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.
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 –
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.
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.
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.
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.
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.
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 –
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 –
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.
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 –
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Posted byVakilsearch Staff
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