By Akeem Lopez
Do you recall the Sony Ericsson Walkman? Perhaps you may be more familiar with the American subscription streaming service, Hulu. What do these two have in common? They are both the result of successful joint ventures. Companies and individuals alike have long recognized the value in strategic alliances, thus giving birth to the joint venture. A joint venture arises where two or more persons, companies or bodies come together to work on a specific project.
Reasons for Pursuing Joint Ventures
There are many reasons why companies seek to enter a joint venture. Some of these include:
- Market penetration – This is mostly applicable where a foreign company wishes to invest in a domestic project. The foreign company may wish to enter a joint venture with a domestic partner based in the jurisdiction it is seeking to enter.
- Knowledge acquisition – Some companies are more advanced than others. Accordingly, companies that are less advanced may seek to enter a joint venture with those in a greater state of advancement to gain access to technical knowledge and business strategies while, of course, making some form of meaningful contribution to the venture.
- Responding to legal developments – Certain jurisdictions restrict the ability of foreign investors to own domestic companies or projects. Others might require that locals maintain a majority stake. In any event, a joint venture may be entered into by foreign investors or a foreign company with persons based in the jurisdiction in which they seek to invest. This may be necessary to uphold the Local Content laws in that jurisdiction, as is the case in Guyana. It is worthy to note that a proposed joint venture may necessitate permission from the relevant competition authority where that venture is captured by the provisions of the destination jurisdiction’s Merger Control legislation (in the case of Trinidad and Tobago, the Fair Trading Act Chap 81:13).
- Financing – Expansive and ambitious projects often carry such a high cost that no one party can finance the project on their own. It thus becomes necessary to enter a joint venture with numerous parties who can contribute to the financing of the project.
- Outsourcing – When pursuing complex ventures such as large-scale infrastructural projects, it may be more prudent and economically sound to out-source technical tasks to contractors by way of a joint venture.
Joint Venture Agreements
The hallmark of any joint venture is the joint venture agreement. No doubt, based on the specific project being pursued, the terms of a joint venture agreement may vary. Nonetheless, there are some key provisions that can be found in most joint venture agreements. They include:
- Scope – The agreement must expressly state the purpose of the venture. This will be necessary to outline the intentions and expectations of the respective parties and minimize disputes.
- Duration – The agreement must set out the date on which the venture is to be completed. It ought to be noted that some ventures are set up as free-standing companies and in such cases, there may not be a termination date.
- Contributions – Every party to a joint venture may make a different type of contribution. Common examples include capital, technical expertise or plant and machinery. Regardless of what contribution each party makes, the agreement must clearly set out what each party must contribute and the terms of that contribution.
- Conditions Precedent – It may be necessary to set out steps that must be taken or circumstances that must exist before the joint venture becomes effective. In the case of a construction project, for example, where one party contributes land, it may be a condition precedent that the contributing party is confirmed to be the legal and beneficial owner of the land.
- Financing– While joint ventures tend to be funded in part by the parties, it is common for financing to be sought from third parties such as banks or non-bank financial institutions. It is therefore necessary for the agreement to set out how such financing is guaranteed and the extent of that guarantee on each party.
- Management– The agreement must set out the regime under which the venture will be managed.
- Profit sharing –The joint venture agreement should also outline the way that the profits of the venture are to be shared among the parties. Notably, profit distribution can take different forms. For example, if a party contributes a physical asset, his profit may be payment for the use of that asset. On the other hand, a party who contributes intellectual property may find his profit taking the form of royalties.
- Restrictions on ownership – It is commonplace for parties to wish to circumscribe who can own a stake in a venture. This can be accomplished by placing restrictions on the transferring or assignment of interests in the joint venture in the form of change of ownership/management provisions.
- Non-competitive provisions – Parties should not compete in the same market that the joint venture seeks to operate in. Therefore, the agreement would usually include detailed non-compete clauses.
- Termination – Some joint ventures are entered into to achieve a specific purpose or for a specific time frame. Once that purpose has been accomplished or the time frame has elapsed, the venture will come to an end.The agreement therefore must set out the circumstances under which the overall venture can be terminated. Furthermore, it may be necessary to set out the circumstances in which one party may acquire the interest of another such as where financial difficulties arise.The agreement should also provide for Events of Default which will bring the venture to an end. Such events include appointment of a receiver, liquidation of a party, a party going into administration or where a change of control occurs.
Due diligence refers to the investigations conducted before any transaction which involves the disposal and acquisition of rights. The due diligence exercise serves many purposes. Firstly, it allows the investigating party to determine whether to proceed with the transaction based on the results of the investigation. Secondly, the due diligence exercise can result in an alteration of the agreement. For example, if an asset to be contributed by a party turns out to be worth less than initially represented, the agreement may have to reflect that lesser value.
In the context of joint ventures, the due diligence process includes market research, investigations into the ability and competency of the other parties, the prospects of the venture’s success and the need for licenses/approvals from the competent authorities.
The joint venture remains an attractive vehicle through which many investment opportunities can be pursued. Nonetheless, before embarking on this journey, it is essential that the parties negotiate and settle the extent and bounds of their joint business pursuit as well as undergo the necessary due diligence exercise.
Akeem Lopez is an Associate at M. Hamel-Smith & Co. He can be reached at email@example.com
Disclaimer: This Column contains general information on legal topics and does not constitute legal advice