A Joint Venture is defined as any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective. In other words, Joint Venture is a business agreement between two or more companies whereby the business resources of the partners are mutually shared and put to use.
What is the purpose of JV?
JV's are envisaged as symbiotic business agreements that yield benefits for the JV partners by –
- contributing to a platform to attain their business goals which would not be that easy when done independently,
- provides a fast way to leverage over resources available by sharing capabilities and complementary resources of 2 companies,
- access new markets,
- strengthen position in the current market, and
- diversify into new businesses.
What is a 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 and the Article of Association along with Memorandum of Association should be at par with the Joint Venture Agreement.
Documentation of JV
Documentation involves series of steps and it starts with the selection of the best partner after proper due diligence. The next step would be parties expressing their intention to enter into agreements by signing a memorandum of understanding (“MoU”) or a letter of intent (“LoI”).
Important limbs of JV agreement
For a best and leak-proof ‘Joint Venture agreements’, it has to be properly tailored based on the facts in hand because each JV agreement is influenced by the interest of both the parties. But there are basic clauses that have to be examined and considered as the foundation of any joint venture agreement and there are specially tailored clauses that can be added in order to achieve the various purpose. Some important clauses to be added are:
- Object and scope of the Joint Venture,
- Equity participation by local and foreign investors and agreement for 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,
- Remedy for 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.
A good Joint Venture agreement provides an all-inclusive roadmap of the duties and obligations of both the parties thus minimising complications whenever dispute arise. Hence, as a prudent businessman, there is a need to pay attention while drafting a Joint Venture agreement. For that, basic step would be, before finalizing a Joint Venture Agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage.