A Joint Venture Agreement is a cooperation between two or more parties to perform a certain project.
The parties to the agreement sharing their resources, which including but not limited to capital, personnel, physical equipment, facilities or intellectual property like trademarks, patents or any other intellectual property form.
In order to enter into a Joint Venture with the prospective business partner, a Memorandum of Understanding (known as MoU), as well as letter of intent (known as LoI), may be signed by the parties that clarify the basis of the future Joint Venture agreement. This also includes understanding the culture as well as the legal background of the parties. While signing a Joint Venture agreement, the following clauses must be properly examined such as: Object and scope of the Joint Venture; Equity participation by local and foreign investors and agreement to a future issue of capital; Management Committee; Financial arrangements; The composition of the board and management agreements; Specific obligations; Provisions for distribution of profits; Transferability of shares in different circumstances; Remedying a deadlock; Termination; Restrictive covenants on the company and the participants; Casting vote provisions; Appointment of CEO/MD; Change of control/exit clauses; Anti-compete clause; Confidentiality; Indemnity Clause; Assignment; Dispute Resolution; Applicable law and the Force Majeure clause.
Herein below we will shed the light on the main critical clauses that shall be inserted in the joint venture agreement, as follows:
- Nature of the relationship. One of the most important functions of the joint venture agreement is to explain the nature of the relationship between the joint venturers; as one aspect of this is whether the parties owe fiduciary obligations to one another, or whether theirs is merely a contractual relationship where the parties remain at arm's length;
- Parties' contributions. The joint venture agreement will explain the contribution of the parties to the agreement. This is to ensure that each party understands what they will be committing to the venture, and also to ensure that they are bound by that commitment.
- Sharing of profits, risks and liability. An important consideration, particularly in terms of the structure of the venture, is how profits, risks and liability will be shared. Is it the intention that the profits and liabilities will be divided according to the parties' ownership interests? Or will the liability of some parties be capped, with other parties having unlimited liability?
- Control Issue and Decision Making. Joint venture agreements will explain who will manage the venture and take care of its day-to-day operations. It will also usually specify different levels of approval for different types of decision.
- Intellectual Property. Joint ventures will produce intellectual property that is of potential value to each of the joint venture parties and in order to avoid the risk of one party attempting to take advantage of the venture's intellectual property for its own gain, the joint venture agreement should explain who will own any new intellectual property created by the venture, and the extent to which the parties may use that property outside the venture.
- Other Clauses. The agreement will contain a range of other provisions and clauses, such as:
- The mechanism of selling the interests in the venture;
- Restriction on sale of shares;
- Buy-sell arrangement;
- Installation of Plant & Machinery;
- Maintenance Facilities;
- Tax Consideration;
- Dispute Resolution Mechanism;
- Exit Strategy;
- Confidentiality and non-competition clauses; and
- Clauses explaining the extent to which the venturers will be entitled to receive information about the venture, such as financial information.
It is worth to mention that the there is a lot of common provisions between the joint venture agreement and the shareholder ones; because they both deal with a situation where parties are pooling their resources in pursuit of a common objective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.