Joint Venture Agreement
A joint venture (JV) is a business entity created by two or more parties. It is generally characterized by shared ownership, shared risks, shared governance and most importantly, shared returns. A JV is usually a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or business activity. In a JV each of the participants is responsible for profits, losses and costs associated with it, however, the venture is its own entity, separate and apart from the participants' other businesses or business interests. The new entity may be a corporation, limited liability company, or a partnership, depending on the JV agreement.
Sony Ericsson is a famous example of a JV between two large companies. In this case, Sony, a Japanese company entered into a JV with the American company Ericsson. Their aim was to be a world leader in smart phones. After several years of operating as a JV, the venture eventually became solely owned by Sony, once their targets were achieved.
Steps for making a Joint Venture
- Defining a business strategy which is to be the basis of the JV.
- Determining whether or not a JV is the right choice of agreement for the situation. This requires comparing the JV option against others such as acquisition, non-equity partnership, contractual alliance, or go-alone approaches. Generally JVs are most appropriate when:
- they are focused on combining complementary capabilities of the parties (e.g. products and market access), sharing risks, or
- merging businesses where an M&A transaction isn't possible or where the premium involved in an M&A can't be recovered and
- when go-it-alone is too risky or too slow, and
- simpler vehicles like contractual agreements are insufficient.
- Choosing and screening potential partners.
- Developing the agreement.
- Negotiating detailed terms and conditions of the agreement.
- Planning and launching the venture as its own unique entity.
- Terminating the JV through liquidation or any other process.
Enforceability of Joint Venture Agreement
A JV agreement is like any other contractual agreement, whereby the terms and conditions laid down in it are binding in nature. A JV agreement has two (or more) parties, objectives, contribution of assets and funds, dispute resolution clauses, termination clauses- all ingredients of a standard contractual agreement.
Benefits of JVs
- Helps a business grow faster and generate profits without having to borrow funds.
- Creates access to new markets from the pooled resources.
- Shared costs and risks are undertaken.
- It is a great tool to enter foreign markets by entering into a JV with a local company.
- A JV is very flexible in nature- it can have as long or short a life span as necessary.
Considerations prior to entering into a Joint Venture
- Determining that both parties have the same expectations of what to achieve from entering into the JV. Thus, the end-game of both parties must be common.
- It is ideal to work out the share in profits that each company will have. For a two-party JV a 50-50 share of profits works the best. However if there are more than two parties, profit sharing is more complex and must be properly negotiated.
- It must also be determined as to what form the agreement is to take- a partnership, a corporation, and LLP etc.
Checklist for drafting a Joint Venture Agreement
While all Joint Venture agreements will differ in their substantive elements, the following are the main points that should be present in such agreements.
- Description of parties: The JV agreement should clearly state who the parties to the agreement are.
- Definitions & interpretations: The agreement should have a list of definitions of all the major terms used throughout the agreement so as to avoid confusion while interpreting the agreement.
- Objectives: The main objective and purpose for entering into the JV should be laid down as well as the milestones that the JV has to reach in order for it to be deemed to be successful.
- Performance: The JV should lay down the details with regards to performance of the agreement. This should include the targeted achievements for the entity created by the JV.
- Applicable law: The JV agreement should specify the law that governs the agreement. This is especially necessary when the parties are from different countries.
- Exclusivity: Members of a JV agreement generally create a binding exclusivity clause. This essentially means that members of the JV shall not take part in any activities laid down in the agreement with other firms or establishments outside of the agreement.
- Executive Authority: No member of the JV can enter into any binding commitments with parties outside of the agreement without the express consent of all the members of the JV. Any assignment of rights to third parties can also be done only through mutual consent.
- Duration of the JV Agreement: A JV ceases to exist once its objectives have been fulfilled. Thus the necessary milestones to deem the JV completed and any timeline for achieving the same must be laid down clearly.
- Liability and insurance: Details of the extent of liability of the parties as well as their insurance must be clearly stated in the agreement.
- Project costs: One of the most important aspects of a JV are the costs of the project itself. The cost and profit sharing should be laid down unambiguously in the agreement.
- Dispute resolution: In case any dispute arises among the parties, the agreement should lay down where such a dispute is to be resolved. This could be under the jurisdiction of a particular court, through arbitration or even through mediation.
- Breach of contract: The agreement must lay down the situations that would result in breach of contract, thereby triggering the dispute resolution clause. Generally an exception is created for force majeure situations- situations that are outside the control of the parties such as fire, explosions, terrorism, governmental acts etc.
- Confidentiality: The parties generally agree to keep secret and confidential all the information furnished to them by other party.
- Signatures: The agreement must be signed by the proper representatives of the parties. It is also recommended that witnesses are resent to verify the same.
Why Choose PocketLawyer for JV Agreement Drafting?
- Experienced and qualified professionals with more than 12 years of experience.
- Access to highly qualified professionals anytime, anywhere in India.
- Fixed price. No hidden fees or long-term commitment.
- 100% satisfaction guaranteed. Our money back guarantee makes sure that you get complete satisfaction, every time you choose our services.
What is more?
- Our dedicated support team is always there to help you with any query or issue that you may have.
- Choosing PocketLawyer means the best service, at the best price.