Why you need a Joint Venture Agreement

Joint Venture Agreements

If your company and another company (or other companies), share a common vision of creating a company which will be one of the leaders in your sector, you may need a Joint Venture Agreement drawn up by Philip Jones’ corporate lawyers. 

Joint Venture companies are built on mutual synergies and generating value for each shareholder party. You and the other companies may have recognised these mutual synergies, are desirous of pooling your respective resources and skills in order to implement this vision and have agreed to pursue business opportunities through a Joint Venture Company (‘JVC’). 

Such joint ventures require the shareholders and directors to operate and manage the affairs of the JVC. 

The overall objective and the business purpose of this legal agreement, shall be the operation, control and management of the affairs of JVC and its subsidiaries. Sometimes, with the objective of carrying on business in a particular geographical region. 

JVC may be incorporated in a completely different jurisdiction to where the business is going to be carried out, or the law that governs the parties in the event of a dispute. 

The agreement shall control the way, and the price at which, shares shall be issued. It will stipulate the issued and subscribed share capital, and any subsequent actions that must be taken within a stipulated timeframe. 

The agreement sets out a corporate action plan for JVC, for example, it binds the JVC to incorporate subsidiaries in multiple countries if required, with the objective of carrying on the JVC business in the respective countries. 

It stipulates the obligations of the shareholders. For instance, if one shareholder operates in a certain geographical region, for example Dubai, the agreement shall ensure that all new business undertaken in Dubai shall be undertaken for the account of JVC, and the shareholder shall discontinue soliciting and executing any fresh/new business in their own entity except as agreed with the JV partners. It can also oblige a shareholder party to shut down its operations in a particular geographical region, if the JVC is going to target the same region. 

If one of the shareholder parties has an established brand, the agreement can enable the shareholder to allow and grant authorisation and / or a licence to JVC to use the brand name in its corporate name and for business purposes and provide supporting documentation, such as no-objection certificates and board resolutions that may be required. 

Funding plans for the JVC and its subsidiaries can be agreed in the agreement. For instance, one shareholder party may agree to procure loans, or funds through any other suitable instruments, for any working capital investment required by the JVC or its new subsidiaries, for the expansion. 

Powers are usually vested in the Board of Directors of the JVC, who will be responsible for the management and control of the company. The composition of the Board should be specified in the Agreement. It should also specify which shareholder parties have the right to appoint Directors, and the number of Directors that particular shareholder can appoint. It may also include a mechanism whereby a shareholder party loses the right to appoint any Director on the Board, as well as, specifying who the Chairman of the Board shall be.

Shareholders can also retain control by including a clause in the agreement, with gives the right to each shareholder party, in its sole discretion, to replace any Director nominated by it at any time and without cause, to the extent allowed by law. 

You and your fellow shareholders will need to prepare a business plan. This business plan is to be jointly prepared and approved by all the JVC shareholders. This can be annexed to the agreement and may be modified by mutual agreement of the shareholders. JVC shall conduct its business in accordance with the business plan. 

The above are just a few reasons why a Joint Venture Agreement is an essential legal contract, when you are entering into a business arrangement to pool your resources with other companies, to accomplish your business goals such as accessing a new market; to scale; to share risk for major investments or projects; or to access skills and capabilities. 

Shekhar Bharania

Philip Jones Legal