Introduction: A Joint Venture or JV is an arrangement between parties wherein two or more entities come together, bringing a specific skill, expertise, know how, funding, approvals or other recourses etc., to run a business in collaboration with each other, with a common motive of achieving commercial benefits.
Purpose: A Joint Venture can be created for various reasons like:
Types: A Joint Venture can be in form of Structural like JV Company and JV LLP, JV Partnership (unstructured but contractual) or Contractual Obligation.
Company: In case of JV Companies, the parties to JV would hold shares in agreed percentage and on shall decide on terms and conditions defining the rights and obligations of the parties. The charter document of the Company i.e. Memorandum and Articles of Association (MOA&AOA) alongside the JV Agreement should capture all the agreed terms and should be in consonance with the provisions of Companies Act 2013 and rules and regulations thereunder. It is not always necessary to incorporate a fresh JV entity and JV entity can be created by acquisition of shares of the existing company by the JV Partner and making necessary amendments in the MOA & AOA of the company.
LLP: In case of JV LLP, likewise to company, the holding or sharing ration between the parties have to be agreed upon alongside other terms and conditions to be recorded in LLP deed (to be in terms of LLP Act 2008) as well as JV Agreement. The LLP gives the benefit of limited liability and separate legal entity to the parties involved and alongside give flexibility to organize internal structure as partnership basis the mutual agreement.
In case of a JV Company and JV LLP, an already existing Company or body corporate can directly become a party.
Partnership: A partnership firm (governed by Partnership Act 1932) can also be created for the purpose of JV giving more flexibility in terms of ease of arrangement, no or very few compliances and simpler understanding between the parties. A partnership essentially represents a contractual relationship between the parties to carry on a business and share profit. A JV partnership is more of fusion of Structural and Contractual JV form. The Partnership JV mode has limitations like unlimited liabilities of partners and no separate legal recognition to the firm and are most suited for smaller projects.
Contractual JVs: Contractual JVs are in form of cooperation agreements or strategic alliances/collaborations. Under these kind of JVs parties can collaborate for specific projects or
assignments and may work as independent contractors. These types of JVs are generally project specific or for short term assignments and give flexibilities to parties not to bind themselves in a more permanent or stringent structure. The objective of the parties is to generally earn profit on completion of the common target or purpose. These JVs are generally in nature of purchase agreements, distribution agreements, technology transfer agreements, promotional collaborations, intellectual advice or sharing etc. Also, it is quintessential to deliberate upon applicable tax provisions and tax implication before entering into any such strategic alliance agreement.
Documents to be executed: In case of JV Company, the parties would require to execute a JV Agreement (JV) or a Shareholder’s Agreement (SHA) along with AOA and MOA. Likewise in case of LLP, a LLP Deed will be required. Other ancillary agreements like employment, trademarks/patents licensing or assignment, technology transfer agreement etc. may be needed depending upon the nature of Transaction.
Key Clauses: While each JV differs from another and have range of terms and conditions and clauses, but there are certain critical clauses which are covered in almost all the JV Documents.
Statutory & Contractual considerations: While deliberating a JV, parties must take into consideration the applicable statutory and regulatory provisions and restrictions. Contractually parties have liberty to negotiate and agree on terms and conditions but contractual rights cannot supersede statutory provisions. There are certain key statutory provisions, which requires deliberation, while discussing and strategizing a JV formation and stricture.
Companies Act: In case of JV Company, the shareholding of the parties plays a crucial role in deciding the control and decision making of the JV entity. The restrictions and thresholds are majorly governed by Companies Act. The decision making in companies are governed by board of directors and shareholders and the actions/decisions have to be in compliance with provision of the Companies Act. For matters to be decided by shareholders have to be either through ordinary resolution (approval of 50% shareholders present voting required) or special resolution (approval of 75% shareholders present and voting required). Thus as a statutory right any JV partner holding more than 25% in JV Company would be able to exercise certain amount of control and the ones holding more than 50% would be able to exercise total control. Legally the provision can be made stringent and therefore contractually special rights can be accorded to the JV partner in form of veto rights in shareholder’s as well as management decisions.
Likewise, as a statutory right, any JV partner holding 10% or more shares can exercise minority rights like requisitioning a shareholder’s meeting, withholding consent to call general meeting at shorter notice or initiating action of oppression and mismanagement.
FDI: Foreign investment in JV companies can be made under Automatic Route or Approval Route. FDI is sector specific wherein now almost in all sectors 100% FDI is allowed under Automatic route although in some sectors limits are prescribed (Sectoral caps). Under Automatic Route only intimation is required to the Regional Office of RBI within 30 days of receipts of funds. For investment beyond sectoral caps, prior permission is required to be obtained from Foreign Investment Promotion Board (FIPB). It is easy to procure FDI in JV Company whereas in case of LLP, FDI is permitted only under government approval route and also LLPs with FDI are not eligible to make downstream investments.
FPI Regulations: In case of listed companies, any investment by Foreign Institutional Investor (FII) or Qualified Foreign Investor (QFI) will have to comply with the provisions of SEBI (Foreign Portfolio Investment) Regulations 2014 (SEBI FPI Regulations).
Competition Commission Act 2002 (CCI Act): Formation of any JV which causes or is capable of causing an appreciable adverse effect on competition is void under CCI Act. Hence the terms and conditions of a JV agreement needs to be drafted carefully in a manner that it is not oppressive of competition. Also, combination (mergers or acquisitions or JVs) of value above the prescribed thresholds require prior approval of CCI.
Special Acts Governing Specific Industry: While negotiating and structuring JVs of specific sectors like Telecom (TRAI), Insurance(IRDA) etc. the sector specific laws and governing provisions and approvals are also to be kept in mind. In case of listed companies, regulations of SEBI and stock exchange approvals etc. are also to be mindful of.
Conclusion: From the discussions above on different structure of JV, critical clauses, applicable statutory requirements etc., it is clear that there is no one structure which can be suited for all transactions. Every proposed transaction has to be evaluated, deliberated, discussed and negotiated independently depending upon the proposed objective, requirement and uniqueness of the proposed transaction. The document/agreement of each such transaction also needs to be carefully drafted and should include all critical and relevant clauses unambiguously leading to a smooth operation of the business of JV and covering remedial measures in case of any dispute or deadlock.
Authored By:
Deepika Vijay Sawhney
Founder
Transique Corporate Advisors