INTRODUCTION
When two or more companies come together to do a business activity and start a new venture or one of the companies may take over other one and continues to work, it is called joint venture. Usually, these two companies will be someone who is compliment to each other, they will be in same line of business or a business which somehow related to each other. Joint venture can be project base or time base depends on the circumstances.
The contribution that each partner (this can mean individuals as well as companies), makes can either be in equivalent proportion or in an unequal proportion wherein one of the partners contributes more resources in the said joint venture.
In this article, Team YLCC brings you all you need to know about a Joint Venture Agreement. Read on!
ADVANTAGE OF JOINT VENTURE
One of the advantages of a joint venture is that it can be restricted to a specific period or a specific project or specific responsibilities of the partners.
Another advantage offered by joint ventures is that it enables organisations to secure expertise or connections from different organizations, to enter new markets, or to grow in size by adding to the product line or increasing administrative capability. The combined resources for the joint venture thus benefit both the partner. For instance, small organisation can join hands with bigger and more settled organisation whereby the smaller organisation can benefit from new technologies while the bigger organisation might benefit from the nimbleness of the smaller entity in a particular area. Combined resources of the two entities may increase the market share for both, thus reducing the competition.
CLAUSES TO BE ADD WHILE DRAFTING
- DEFINITIONS
Definition clause is always a crucial and important clause for a contract because it helps to understand the whole contract properly even to a layman. Definition clause define the legal terms used in agreement so that it become easy to understand and read the whole agreement at the same time. To draft a well drafted Joint venture agreement, you need to add definition clause with important definitions of terms like
- INCORPORATION OF A COMPANY
In a joint venture, if you decide to create a new company than you need to have this clause. In this clause you have to mention about incorporation of your new private limited company that you have created for your joint venture. Its registered office, name and style of company, incorporation under Indian laws etc.
And if you decide to not create a new company than you should have only Name & Style clause instead of this clause.
- INVESTMENT
Investment is the total investment of the project, and in this clause, you have to decide and draft about who is going to purchase the land, how the building is going to be done, who will purchase the machinery or one of the parties of JV give the machinery for interim period. If everything is jointly done than mention that and if one party is going to do some investment and other is going to help the JV by any other mean than mention that and just draft everything clearly. What happens after completion of project, do you sale the property and machinery and how do you divide the sale value or the scrap value, everything should be draft in a agreement.
- USE OF THE COMPANY NAME & TRADEMARK
Which company name are you going to use in a joint venture? People usually don’t prefer having a new company name because that create a conflict. For ex: If company A’s trademark is something like @ and company B’s trademark is BACHELOR so one is creator one is alphabet. You can’t combine both and create one new logo, one thing its funny and second thing people will not even understand which particular bank is this.
Instead, if you are already a preowned name across, then will use the same name
So, think and decide which brand are you going to use.
- COST & PRICING
Usually if there is any expenses related regarding your duties, taxation so it should be jointly bear by both the parties, because your joint venture is a mutually shared relation.
- CONDITIONS PRECEDENT
Condition precedent is a clause that mention about conditions that needs to be doen before start a joint venture and you can say that these conditions are mandatory for a joint venture and you should draft them in your agreement to make things clear and crisp. Incorporation of the new company according to the Indian laws and draft MOA and AOA is first mandatory condition that needs to be fulfil and second is execution of production and license agreement, because you have to be clear about licenses that what license both the entity has and what more license you need to run this Joint venture smoothly.
In this clause you also have to mention that if any condition is not fulfil than this joint venture will automatically terminate on any particular date decided by both the party.
- SHARE CAPITAL
share capital clause is a very important clause as it gives details about all the capital bifurcation. So, in this clause you will have to draft about your Authorised capital, paid-up capital, how many shares are there, company A has how many shares and company B has how much stake in the company or Joint venture. how paid-up capital is going to be transfer, is it only in cash or any other payment method. How many equity and prefense shares are there, what are the rights available to equity shareholders. Details of both the parties are very important in respect of joint venture to draft a JV.
- Further issue of share and financing
Usually in JV third parties intervention will not be there, because two people have come forward for a purpose so then they will conclude it and step away after completion of their purpose. But in some cases people want to issue further share for outside investment, in such case first you have to issue to other shareholder and if he is rejected it, only then you can move forward and give it to some third party investor.
There is very less chances of Further issue of share in JV but its good to have an option already drafted in agreement because tomorrow to amend a JV and negotiate is going to be hard and hectic.
- REPRESENTATION AND WARRANTIES
This is also one of the important clause for any corporate contract as it gives security to the agreement and also to the other party. In this clause both the companies or entities represent & warranty that whatever they are saying in this agreement is true and they can guarantee that for example both the companies are incorporated under companies ACT, both the companies have respective license whatever they are claiming, both the companies have asset and expertise whatever they are claiming in this agreement and they warranty to all the information they gave about their self respectively.
- RESPONSIBILITIES OF THE PARTIES
Most important and necessary clause for JV as it defines about the responsibility of the parties like who is going to do what, how all the responsibilities are bifurcate in this JV. So for a successful joint venture parties need to divide their work by consent and then done those work on time. In this clause you have to draft about all the responsibilities and also who is going to do those responsibility for example one party is good in purchasing material then both the party can decide to give this work to respective party, if one party is good in taking licenses and do all the paper work then that party can have this responsibility also some responsibilities need to done by both the party mutually like inspection of accounts regularly and inspection of manufacturing unit if any, then these kind of responsibility you have draft separately,
So in this clause you can draft three points, one is company A’s responsibility
Company B’s responsibility and responsibility that needs to done by both the party.
- MANAGEMENT
How the board of directors are decided and how many are decided all has to mention in this clause. Minimum 2 director are necessary for a private limited company as per company Act so who is going to appoint those and how. How the board of directors meeting will held, who should ne present in every meeting and who can be absent all of these information needs to decide mutually and then drafted in this clause for further understanding.
- PROCEDURE AT BOARD MEETINGS
Under the law, minimum 4 board meetings are necessary for a private limited company but if you as company wants to have more meetings than decide and draft under this clause. How many days before written notice be send for a board meeting, what will be discuss in the meeting should always mention in the notice before, Who should sign the agenda, who will be the MD of company, who has the right to appoint MD for the company, without prior consent no special resolution will pass in any general meeting, all of these information should be drafted in an joint venture agreement under this clause.
- TRANSFER AND SALE OF SHARES
Transfer of shares is an important clause as it defines about who can transfer and when can transfer the shares, and what are the conditions to transfer share by any party. So, you can draft like no party can transfer any share without taking consent of other party. To create a well drafted agreement you should mention that transfer of share does not mean that the party who transfers the share will not be bound by this agreement.
- TECHNICAL KNOW-HOW/ CONFIDENTIALITY
First of all always make confidential clause as inclusive because it will be favourable for both the parties. So always mention the information in detail and clearly under this clause which needs to be confidential for benefit of both the parties. Always mention about the use of confidential information under this clause that who can use this information and how. Also clearly mention that this clause will also be in effect for (next 5 or 7 yrs. whatever both parties decide and agree upon) after completion of this project for further security of confidential information.
- BOOKS, REPORT AND AUDIT
Financial year is April to march, according to section 2 (41) of companies Act but if your company is not incorporated under Indian companies act than you can decide any financial year and draft in the clause. This clause is important for making things clear between parties. How many times in a year book will be get audited, both parties can inspect books of accounts any time, at the end of each year who should sign the final accounts, when will the financial year start and end in respect of the new company create for joint venture all of this information should be drafted under this clause. How does a auditor be appoint, what should be the procedure.
- NON-COMPETITION
Until this joint venture is running, no party can do another business in same filed or any competitive business not even the affiliated companies of both the parties. Non-competition clause is very crucial as it protect the right of the parties as well as it gives restriction to carry forward any similar business.
- EFFECTIVE DATE OF AGREEMENT
When will this agreement be effective is explain under this clause. What will be the effective date i.e. on which date the agreement executed or you can write about the condition on which the execution is depends.
CONCLUSION
A joint venture provides a business or an organisation an opportunity to establish short-term, sole purpose partnership, as a result, deriving multifarious advantages of a strategic partnership without the joint and several liabilities attached. In order to incorporate a joint venture, the partners intending to achieve the same, contribute their resources like capital funds, stocks/goods or any other equipment at the beginning.
Besides, it is pertinent to note that the partners in a joint venture, which is established for achieving the short-term purpose, generally agree to an exit strategy, wherein, one of the partners can acquire the distribute interest of other partners in the joint venture. providing for an exit mechanism will work well in cases where an entity wishes to experiment with businesses which are new for the entity, but which are the domain of the joint venture partner.
YLCC would like to thank Nikita Jain for her valuable insights in this article.
