ContractsIncorporation of a JV : Documentation Essentials

In our previous blog “Overview of Joint Ventures: A Catalyst for Success in India”, we touched upon the nuanced nature and structure of JVs in India. Moving forward, herein, we shall delve into the various documentation essential for the incorporation of a JV in India, and the structure of a Joint Venture Agreement, which forms the foundation of any JV.

When entering a JV arrangement, it is crucial to address essential documentation. It is pivotal to ensure a smooth process by attending to the necessary paperwork when two or more parties decide to form a JV.

Memorandum of Undertaking or Letter of Intent

After a party is chosen, the parties typically sign a memorandum of understanding (“MoU”) or a letter of intent (“LoI”), indicating their intention to proceed with formal agreements. This preliminary document, though non-binding, serves as a roadmap for future negotiations, outlining the parties’ responsibilities and setting the course for further discussions.

Definitive Agreements

The definitive agreement essentially outlines the mutual rights and responsibilities of the parties involved in the JV. Additionally, it specifies how the parties will conduct themselves while operating and managing the JV. In case of a company it is JV Agreement, in case of LLP it is Limited Liability Agreement and in case of partnership it is partnership deed.

Other Agreements

Other agreements of equal significance will encompass the arrangements facilitating the transfer of contributions made by the JV partners to the JV, aimed at achieving its objectives. These may involve agreements such as Technology Transfer Agreements, Intellectual Property Assignment or License Agreements, Business Transfer Agreements, and such similar agreements.

Other Documents Required in the Incorporation of a JV

• ID Proofs of all Parties – Copies of Government-issued identity proofs such as passport, PAN card, or voter ID.
• Incorporation Certificate – Each company involved should provide a copy of their Incorporation Certificate.
• Bank Details – Bank account details of all parties, including cancelled cheques.
• Registered Office – Proof of registered office, such as a rent agreement or utility bill, is required.
• MOA and AOA – Memorandum of Association and Articles of Association is required.
• Licenses and Permits – Any licenses or permits required for the JV to operate, such as a GST registration, etc.

Key Clauses in a JV Agreement

A JV Agreement (“JVA”) acts as a binding force for the entities entering into a JV arrangement. This agreement specifically mentions all the resources, objectives, financial obligations of each entity for achieving the common purpose. JVA also contains the specific terms and clauses to ensure the protection of the interest of all the parties who are involved in the joint transaction.

1. Member Names and Details

This Clause of the JVA mentions the names of the parties that have mutually consented and entered the JV, their addresses, and other details. A JVA member is someone who has contributed capital resources and assets for the shared objective of the business, and is essentially a party to the JV in any capacity whatsoever.

2. Type of JV & Business Information

This clause elaborates the kind of JV that has been opted by the parties and also includes all the information of the business transaction for which the parties have specifically gotten into this arrangement. It contains a brief background about the business and all the relevant information about the transactions that would be facilitated through that business. It also mentions the common objective of such JV.

3. Purpose

This section of the agreement mentions the specific objective/purpose and reason for collaboration between the entities.

4. Term

This Clause of the JVA lays down the duration of the JV. The parties mutually decide the time period for which the JV will exist and whether the JVA is subject to renewal on yearly basis, and other such conditions.

5. Percentage of Ownership

It indicates the proportion of ownership shared between the parties. It may divide the ownership as per the specific capital contribution of each entity. The provisions for increasing the proportion of ownership of the parties should also be listed in this clause.

6. Duties and Obligations

The purpose behind this clause is to clearly stipulate the duties, obligations, contributions and expectations that each party has been allotted pursuant to the JV arrangement. The duties and obligations of each party may vary as per their specific contributions or shares.

7. Voting and Meeting

This Clause of the JVA highlights the voting rights of each entity of the JV. The voting rights may include right to vote for election of Directors, Partners, inclusion of new entities in the venture, etc. Based on the kind of contribution and obligation of each individual identity, the voting rights also varies. The aim of such a clause is to establish a decision-making and management hierarchy in the JV to avoid conflict between the parties. Similarly, this clause also includes the provision for formal meetings between the parties. These meetings can be held monthly/quarterly/yearly and the objective of such meetings could be better collaboration, dispute resolution, election of board members, etc.

8. Profit or Loss Allocation

This clause includes the method of allocation of profit earnings and financial losses among the partners. This can also include the tax obligation of each party as per their ownership, role or profit proportion.

9. Financial Obligations and Additional Costs

This clause of the JVA lists down the financial obligation of each of the parties. It shall include obligations regarding expenditure, debt payment, monetary assistance, and additional costs. The parties should clearly stipulate which financial obligation is to be borne by which entity and to what extent.

10. Human Resources and Manpower

This clause is required only if the manpower and human resources of the individual entities are shared between the entities by way of the JV. The parties can set out their financial obligations, and responsibilities towards such shared employees. There should be appropriate provisions with regards to the division of the employees when the JV terminates and ceases to exist.

11. Intellectual Property Rights & Confidentiality

This clause of the JVA lists down the details of the knowledge, trade secrets, technical expertise, and intellectual properties which is being shared between the entities. This should also include the extent of such sharing to avoid the exploitation or disclosure of trade secrets of any of the JV’s entities.

It also includes the confidentiality clause whereby the parties agree not to disclose the important trade secrets or other confidential information of each other to a third party. It also ensures the protection of the intellectual property rights of each party.

Further, an important ingredient for this clause is to mention the roadmap with regards to the intellectual property rights in case of a dispute or in case the JV has ceased to exist. The intellectual property rights of each of the collaborating entities shall be protected with a confidentiality clause in this agreement or with a separate confidentiality agreement.

12. Non-Compete

This is one of the most important clauses of the agreement which ensures the protection of the individual interests of all the contracting parties at the time of entering the JV, during the term of the JV, and even after leaving the JV. This clause includes the non-compete obligation whereby the parties agree not to involve in each other’s’ business or market during the JV or after the JV has terminated.

13. Indemnity

The Indemnity clause should list down the provisions and the way forward for compensation to a partner for the loss incurred on behalf of other partner or due to the acts or omissions of the other member.

14. Exit

The agreement should provide for the conditions/ways by which a particular contracting entity may exit the JV. This clause should include the outline of distribution of assets, profit, dividend etc. to such entity which choses to exit the JV.

15. Dissolution/Termination

This clause provides the conditions under which the JV would terminate. It shall include the roadmap for the business after the termination and the distribution of its assets and resources among the parties.

For illustration, the clause may include:

• Termination for Default
• Termination with JV Dissolution
• Effects of Termination
• Termination’s Business Impact

16. Dispute Resolution

This clause shall include the method of resolution of dispute between the parties. This can include methods such as arbitration, negotiation, mediation, etc. Usually, arbitration is opted as a method for dispute resolution. In such circumstances, the seat and venue of the arbitration, process of appointment of the arbitrators and the number of arbitrators, distribution of the costs of arbitration, etc. have to be laid down in detail.

17. Governing Law and Jurisdiction

The parties can mutually discuss and decide upon a certain jurisdiction where the courts can decide on the disputes. Similarly, the parties should also state the governing laws that shall be applicable to the JV.

A well-drafted JVA is crucial for the success of any collaborative business. It acts as a roadmap and outlines the rights, responsibilities, and expectations of all parties involved.

Inclusion of these essentials in a JVA can lead to the establishment of a strong foundation of trust, transparency, and collaboration between the parties and this would also turn the partnership into a successful and prosperous one.

Exit Strategy

Exiting a JV typically occurs either upon project completion or by mutual consent between partners. There are various exit strategies, including selling assets, listing the JV company publicly, transferring interests between partners, or selling interests to a third party. Often, JVs dissolve through a partner buyout, where one partner either sells their stake to the other or buys out the other partner’s stake.

While mutual agreement is ideal, unilateral exits may occur for various reasons. Therefore, it’s crucial to address potential issues in advance, such as establishing the right of first refusal if one partner intends to sell their share to a third party. Premature exits could also arise due to events like a partner’s default, inability to operate effectively, or a deadlock in decision-making.

Key Points to Consider

1. Establish Clear Exit Strategies: Define various exit options, including selling assets, buyouts, or listing the JV company publicly.

2. Address Potential Issues: Anticipate and address potential issues such as unilateral exits, defaults, or deadlocks in decision-making.

3. Comprehensive Partnership Agreement: Ensure that the partnership agreement outlines the circumstances under which the JV may terminate, including procedures for handling disputes and buyouts.

4. Exit Clauses: Include specific exit clauses in the agreement, such as requirements for prior notice, defining ‘walk-away points,’ and procedures for handling deadlocks.

5. Post-Termination Activities: Consider post-termination activities such as winding down operations, transferring contracts, and resolving outstanding disputes.

6. Regular Review and Updating: Regularly review and update the exit strategy within the agreement to ensure its relevance and effectiveness throughout the JV’s lifecycle.

AMLEGALS REMARKS

The meticulous process of incorporating a JV demands a keen focus on documentation essentials, as highlighted hereinabove. The significance of a well-structured JVA, detailing rights, responsibilities, and profit-sharing mechanisms, cannot be overstated.

Clear delineation of governance structures, decision-making processes, and dispute-resolution mechanisms lays the foundation for a successful and harmonious partnership.

Thorough due diligence, comprehensive financial documentation, and transparent reporting mechanisms contribute to the financial health and accountability of the JV. As businesses embark on the journey of JV incorporation, attention to these documentation essentials not only mitigates risks but also fosters trust among partners, laying the groundwork for a resilient and prosperous collaborative venture.

– Team AMLEGALS assisted by Ms. Shrishti Dwivedi and Surbhi Talreja