C.V.O. Chartered & Cost Accountants' Association

Joint Venture

Contributed by Shri Ashok Dedhia

The term “Joint Venture is widely used to connote relationship between persons coming together to carryout certain specific activity.

A joint venture may be in the form of, inter alia,:
l a partnership firm;
l an Association of Persons without being partners within the meaning of Indian Partnership Act, 1932 (“IPA”);
l a limited or unlimited company/corporation having separate legal identity.

As mentioned hereinabove, two or more persons may carry on any specific activity in Joint Venture. Joint ventures in the form of partnership firm and limited companies are not new to us. Even joint ventures in the form of AOPs are fairly known to us as it gets a separate status as AOP/BOI under the Income Tax Act, 1961.

In this article we are concerned with and shall concentrate on various important points in relation to joint venture for carrying on business activities in the form of limited company.

General points for consideration while structuring joint venture

It is important to understand your clients’ basic objects behind entering in to the joint venture. That would help in preparing an appropriate structure in accordance with the needs of your clients. For ex. At times the client is interested in investing money and other party would be like a working partner. In such cases at times the investor is not interested in taking over any liability as a director or a partner. He may like to limit his liability up to his monetary investment therein as share capital or otherwise. In such a case, one may prepare a structure wherein though the investor may not become a director or have any of his nominees as director gets majority voting rights and/or other types of control through restrictions in articles.

Though it may not be within the scope of your professionalengagement terms, generally you should evaluate the commercial terms and conditions. If any condition agreed by the client is unreasonably against your client, you may point that out and bring to the notice of your client. Of course at the end of the day the final decisions has to be of the client, but as a professional we have to see to it that he makes informed decision.

Generally the terms and conditions shall be fair and reasonable. If they are too much tilted in favour of any of the parties (even your client) it is dangerous for the success of the transaction/business in long run. In such a case the situation has to be evaluated and advice has to be given on case-to-case basis. Many a times when other side is ready to give too much to your client you may smell a possibility of fraudulent intentions of such other party or similar possibilities.

Upon substantially complying with the above, one would consider which vehicle shall be used for the joint venture (“JV Vehicle”)? Limited Company? Partnership Firm? AOP? Trust? Combination of any of these vehicles? We shall not do appraisal of different types of business entities as JV vehicles. It would depend upon facts and circumstances of each and every matter i.e. it shall be decided from matter to matter on the basis of the facts and circumstances thereof.

Company limited by shares as JV Vehicle

If you decide to go ahead with limited company as a JV vehicle generally a JV Agreement/Shareholders’ Agreement is prepared. JV Agreement is a comprehensive agreement providing in addition to other basic terms and conditions, inter alia, following.

The agreement shall provide that to an extent possible the articles and memorandum of association shall be formed or amended, as the case may be, in accordance with the provisions of JV agreement and in case of any conflict between the articles/memorandum and the JV agreement, the terms of the JV agreement shall supersede the articles/memorandum and shall also be binding the parties thereto.

The Agreement shall also provide that the parties thereto agree to vote upon relevant resolutions in such a manner that the terms and conditions mentioned in the JV agreement are complied with.

Though the above clauses won’t be binding upon the company and articles and memorandum would only be the documents governing the company per se but the parties can enforce the JV agreement inter se.

Share Capital, ratio of holding with voting rights, financial obligations of the parties and similar provisions shall also be properly set out in the agreement.

Provisions relating to transfer of shares shall be provided keeping in mind the separation terms.

Separation terms are the most important and vital to success of any JV. Howsoever successful the business may be but if at the time of separation, the partners do not get separated peacefully and smoothly, generally all the benefits of the successful business are lost due to the confrontation between the partners while separating. Thus the terms and conditions for separation shall be clear and fair. Provisions relating to separation may be provided in many ways but in my opinion best way is to provide that the party paying the highest price per share, shall be entitled to buy out the shareholding of other (“take it or leave it”) i.e. either buy out whole company or sell out your shareholding. Of course proper provision in relation thereto and procedure therefore after taking in to account all the major possible permutations and combinations shall be provided in the JV agreement.

Provisions relating to constitution of board of directors (BOD), nomination rights/election rules in relation thereto, casual vacancy, alternate directors etc. shall be there in the JV agreement and also the provision relating to voting at the BOD meeting. One may provide for at least one affirmative vote from either of one of the sides in relation to certain specific businesses to be conducted at BOD meetings and also that the quorum shall not be deemed to be constituted unless the director/s nominated by both or either side is present and voting.

Wherever applicable and necessary, provision relating to non-competition by the parties to the JV may also be provided.

It shall expressly be provided that the JV agreement does not and shall never be deemed to constitute a partnership within the meaning of law relating to partnership.

JV agreement shall also provide for arbitration. An arbitration clause in the JV agreement would be binding on the JV partners inter se. It may be enforced upon the JV partners only and not upon the JV company. The company cannot be forced to be party to the arbitration invoked under the said clause in the JV agreement.

Arbitration clause may be included in the articles of the JV company. However, under section 2(3) of the Arbitration & Conciliation Act, 1996, (“ACA”) the provisions of ACA relating to domestic arbitration shall not be applicable to certain disputes where under any law for the time being in force the same cannot be submitted to arbitration. One may argue that if under any law, jurisdiction for any specific types of disputes is conferred upon a specific court or authority, excluding jurisdiction of all other courts, such matter cannot be referred to arbitration. The Company’s Act, 1956 provides for exclusive jurisdiction of the high courts, district courts and company law board in case of several matters relating to companies. Under the circumstances, the provision relating to arbitration in the articles of JV company shall not be applicable to such matters.

C.V.O. CA's News & Views

Vol.5 No.3 Jan - Feb 2003