Joint Venture Agreement

Joint Venture Agreement
12 June 2020

Joint Venture Agreement

A joint venture is usually understood as financial and technical collaboration for the cause of fulfillment of some projects with existing companies. Companies lacking in some factors such as assets, technology, knowledge, or reach to the market are commonly involved in joint ventures with other companies because they are not able to achieve their goal on their own. Collaboration enables the first party to have access to the resources of the other party without any expenditure for obtaining it.

Indian joint ventures are generally formed by two or more companies or individuals, one of whom may be non-resident, who collaborate to form an Indian public or private limited company with the mutual contribution in the share capital. Joint ventures exist in the form of partnerships, companies, or joint working agreements.

A Joint Venture Agreement is a lawful document where two or more entities combine to do business o undertake an economic activity together. The parties either agree to form an agreement without incorporation of a new entity but with the common intention of running a business or create a new entity by contributing equity and share the revenues, expenses, and control of the enterprise in the proportion of their capital contribution.

Foreign Direct Investment (FDI) up to 100% or a certain percentage is permitted under automatic route in those sectors which are not defined in the FDI policy of the Government of India. There are also some other sectors in which permission from the concerned Industry Ministry is needed for investment. Before 24th May, 2017 all the approvals were handled by the Foreign Investment Promotion Board (FIPB).

The Basic features for entering into a Joint venture Agreement includes Contribution by partners of property, money, effort, skill, knowledge or other assets to the common undertaking, Right of mutual management or control of the property in enterprise and Right to share in the loss and profit of the property.

Forms Of Joint Venture
  1. Incorporated Joint Venture: An incorporated joint venture is one that uses a company established for the purpose of the joint venture, with the venturers acquiring shares in the company. It is either a private or a public company with limited liability in which the shareholders are the joint venture participants. Here, the shareholders have no rights in relation to the company’s assets. They can participate in the profits (which are distributed as dividends), but not in the losses. Basically, in this form of the joint venture, the equity of the project is divided into shareholdings. All incorporated joint ventures in India are domestic companies, and are governed by the provisions of the Companies Act, 1956. Such joint ventures have a separate legal entity under the law and enjoy an independent existence from the parties constituting it.
  2. Unincorporated Joint Venture: An unincorporated joint venture is a contractual joint venture that is affected by a lawfully binding agreement, and does not include the incorporation process. It does not form a separate corporate entity or form equity capital. Hence, it is very like a partnership. This form of the joint venture is usually entered into for a limited period or for a particular purpose and does not join the parties for perpetuity. An unincorporated joint venture may be either by way of partnership or contract.

In a joint venture by way of contract, the contract is entered into between the parties and sets forth their relationship, and their respective rights and liabilities. A joint venture formed by way of partnership is governed by the Indian Partnership Act, 1932. A partnership does not enjoy an independent existence from its members and may be either in the form of an expressed or implied agreement. It is not compulsory that it be registered, however, registration helps in providing some benefits and exemptions under different statutes and enactments, and makes the partners eligible for instituting lawful proceedings to enforce their rights, as arising from the partnership agreement. Registration also gives them the right to sue any third party, to enforce the contractual rights of the partnership.

Documents Required For A Joint Venture Agreement 

The documents required for the fulfillment of a joint venture agreement are as follows:

  1. All documents related to the venture agreement shall bear the name of the joint venture.
  2. All documents prepared by either of the members, related to the venture or project that reflects the performance of activities completed under the contract.
  3. Copyrights (if any) granted to a member of the agreement by another member to reproduce similar work.
  4. Documents that indemnify its members against claims, liabilities, damages, costs, and expenses sustained as a result of reusing the designs, drawings as part of a project or other projects, under the venture.
Clauses of Joint Venture Agreement 

In order to enter into a Joint Venture with the prospective business partner, a letter of intent as well as a Memorandum of Understanding (MoU), is signed by the parties that simplify the basis of the future Joint Venture agreement. This also involves 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 which are as follows:

  1. Object and scope of the Joint Venture
  2. Equity participation by local and foreign investors and agreement to a future issue of capital
  3. Management Committee
  4. Financial arrangements
  5. The composition of the board and management agreements
  6. Specific obligations
  7. Provisions for distribution of profits
  8. Transferability of shares in different circumstances
  9. Remedying a deadlock
  10. Termination
  11. Restrictive covenants on the company and the participants
  12. Casting vote provisions
  13.  Appointment of CEO/MD
  14. Change of control/exit clauses
  15. Anti-compete clause
  16. Confidentiality
  17. Indemnity Clause
  18. Assignment
  19. Dispute Resolution
  20. Applicable law
  21. Force Majeure etc.