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What is a joint venture agreement?

What is a joint venture agreement?

Legal & Compliance

Vakilsearch Staff

Vakilsearch Staff

1 Oct 2020, 10:00 — 7 min read

A Joint Venture is an alliance, with parties making promises to each other, sharing expenses and fruits of their togetherness. In the business world, a joint venture is all about sharing complementary resources, customers, suppliers, or production. Let us discuss the legal issues surrounding a joint venture agreement. We also delineate pointers that can help you in negotiating a joint venture agreement for your business. 

 

Why should you consider a joint venture agreement?

In today’s world, we find successful joint ventures companies in every industry – from space, to automobiles to beverages and apparel. NASA and Google have jointly created Google Earth. In India, Maruti-Suzuki is a classic example of the success of involving an Indian and an international partner.  

 

Whether you’re an early startup company or a large business, a promises certain distinct advantages for each of the parties. Here are the top five features of a typical joint venture agreement  – 

 

1. Minimising costs 

Partnering with an existing business can provide valuable links – office space, access to suppliers, distribution networks. It is prudent as it not only saves time, energy, and costs but may also act as an easy exit if the venture does not work out. 

 

2. Cultural alignments in a new market 

Every company, before entering into a new market has to make adjustments in its products and advertising to suit society. For Indian companies, a joint venture with a local company would help them adjust to a new country faster. For foreign brands in India, the Indian partner can provide valuable insights on market perceptions. It is no wonder that McDonald’s Maharaja Mac or Dominos’ Peppy Paneer are hugely successful variants in the Indian market. 

 

3. Overcoming legal hurdles

In India, joint ventures are especially preferred as the law may not allow a foreign entity to invest in certain sectors or industries. For example, in the defence sector – foreign investment is allowed only up to 49%. A stand-alone foreign company may not be eligible for certain tenders, and thus a joint venture with an Indian entity may be the only way to circumvent such provisions. 

 

4. Sharing risks and rewards 

There are psychological studies that demonstrate the success of joint ventures. In a joint venture, there is sharing of potential benefits and the risks are distributed. Thus, each company is motivated to work hard and utilise the shared resources to the fullest. This generates better collective outcomes for the joint venture company as a whole. 

 

5. Sharing assets, intellectual property, and human resources

It may take years of hard work and investment for a company to build a patentable technology and obtain intellectual property rights. However, a joint venture is an easy key to unlock strategic resources like patents, manufacturing technology, or marketing tools. Partnering across the business chain (such as with a manufacturer or entering in a joint-venture with a distribution company) can help reap the expertise of each other’s key areas and trained human resources.

 

Types of Joint Ventures in India and their features

 

1. Equity joint ventures 

Here, one company may buy the stock of another company and invest in its equity, thereby creating a joint venture company. Two companies may also jointly set up a third company with equity contribution in a decided ratio. While negotiating such a joint-stock agreement, it is imperative to discuss the following – 

  • Shareholding pattern 
  • Board of directors 
  • Policy on share transfer and restrictions thereof 
  • Dividend policy 
  • Change of control 

 

2. Partnership, as a form of a joint venture 

A Limited Liability Partnership for a joint venture can be set up under the LLP Act. In this case, the minimum of two partners are required, of which, one has to be an Indian resident. In such a set-up, the following are essential pointers for the agreement –

  • Duration of a legal relationship 
  • Sharing of profits 
  • Sharing of losses 
  • Rights and obligations of each partner 
  • Dissolution of partnership 

 

3. Contractual joint venture 

Other than the above two conventional joint ventures, two companies may also come together under a contract to fulfil a specific task. In such a scenario, the contractual agreement would determine each partner company’s rights, duties, and remedies. The contract may also specify how the joint venture may come to an end. 

 

In India, joint ventures would be subject to the Companies Act as well as the Limited Liability Partnership Act, based on the agreement. Additionally, other general acts such as the Indian Contracts Act, Competition law provisions, labour, and taxation laws would also apply. Thus, a due diligence study of the legislative obligations that would ensue is advisable. 

 

Due diligence before a joint venture agreement

A due diligence exercise can help identify risks, potential costs, and dangers of investing in a venture agreement with another company. It can be done at the following levels – 

  • Company level – doing background checks, profiling projected sales and revenue of the company, etc
  • Industry-level – risks specific to the industry, governmental regulations, cost of compliance, taxation obligation, etc 
  • Other relevant considerations – Companies must also be aware of foreign exchange issues, currency repatriation, specific restrictions in an economy, intellectual property laws, compulsory technology transfers, royalty issues, compulsory licensing, etc 

 

Also read: Top 3 things to keep in mind for SME Joint Ventures

 

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Image source: shutterstock.com

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

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