All about Joint Venture Agreements

Shubham Chauhan

23 Dec, 2019

Every business owner looks for an opportunity to increase the market reach of his business and generate significant revenues in a shorter amount of time. In such situations, Joint Venture agreements come into play. A joint venture agreement is a strategic alliance between two or more parties to accomplish a specific goal. It is an agreement where two or more parties agree to combine their resources to achieve a common goal. A joint venture should not be confused with a merger as there is no transfer of ownership in Joint Venture agreements.

Types of Joint Ventures

There are two types of Joint Ventures, and those are:

Equity-based Joint Venture: In this type of JV, the parties involved pool investment and other resources to create a new business entity.  For example, a foreign-based company establishing a business in India may do so by signing a joint venture agreement with an Indian business partner. Through this agreement, the Indian business gets the required foreign investment and technology from its partner.

Contractual based Joint Venture: This type of JV does not require the creation of a new and separate business entity. The parties involved enter into an agreement to work on a project. For example, the franchise operation, wherein the owner of franchise and franchisee enters into a Joint Venture agreement for just this one project, while both the businesses shall continue to carry on their individual work.

Checklist for Entering into a Joint Venture Agreement

The following checklist can help you in planning a successful joint Venture:

• Thorough research should be made on the activities of other businesses.
• You should carry out SWOT (strengths, weaknesses, opportunities, threats) analysis of your business.
• You should compare your method of working with those who are going to be your potential Joint Venture partners.
• Opinions of the employees of your business should be taken into consideration.

Process of Entering into a Joint Venture Agreement

• The first and foremost step towards a successful JV is to select the right partner. While choosing a partner, it should be kept in mind that the culture of the proposed partner fits with that of your organization.
• Once the partner is selected, the parties involved should sign a Memorandum of Understanding (MOU) which is also known as a letter of intent. Signing an MOU lays out the basis of the future Joint Venture Agreement. The MOU serves as the indicator of each party’s intention of entering into a JV agreement.
• Corporate law experts should draft MOU and Joint Venture Agreement.
• The Joint Venture Agreement includes details like the type of firm, sources of funding, stakes of shareholders, the contribution of intangible assets, etc. It also contains information on the exit strategy, in case the parties involved decide to dissolve the venture.
• Further, you need to select the name for your Joint venture.
• Once the agreement is made, the next step is to register the Company and the Articles of Association.

What should be Included In Joint Venture Agreement?

Some clauses are extremely relevant that should be included in the joint venture agreement. Joint Venture Agreements consists of provisions for:

• The financial investment, if any, that both the parties involved will contribute to the enterprise.
• The distribution of profits, losses, and liabilities.
• Specific responsibilities of all relevant parties.
• Mediation of any future disputes.
• Responsibility of keeping the financial and administrative records.
• Dissolving the joint venture, also known as an exit strategy.

Opportunities Offered by Joint Venture Agreements

Like small businesses, Joint Ventures are usually launched with great optimism for success. If everything falls in place Joint Ventures offer following opportunities:

• Entering into a joint Venture Agreement gives the parties involved access to new resources that includes technology, equipment, and staff talent.
• Joint Venture gives a chance to acquire new customers which would not have been possible for the business involved before entering the agreement.
• Businesses get a chance to gain new information.
• When two or more forces are involved, it enhances their ability to bring a new product to the market with greater speed.
• The businesses involved get an opportunity to gain expertise in a new domain. This ultimately enhances the abilities of staff.
• If the second party involved in the Joint Venture enjoys a good reputation, it allows the small enterprise to improve its public image.

However, if a joint venture is not planned correctly, certain aspects such as cultural differences, poorly drafted contracts, misunderstanding between the parties may lead to the termination of the agreement.

Possible Disadvantages of a Joint Venture

Generally, joint Ventures offer more benefits than disadvantages. However, before signing a joint venture agreement, certain demerits that come with the contract should be given a thought. Some of the disadvantages of entering into a Joint Venture Agreement are:

• Restriction in Flexibility: For businesses to flourish well in their respective fields, they need to infuse flexibility in their working structure. However, in some joint ventures, the involved companies tend to lose the flexibility of work in their course of forming a new business entity.
• Vague Objectives: The objectives of the Joint Venture are not entirely clear and are rarely communicated to the people involved.
• Restricts other opportunities: Joint venture agreement limits the outside activities of the companies involved, while the project is in progress.
• Liability: One of the biggest disadvantages of a joint venture is that the structure offers no liability protection to the businesses involved.
• Clash of Cultures: When two or more parties sign an agreement to work for a common goal, there is a cultural clash in the management styles of parties involved. This clash of culture results in poor cooperation and integration of both parties.
• No Equal Involvement: It is unlikely for the parties involved in a joint agreement to share the same level of involvement. For example, In a joint venture if one company is responsible for the production and other for sales and marketing, the responsibilities of both the companies differ and hence the level of involvement of the companies involved doesn’t remain the same.

Termination of Joint Venture Agreements

There are a number of factors that can cause the termination of a joint venture agreement. Some of the factors are as follows:

• One of the parties involved committing a serious breach of the agreement.
• The parties involved being unable to solve their disputes.
• The project in which the companies were involved coming to an end.
• Insolvency

The Joint Venture Agreements should offer clear steps to manage the termination of the joint venture. If a joint venture gets terminated because of the defaults of one party, the agreement should allow an opportunity for the defaulting party to remedy the situation.

Conclusion

We can conclude by saying that Joint Ventures offer a variety of perks to the businesses involved in the agreement. Joint ventures provide companies with a platform to come together and pool their finances, ideas, and resources to develop a specific project. All this is possible only if a well-drafted agreement governs the parties involved in the agreement. Discrepancies in the joint venture may lead to the termination of the joint venture agreement.