
The analytical approach is used as the research involves a careful examination of the effect of Joint Venture agreement on the company. The analysis and conclusion are drawn after studying the company documents as well as the procedure for drafting.
This research is best for due diligence and corporate consultations exercise as it relates to the study of requirements or essence of Joint Ventures.
For the present research various tools of data collection are through:
- Primary sources
- It includes MOA, AOA as well as Joint Ventures.
- Secondary sources
- It includes various authors, articles in journal, and websites.
It is an arrangement where two or more parties cooperate in order to run a business. There are various forms of this co-operation such as equity-based or contractual Joint Ventures. This may be on a long-term basis involving the running of the business in perpetuity or on a limited basis involving the realization of a particular project. This may involve an entirely new business or an existing business that is expected to provide benefit from the introduction of the new participant.
It is considered to be a highly flexible concept. The nature of any particular Joint Venture will depend on the specific underlying facts and characteristics and on the resources and wishes of the involved parties. Joint Venture can be epitomized as a symbiotic business alliance between two or more companies where the complementary resources of the partners are mutually shared and put to use.
The purpose of Establishing a Joint Venture
Forming a Joint Venture with an ideal business partner provides a fast way to influence complementary resources that are available with the other partner, share each other’s skills, access new market or diversify into new business. There are disadvantages when it comes to Indian global expansion where the Indian Companies find it had to achieve the expectation in the global market in terms of:
- Product quality
- The management process.
These difficulties can be superseded by way of an alliance with a foreign counterpart who is a strategic fit. The alliance between those possessing varying expertise and capabilities in technology, marketing and distribution etc., are necessary to encounter the growing needs of modern business.
Advantages of Joint Venture
- Cross-border business is more demanding and beneficial either it is outright acquired or shared through Joint Venture. Cooperation is a great way of reducing research as well as manufacturing cost without limiting exposure. This process reduces research and manufacturing costs while limiting exposure.
- There is a chance of risk reduction as the business activities of the Joint Venture can be expanded with smaller investment outlays independent.
- It is a mode of gaining good market access. Joint Venture agreements expand their business into other areas of the world as well as consumer segments and product markets. In the case of cross-border, the involvement of a local business party may be necessary or is desirable in countries in cases where the local laws limit the ownership structure by foreigners.
- There is the joint management of the risk associated with new ventures which Joint Ventures can offer. In Joint Venture when the liabilities and risks are shared the pressure on each individual partner is drastically reduced.
- There are many flexible business diversification opportunities to the partners. It provides full freedom to involve with the other company for a full merger or only for a part of the business. Companies can also choose Joint Ventures as a method to gradually dispersed a business from the rest of the organization and ultimately sell it further.
Forms of Joint Ventures
Joint Ventures are different kinds which depend on the requirements of the parties. It can be either contractual or structural or both. For incorporation of the company, Joint Venture came into existence which is very rampant among foreign investors. In order to constitute a Joint Venture the most common structures employed is as follows:
Company Joint Venture
Under the Companies Act, 2013 Joint Venture would hold the share of such company in an
agreed proportion. This agreement can be termed as Equity or Corporate Joint Venture.
In this case, the Joint Venture Company is universally recognized medium which gives an independent legal identity to the Joint Venture. It is believed to place a better management and employee structure and participants have the benefit of limited liability and the flexibility to raise finance. The company will survive the same entity despite a change in its ownership. The three most prominent way to describe Joint Venture Companies are as follows:
Transfer of Business by one Party and Share Subscription by the Other
Parties to the Joint Venture incorporate a new company where parties transfer their business or technology to the newly incorporated company in exchange for shares issued by the company. The other party subscribes to the shares of the company for cash consideration.
Collaboration with the Promoters of an Existing company
The Joint Venture partner can acquire shares of the existing company by way of subscribing to new shares or acquiring shares of the existing shareholders.
Limited Liability Partnership
The Limited Liability Partnership Act, 2008. It is only under the government approval route Foreign Direct Investment (FDI) is permitted in LLPs. Only downstream investment is allowed when it comes to Indian Company having an LLP, which operates in a sector where 100% FDI is allowed through the automatic route.
LLPs can receive FDI only by cash consideration through inward payment and the banking channels or by debit to Non-Resident External account/ Foreign Currency Non-Resident accounts of the individual concerned, maintained with an authorized dealer or an authorized bank.
Unincorporated Joint Ventures
This kind of agreement is perfect in the situation where the parties intend not to be bound by the formalities and permanence of corporate vehicle. Such agreements are highly functional constructs that allow companies to acquire products, technology, and working capital in order to increase production capacity and improve productivity. This kind of agreement is suitable for the business activities that include:
- Technology transfer
- Joint product development
- Marketing, and
- Promotional collaboration, or
- Intellectual advice.
There might be tax issues if the unincorporated Joint Venture does not have significant tax issues if not structured properly as the Indian tax authorities may qualify such contractual arrangements as an association of persons.
Joint Venture Agreement
Agreement of following companies:
- BAeHal Software Ltd
- Indo Russian Aviation Ltd.
- Snecma HAL Aerospace Pvt. Ltd.
- Infotech HAL Ltd
From the above agreements following can be concluded:
- Joint Venture Agreement is considered for the working of the company, the Article of Association and Memorandum of Association should be at par with the Joint Venture Agreement. Every Joint Venture company will have a Joint Venture Agreement which governs the working of such Companies, Article of Association may or may not be present.
- If there is an Article of Association, the clause is put in Joint Venture agreement that if Article of Association is inconsistent with the provision of the Joint Venture Agreement, then the parties will amend the Memorandum of Association and Article of Association accordingly.
- Whereas in other Companies Article of Association and Memorandum of Association manages the working of the company. The members of the Joint Venture are bound by a legal agreement that specifies the degree of control the parties enjoy and the extent of profit or loss that is shared.
- The other companies are governed by its Article of Association or MOA and the Companies Act 2013, the statute being the supreme document.
- Joint Venture may be for specific purposes or for specific period whereas the other companies exist until they are legally dissolved.
Clauses in a Joint Venture Agreement
In order to enter into a Joint Venture with the prospective business partner, a Memorandum of Understanding (Hereinafter known as MoU), as well as letter of intent, is signed by the parties that clarify the basis of the future Joint Venture agreement. This also includes understanding the culture as well as the legal background of the parties. While signing a Joint Venture agreement the following clauses must be properly examined:
- Object and scope of the Joint Venture
- Equity participation by local and foreign investors and agreement to a future issue of capital
- Management Committee
- Financial arrangements
- The composition of the board and management agreements
- Specific obligations
- Provisions for distribution of profits
- Transferability of shares in different circumstances
- Remedying a deadlock
- Restrictive covenants on the company and the participants
- Casting vote provisions
- Appointment of CEO/MD
- Change of control/exit clauses
- Anti-compete clause
- Indemnity Clause
- Dispute Resolution
- Applicable law
- Force Majeure etc.
It is essential that the consent is for that same opinion over the proposed management structure and to categorize the party that has to organize early in the Joint Venture procedure. Thus, the parties should be vigilant while preparing the memorandum of understanding and the Joint Venture agreement.
The Board of Directors of the Company is also mentioned in the Joint Venture Agreement and the corresponding necessities can be mentioned in the Article of Association of the Company.
The parties to the Joint Venture can choose on the matters which is a number of Directors and number of directors that is required to sign the Joint Venture agreement, the appointment of Managing Director, Chairman.
The paid royalty is paid is restricted up to 5% for the local sales and for exports up to 8% without any constraints on the period of the royalty payment. The royalty limits are net of taxes and are calculated as per the standard of consideration. Reimbursements are made through RBI.
This is another aspect that should be factored into the Joint Venture agreement. This clause should also mention the issue of equity shares against lump sum fee and royalty fees that are allowed.
There is a particular period planned for a particular period of time. Joint Venture falls short of funds or there could be many more reasons to exit the Joint Venture. The general options are buy-sell agreement, unilateral sale rights and pull/call rights. The termination clause may also provide the termination of operations and liquidation and closure of the venture. This clause can be independent or in collaboration with each other.
Tax situations are complicated to understand for the foreigners and foreign firms that are investing in India. Thus a consultation is required while drafting such clauses it differs from one country to another as it is based on tax treaties are signed with different countries.
Intellectual Property Rights
Situations wherein Indian market does not cover certain Intellectual Property Rights, the foreign investors have to examine such situations and act accordingly. In such cases, a detailed provision of Joint Venture agreement is suggested in order to protect Intellectual Property Rights that includes registration and making of detailed provisions.
Joint Venture agreements have to be properly drafted by the lawyer and perused by the parties when it comes to execution of such drafts. There are basic clauses that have to be examined and has been mentioned in this article. There are also special clauses that can be added in order to achieve the various purpose.
 Legal Website Samratdu, Joint Venture Agreement, (06.12.2012),
 Establishing a Joint Venture in India, India Briefing http://www.india-briefing.com/news/establishing-joint-venture-india-4833.html/ (last updated on 12.05.2011).
 Law Firm Websites
Establishing a Joint Venture in India, DEZAN SHIRA & ASSOCIATES, file:///C:/Users/Mazumdar/Downloads/Establishing_a_Joint_Venture_in_India.pdf visited on 15.01.2018 at 19:56 IST.
Joint Venture in India, NISHIT DESAI ASSOCIATES, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Joint_Ventures_in_India.pdf (last updated November 2014).
 Other Research Links
visited on 15/01/2018 at 19:48 IST.
visited o 15/01/2018 at 10:40 IST.