Demystifying joint venture agreements

Have you ever been asked to “go into a joint venture” with someone? I have noticed people from all walks of life conducting all sorts of concerted commercial enterprises under the style of what they believe to be joint ventures. When traders at Mupedzanhamo Flea Market in Mbare contribute funds, in equal shares, to import bales of second-hand clothing (mabhero), they often claim to be operating a joint venture.

What then, constitutes a joint venture? My own take is that it is an association of two or more natural or artificial persons to conduct, as joint owners, an enterprise, venture, or operation for the duration of a particular transaction or a succession of transactions.

In his Treatise on Contracts, 3rd Edition 1959, on Page 318, Williston defines a joint venture thus: “It (the joint venture) is an association of two or more persons based on contract who combine their money, property, knowledge, skills, experience, time or other resources in the furtherance of a particular project or undertaking, usually agreeing to share the profits and the losses and each having some degree of control over the venture.”

It is clear, therefore, that the joint venture is a strategic arrangement between two or more entities, where resources are pooled, for the joint operation of a specific project or a series of projects. It is also a mechanism for businesses to collaborate and benefit from their different areas of expertise.

A joint venture may give birth to a new business entity separate from the parties operating the venture or it may operate on nothing more than an agreement between the existing entities. If the parties do not form a new legal entity, the arrangement is usually referred to as an unincorporated joint venture.

Where the parties desire to form a special purpose vehicle to operate the venture, they can incorporate a company or conclude a partnership. In my experience, parties usually incorporate a special purpose vehicle generally referred to as a joint venture company or incorporated joint venture.

All things being equal, a simple handshake is enough to conclude a joint venture. However, experience has shown that, the goodwill that prevails at the beginning of a joint business excursion does not last forever. Therefore, it is wise to create a record of all the terms of the venture in a signed agreement commonly referred to as a joint venture agreement.

Years of experience have also shown me that it is prudent to spend a small fortune on a good commercial lawyer to assist in the drafting of this joint venture agreement. Failure to seek legal assistance right at the outset will cost you a lot more money down the road in the event of a dispute with your joint venture comrades.

The joint venture agreement, among other things, defines the parties’ respective roles and responsibilities and how the parties will work in concert to achieve the joint venture’s objectives. It also sets out the resources, such as funding, properties, and other assets, each entity will contribute to the venture.

The joint venture agreement also defines how the venture will be managed and controlled. For example, if two founding parties to a joint venture wish to exercise equal control, they will allocate to each other an equal number of shares in the joint venture company coupled with equal management responsibilities and equal representation on the board of directors. A good joint venture agreement should cover, among others, the issues discussed below.

Governance arrangements

Parties must agree on how the joint venture (JV) will be managed. The JV must expressly state whether shareholders or their representatives will be actively involved in the management of the JV or if management is going to be the preserve of an existing or appointed management team. Usually, the overall direction and management of a JV is left to the JV entity’s board of directors. It is critical, from the get go, to expressly state the balance of decision-making power between the parties as shareholders, the JV board of directors and individual members of the JV’s executive team. It is not unusual to stipulate that certain “Reserved Matters” will require mutual agreement of the parties either as shareholders or at board level.

Funding the JV

Funding the JV is a crucial issue. The JV should state how the venture will be funded. The rights and obligations of the shareholders in this context also need to be expressed unequivocally. Ordinarily, each party makes an initial financial contribution to the capital of the JV. The JV should stipulate whether or not parties will have any continuing obligation to finance the JV.

Other contributions

Frequently, joint ventures involve the contribution by parties of assets, property, technology or services. This may require the conclusion of further ancillary agreements to stipulate the detailed terms.

Share disposals and exit provisions

The question of share disposals and exit generally may be dealt with in numerous ways. If parties wish to keep it simple, it will be provided that the transfer of JV shares can only be achieved with mutual consent of all shareholders.

More complex provisions will deal with issues such as the identification of prohibited purchasers such as competitors or sanctioned individuals.

They will also cover issues like pre-emption or tag along rights conferred on the remaining shareholders or drag along rights entitling outgoing parties to force remaining minority shareholders to sell their shares to a third-party buyer at the same time and for the same price.

Default provisions

Usually, JVs should list potential events of default and provide structural remedies in the event of default.

Remedies may include, among others, the right to buy out the defaulting shareholder or to require the defaulting party to buy its co-shareholders out.

Business plan

To avoid confusion regarding the development of the JV’s business, it is recommended practice for the parties to agree on a Business Plan from inception. The business plan can be an annexure to the JV or, at least, be identified in the JV.

Human resources

The complexity or otherwise of this issue, will depend on whether employees will be permanently transferred to the JV or remain in the employment of the respective shareholders while on secondment to the JV.

Dispute resolution

The JV must specify dispute resolution mechanisms. For instance, that disputes between the parties shall be resolved by litigation or through arbitration by an agreed third party.

Governing law

A JV is not formed in a vacuum; it must have a particular jurisdiction. Often, this will determine the governing law.

Duration

The JV must state how long it is going to subsist. If it is open-ended, it should stipulate the notice period each party should give if it desires to pull out.

Conclusion

A properly crafted JV will save you time and money in the event of disputes with your JV partners. All things being equal, it will help your business grow faster, increase productivity and generate additional profits. -herald.cl.zw