ContractsOverview of Joint Ventures : A Catalyst for Success in India

INTRODUCTION

A Joint Venture (hereinafter referred to as “JV”) is a type of business entity where two or more parties come together, and pool in their resources to accomplish a specific project. It can take various forms like forming a new entity all together or merely coming into a contractual arrangement for the purpose of a specific project.

JVs are highly flexible and take structures according to the objectives and considerations of the parties. The essential characteristics of a JV are as follows –

• The parties involved in the JV are legally independent, with the exception of the work they do together during their collaboration
• The parties come together for a specific mutually beneficial goal.
• Both the parties share ownership of the JV’s assets and liabilities and share in the implementation and execution of the project.
• The JV is temporary in nature (short term/long term) dissolving once the target is achieved.

TYPES OF JOINT VENTURES

The different types of JVs can be classified on the basis of the purpose of the venture as well as the structure of the venture. The various types of ventures based on purpose are as follows –

1. PROJECT-BASED JV

Project-based JVs are established with the aim of working together on a particular project, often with a defined objective and timeframe. This collaborative effort involves pooling resources, expertise, and skills from participating entities to enhance the efficiency of achieving the project’s goals beyond what could be accomplished individually. Upon the completion of the project or attainment of the desired outcome, the JV may be dissolved, allowing the partnering entities to resume independent operations or explore potential collaborations on future projects.

For example, Tribeca Developers, a company renowned for its expertise in residential project development, has recently entered into a JV with Trump Industries, leaders in sales and marketing within the residential real estate sector in the United States, for the launch of a luxury pioneering project in India. This collaboration serves as a prime illustration of a project-based JV, focused on a specific task and deemed to be terminated upon the successful completion of the project objectives.

2. FUNCTION-BASED JV

In a function-based JV, businesses collaborate to execute a particular business function or activity, such as marketing, sales, or distribution. This form of JV enables companies to capitalise on each other’s expertise, resources, and networks within specific business domains, thereby enhancing efficiency and expanding market presence.

For instance, Starbucks and PepsiCo have collaborated since 1994 to manufacture and distribute ready-to-drink coffee beverages. Through this JV, known as the North American Coffee Partnership (NACP), renowned products like Starbucks Frappuccino and Starbucks Doubleshot Espresso have been developed.

The outcome – both companies have experienced heightened market penetration, increased brand recognition, and enhanced profitability.

3. VERTICAL JV

A vertical JV represents a strategic alliance between companies operating at different stages of the supply chain, such as manufacturers, distributors, or retailers. The primary objective of such partnerships is to streamline the supply chain by amalgamating the unique capabilities and resources of each entity. This synergy results in heightened efficiency, cost-effectiveness, and improved oversight over production and distribution processes.

For instance, in 2010, Royal Dutch Shell and Cosan, a prominent Brazilian producer of bioethanol, sugar, and energy, joined forces to establish Raízen, a JV with a focus on sustainable and competitive biofuels. This collaboration seamlessly integrated Shell’s proficiency in fuel distribution with Cosan’s extensive experience in sugar and ethanol production. Since its inception, Raízen has emerged as one of the leading bioenergy producers in Brazil, delivering mutual benefits to both companies through expanded market presence and increased profitability.

4. HORIZONTAL JV

Horizontal JVs represent strategic partnerships between companies operating within the same industry or market, often as competitors. These collaborations are centred around the integration of resources, technology, or expertise to achieve common goals, such as venturing into new markets or innovating products. Such ventures offer participating entities a competitive advantage by capitalizing on their collective strengths and mitigating risks.

For instance, Hulu was established through a JV involving several prominent media companies, including NBC Universal, News Corporation, the Walt Disney Company, and Providence Equity Partners. By pooling their vast media libraries and resources, these companies successfully launched a competitive streaming service, meeting the rising demand for online video content.

Over time, Hulu expanded its offerings to include live TV and original programming, further solidifying its position in the streaming market. This collaborative effort enabled the partner companies to adapt to evolving media trends, monetise their content libraries, cross-promote their brands, share costs and risks, and develop original content, thereby strengthening their market positions and unlocking new avenues for growth.

The above types of JV can be further segregated into two types based on its mode of inception, namely – Equity-based JV and Contractual JV.

A. Equity based JV – This concept entails the formation of an independent legal entity through an agreement between two or more parties. The associated parties undertake to provide money or other resources as their contribution to the capital or assets of the corporate entity. This framework is particularly suited for long-term, expansive JVs, encompassing entities like JV companies and JV limited liability partnerships (“LLPs”).

B. Contractual JV – This form of JV is suitable for situations where a separate legal entity is unnecessary or not feasible for the company to establish. It is preferred when the JV is intended for a temporary duration or involves limited activity or a specific short-term task. For example, a Cooperation agreement or Strategic Alliances.

LEGAL STRUCTURE OF A JOINT VENTURE

In India, JVs can adopt various structures tailored to their specific needs and goals. One common structure is the company limited by shares, offering the advantage of a recognised corporate identity with limited liability for its members. This structure allows the JV to own assets, enter contracts, and benefit from a comprehensive legislative framework supporting governance arrangements.

Another option is the contractual venture, which lacks a separate legal entity but provides flexibility and ease of setup. While each party retains ownership of its assets, the absence of clear structure and potential partnership risks must be carefully considered. Moreover, raising external finance might pose challenges as this structure does not own assets or grant security.

LLPs offer a blend of limited liability and tax transparency. With separate legal identity and limited liability, LLPs provide flexibility in governance and taxation, making them increasingly popular for commercial ventures. However, certain filing requirements exist, and limited liability may be compromised in practice by guarantees or security for financing.

Lastly, general partnerships or limited partnerships offer flexibility governed by the agreement between members. While general partnerships lack separate legal identity and entail unlimited liability, limited partnerships provide limited liability for some partners but restrict their involvement in management. Privacy and tax transparency are notable advantages, yet raising external finance may be challenging due to the absence of a separate legal entity.

AMLEGALS REMARKS

In conclusion, the landscape of JVs in India stands as a dynamic and evolving ecosystem, offering both domestic and international businesses unique opportunities for growth and collaboration.

From equity JVs that facilitate shared ownership and risk to contractual JVs providing flexibility in partnerships, businesses can strategically choose the structure that aligns best with their goals and objectives.

As India continues to position itself as a global economic force, the strategic alliances formed through JVs serve not only as a pathway to market expansion but also as catalysts for innovation and sustainable business development in this dynamic and promising landscape.

– Team AMLEGALS assisted by Ms. Dhwani Tondon