The fact that India managed to record a net Foreign Direct Investment (FDI) inflow of $25 Billion during the September quarter of 2020, even amidst the pandemic, only reiterates the fact that India is an attractive and a durable investment destination for the investors abroad. Not only that, but India is also an aggressive investor.
In the recent years, Indian companies have displayed their willingness to venture into the quest to expand in the overseas. However, the main roadblocks for the domestic companies in achieving their estimated levels of worldwide presence are the deficiencies in terms of infrastructure, product quality, technology, and even management processes.
These shortcomings can be addressed by partnering with a foreign counterpart who is a strategic match. To meet the ever-increasing demands of modern business, alliances between those with varying levels of expertise and capabilities in technology, marketing, and distribution, etc. are necessary.
Part I of the Series on Joint Ventures provides an overview of Joint Ventures and Joint Venture Agreements.
What are Joint Venture Agreements?
Joint Ventures (JVs) are envisioned as collaborations that benefit the JV Partners by providing a platform for them to achieve business goals that would be difficult or uneconomical to achieve on their own. JVs are similar to a symbiotic relationship in which the complementary resources of the Partners are shared and used for mutual benefit. JVs can be structured as corporations, partnerships, or collaborative working agreements.
JVs can be contractual or based on equity. Contractual JVs are formed when the requirement is temporary or limited. In case of equity-based JVs, a separate legal entity, such as a company or a limited liability partnership (LLP), is created in line with the consensus of both the Parties. The Parties contribute money or other resources as their contribution towards the assets or other capital of that legal entity.
For the establishment of a JV, an alliance is to be formed through a process of thorough planning, market research and detailed assessment of the partnering entity. Soon after the broad contours of the relationship underlying a joint venture is set up, it becomes necessary to create a Joint Venture Agreement (JVA), to fix the terms of engagement.
A JVA essentially establishes the method of incorporation of the JV, mutual rights and obligations, code of conduct for operation and management of the JV, as well as the remedies to legal deadlocks. The key elements of a contractual JVA are very similar to that of a Shareholder Agreement (SHA).
For the successful implementation and smooth functioning of a JV, definitive agreements are a must, and hence, it is critical to draft it in the best possible manner without any room for ambiguity. JV transactions necessitate documentation that is efficient, clear, and error-free.
STRUCTURE OF THE JOINT VENTURE AGREEMENT
The formation of a JV necessitates the selection of a suitable Partner, which can be accomplished through proper due diligence. Once a prospective Partner has been identified, the parties sign a Memorandum of Understanding (MoU) or a Letter of Intent (LoI), expressing their intention to enter into definitive agreements.
Definitive agreements are to be drafted on the basis of the nature and scope of the JV structure. For example, in case of a JV entity being an incorporated company, the JVA or the SHA must outline the Parties’ obligations and the method of formation of JV along with the charter documents of the company i.e., the Memorandum of Association (MoA)/ Articles of Association (AoA); whereas, in case of a Limited Liability Partnership (LLP), an agreement to that effect would be required.
Similarly, if the entity is unincorporated, such as in the case of Partnerships, a Partnership Agreement must be drafted; whereas, a Cooperation Agreement is sufficient for a strategic alliance. Agreements such as Trademark Licenses and Technology Transfers are common to all entities of JV, whether incorporated or unincorporated.
What are Charter Documents?
Every incorporated company is required to have an MoA and AoA, which serve as the company’s Charter Documents. In India, the AoA and MoA supersede the JVA while the Companies Act, 2013 (Act) takes precedence over the MoA and AoA.
Anything contained in the JVA, which is in conflict with the provisions of the Act, the MoA or AoA of the company, would be termed as ineffective and would be unenforceable. Therefore, an express inclusion of the terms of the JV in the AoA of the company would bind the Partners to the JVA. A provision for amendment of the JVA, if it is inconsistent with the provisions, would also help reduce conflicts.
Similarly, any contract entered into by a company on a subject outside the scope of the MoA is ultra vires. The Act stipulates that the company shall not exceed beyond the scope of the objects specified in the MoA. The MoA, being a flexible document, should be broadened enough to sufficiently cover the company’s proposed activities under the JVA.
India has emerged as a lucrative investment destination, offering multiple strategic and commercial incentives to the investors. JVs are a quick means to enter into the Indian market, as they signify a formal alliance between two or more entities, each providing distinct facilities to the other, to collaborate and reap benefits out of the alliance.
JVAs are drafted in accordance to the nature and scope of work of the proposed JV. Additionally, such scope of work should not exceed the scope determined in the company’s MoA. JVs are primarily governed by the provisions of the Companies Act, 2013 with regards to incorporation and operation of a JV. Further, the Charter Documents also play a crucial role in the establishment of a JV. Hence, JVAs should be drafted for the purpose of furthering the partnering entities’ business goals, in conformity with the Companies Act, 2013 and their MoAs and AoAs.
Part II of the Series on Joint Ventures will elaborate upon drafting of Joint Venture Agreements, and the issues pertaining to Joint Ventures.
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