Joint Venture Agreement- An Overview
A joint venture agreement is a contract which is formed for the mutual benefit of two or more companies or entities. Usually a new entity or collaboration is formed as a result of a joint venture. The companies or entities agree to share different resources such as assets, intellectual property for the mutual benefit.
One of the main aims of coming to this form of agreement is to move into new markets overseas. The specific joint venture which is formed by the entities is not governed by the law. This new entity which is formed by the co-ventures cannot enter into any other form of contracts. They are only governed by agreements initially negotiated between the parties.
Benefits of a Joint Venture Agreement
The following benefits can be achieved through a Joint Venture Agreement:
- Expertise- The parties of the joint venture agreement would get access to expertise, technology and research and development. Both the parties can benefit from the agreement.
- Access to Resources- Through the joint venture both the companies can secure access to resources. These resources will include manpower, intellectual property, research and development and finance.
- Flexibility- The parties can negotiate the deal before entering into the agreement. Through this process, the parties can put all their terms and conditions related to the agreement.
- More Contracting- The joint venture will open more amount of contracting between the parties.
- Temporary Agreement- Joint Ventures are temporary agreements only for a small period of time. Usually the JV would be for a period of 6 months to 24 months. However, the parties can extend the agreement based on the conditions.
- Reputation- JV agreement is also known as a mutual benefit agreement between the parties. If a company is entering into a JV with another entity which is reputed, the business would improve of the parties entering into a JV. This would not be achieved through any other usual contract.
What are the Types of Joint Venture Agreement?
There are two types of Joint Venture Agreement:
- Contract Based-Usually a contractual based JV agreement would depend on the parties when they initially enter into an agreement or a contract. All the relationships between the parties are governed by the contract.
- Equity Based- Usually this form of agreement is entered by legal entities such as companies, partnerships and other forms of entities.
What are the agreements which are prohibited from entering into Joint Venture Deals?
The following agreements cannot be entered into by entities:
- Gambling or Lottery Business
- Railway Contracts
- Chit Funds Business
- Nidhi Company Business
- Any sectors which permit the manufacturing of tobacco based products
- Trading Business related to Transferable Development Rights (TDRs)
- Atomic Energy and Real Estate Sectors
What are some of the key considerations to include in a Joint Venture Agreement?
Before entering into a joint venture agreement, the party has to analyse the relationship which is formed between the parties. All the points which are considered have to be penned down before entering into the stage of negotiation. It is always crucial to consider services of a lawyer or a legal advisor before entering into a Joint Venture agreement.
There is no form of eligibility criteria for entering into a JV agreement. While there are some form of contracts which are not allowed to be carried out through a JV, most commercialisation projects are allowed to enter into JV.
The following considerations have to be taken by the parties before entering into a Joint Venture Agreement:
- Relationship between the Parties- First and foremost the parties must consider the nature of relationship. The status of the parties can be independent from one another. Some of the considerations also need to consider if the relationship is out of a mere contract or some form of fiduciary obligation is brought out through this venture.
- Contributions of Respective Parties- The next thing what to consider in a typical joint venture is to know the amount of contribution made by the respective parties. This is crucial in carry out the operations related to the agreement.
- Confidential Information- There is no chances where there will be no access of information between the parties. Hence confidentiality is one of the main provisions which has to be included in the JV agreement. The situation related to the breach of confidentiality must also be mentioned in the joint venture agreement. Such situations must be covered by breaches under the respective contract law.
- Use of Data- Another important provision present in a typical JV agreement is the use of data. Data can be divided into sensitive data and non-sensitive data. All data which is categorised as sensitive data must be used properly. The provisions related to data protection act must be complied by the parties at all times.
- Profit Sharing Ratio- The amount of profits and losses must be stated by the parties in the Joint venture agreement. This would also include the amount of losses between the parties.
- Decision Making- Another clause which has to be incorporated in a JV agreement is the decision making ability of the parties.
- Intellectual Property Rights- Through the JV agreement the parties would get to use the intellectual property rights of other parties in the contract. The exclusive use of these intellectual property rights must be stated in the contract.
- Shares Owned- The amount of capital contribution would be directly proportional to the shares owned by the parties.
- Exit Clauses- This is one of the main clauses which a JV should contain. In such events relating to a breach of the JV or termination of the JV what would be the exit options available to the parties.