Concepts

A ‘Joint Venture’ has been defined as:

"an association of two or more persons to carry out a simple business enterprises for profit." (Refer: Words & Phrases, Vol. 23 pg. 117).

The Supreme Court of India, recognizing this relatively new and growing concept of and form of business enterprise has observed:

"The expression ‘Joint Venture’ is more frequently used in the United States. It connotes a legal entity in the nature of a partnership engaged in joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to shares both in profit and losses."

A ‘Joint Venture Corporation’, has been defined in the Black’s Law Dictionary as:

"A Corporation which has joined with other individuals or corporations within the corporate frame work in some specific undertaking commonly found in oil, chemicals, electric, atomic fields."

Indian Scenario

Liberalization policies announced by Government of India since 1991 with a view to increasing economic growth by permitting Foreign Investors and Enterprises to conduct business in India, has been attracting a large number of foreign companies to look to India for new business opportunities and markets.

Consequently, the last few years has seen a significant growth in Joint Ventures in India wherein foreign companies have joined with Indian counterparts to contribute towards capital and technical know-how for setting up business in India.

Joint Venture Agreements

In essence, a Joint Venture agreement is a contract. It is a hybrid agreement which has grown with the times and has been tailored to suit specific needs of commercial businesses desiring to co-operate in new areas.

In some respects a Joint Venture Agreement is like a partnership agreement which brings together two or more persons who may be companies or groups of shareholders who desire to come together for common purposes of setting up and conducting a joint business by pooling their resources and sharing it’s profits within a corporate frame work.

In some aspects a joint venture agreement is also similar to a foreign collaboration agreement in asmuch as, it may also provide for purchase of technology, licensing agreement, purchase of drawings and designs, patents and trade marks to be supplied by one of the parties to the agreement.

Essentially a Joint Venture Agreement provides for the method of formation of the Joint Venture Company and sets out the mutual rights and obligations of parties for the purposes of conducting the joint venture and the manner in which the parties will conduct themselves in operating and managing the Joint Venture Company.

The method of doing business together is known as a "Joint Venture".

A Joint Venture agreement is a contract between two or more parties who agree to be jointly bound to perform their promises and obligations contained therein and to be entitled to share and receive the benefits of such promises and obligations.

Formation of Joint Venture

There are several options available when forming a Joint Venture, depending upon the intentions and requirements of the parties.

Depending on the requirements of the parties desiring to operate within the corporate frame work different ways may be adopted for constituting the corporate body to be operated jointly.

Parties may come together,

1. to form an entirely new corporate entity, or;

2. may modify and adopt an existing corporate entity.

One of the commonest methods of Joint Venture formation adopted by both foreign companies investing in India and established Indian companies in order to establish manufacturing bases in India or expand existing bases is the promotion of a new company under the Companies Act, 1956.

This method is of course a necessity to the Foreign company who has no operations in India and is making a first time foray into India.

For an existing Indian company this method offers protection in asmuch as it keeps the foreign partners at arms length and by selling off their shareholding in the Joint Venture Company (JV Co.) easily break all relationships with the foreign partners and thereafter avoid interference or takeover threats of its existing company. Conversely, it also enables the foreign partners to jettison the Indian partner.

This method may also enable an Indian company to spin off required assets (and no more) into a JV Co. thus limiting its exposure in the Joint Venture.

By this method, cash resources may also be raised by the existing Indian company who may receive value for the assets contributed to the joint venture.

Another method of joint venture formation is by converting an existing Indian Company into a Joint Venture company. This is done by issuing further equity capital to the foreign partner in consideration of the foreign partner bringing in fresh cash/funds or other assets e.g., plant, machinery or technology in lieu of cash/funds.

The second route is possibly easier and more expeditious as, in an existing company, the parties simply have to acquire shares in the agreed shareholding pattern.

This method may be adopted where the existing company has certain business advantages available to it, e.g. a stock exchange listing, which may not be easily available to a new company or where existing company has large immovable properties and facilities which cannot be transferred to a new company except on payment of large stamp duties, and capital gains tax.

Drafting a Joint Venture Agreement

The clauses usually incorporated in a Joint Venture Agreement are briefly as follows :

1. Formation of Joint Venture Company (JVC) :
   This clause sets out the method of formation of the Joint Venture Company, i.e., by registering a new company under the Companies Act or by converting an existing company into a Joint Venture Company. This clause will also provide whose obligation and at which party’s cost the Joint Venture Company is to be formed.
   
   The method / manner of sharing such obligations and the sharing of costs may also be provided.
    

2. Equity Participation by the Local and Foreign Investors :
   The extent of share holding/capital of each of the local and foreign investors is defined in this clause and the consideration to be brought in by each of them is spelt out.
   
   There may be more than two parties participating in the Joint Venture Company. Share capital may be allotted in an agreed ratio by injecting cash funds or by bringing in infra-structural facilities, services and assets as agreed upon by the parties such as land, building, technology, patents, trademarks, distribution network, goodwill, etc.
   
   The extent of shares that may be held by foreign participants will be subject to prevailing government policies which have been announced from time to time as the economy moves towards more liberalization permitting greater participation by foreigners. It is therefore important to check the prevailing Government policies which are to be found in numerous places before drafting..
    

3. Agreements as to Future Issue of Capital :
   This clause would set out the ratios and terms upon which parties would subscribe to further issue of Share Capital and the consideration they would pay.
    

4. Sale & Transfer of Share holdings:
   It is necessary to spell out the Rights of Parties participating in the JV Co. to deal with situations like when —

   1. one partner may want to leave and get out for some reason.

   2. one partner may want to oust the other.

   When parties come together they should also think of the possible situations when they may have to part.
   
   It can happen that when one of the parties to the JV Co. wants to go, the other party does not want that to happen. Separation may occur for various reasons. Separation may become inevitable when one party commits serious or continuous breaches in observing the terms of the agreement.
   
   Great foresight is required in drafting and incorporating clauses which keep parties together and also to enable them to part.
   
   Separation clauses or what is now popularly known as ‘Divorce Clause’ are important and must be envisaged with some degree of planning, (particularly when hidden agenda’s have to met) and must provide for flexibility so as to look after all possible situations.
   
   Valuation of the share holdings of out the out going partners may also have to be provided when shares are not listed or constitute large numbers affecting management rights.
   
   In order to maintain continuity and to prevent an unacceptable changes in the parties constituting the JV Co. and to prevent outsiders getting into the JV Co. it is necessary to prevent one partner from selling off his shares to another person. It may not be possible to put an absolute restriction on sale of shares for a shareholder cannot be restrained absolutely from selling his shares. However, a Joint Venture may be defeated if one party in exercise of such rights sold his entire share holding to a third party not acceptable to the other continuing Joint Venture Party. In order to protect against such eventuality, a stipulation totally restricting parties from selling their share holding would not solve the problem as such a restrictive covenant would be void in law.
   
   This difficulty can be overcome by incorporating a "Pre-emption Clause" so that the party intending to dis-invest is under an obligation to first offer his shares to the other continuing parties. This eliminates chances of an unacceptable third party taking over a substantial interest in the Company to the detriment of the others, and the Joint Venture business.
   
   The method of determining the price at which the shares are to be sold, should be elaborately set out in the agreements.
    

5. Registered Office Clause
   This clause states the location of the Joint Venture business and the Registered Office of the Company, both of which may be at the same place, or at different places.
    

6. Distribution of Profits
   Parties may agree upon the profits distribution patterns and accumulation of profits, so as to build up reserves.
    

7. Grant of Licenses to the Joint Venture Company
    

8. Grant of Trademark to the Joint Venture Company
    

9. Grant of Technical Assistance and Know-how to the Joint Venture Company. Clauses (g) (h) and (i) : These clauses would set out the agreement between the parties and record the obligation of the party (who is to bring in the Licenses, Trademarks or Technology as the case may be) to enter into an agreement on certain terms with the Joint Venture Company when formed.
   
   The exact terms and conditions for grant of licenses, user of Trademarks and transfer of Technical assistance, know-how etc. should be set out in separate agreements to be signed by the parties.
    

10. Name Licensing Agreement.
    Sometimes the name of one of the parties or the name of their product enjoys considerable goodwill and reputation and such party may agree to permit its name or name of its product to be used by the Joint Venture Company either as part of the name of the Joint Venture or in association with its product.
    e.g.,
    "Moda Xerox Ltd."
    (the name of Xerox Company).
    "Maruti Suzuki"
    (name used in association with the product of the J.V. Company).
    
    The Joint Venture Agreement would record the agreement and obligations of a party (who is to lend its name to the Joint Venture (Company) to enter into an agreement on certain terms and conditions with the Joint Venture Company when formed.
    
    To achieve this purpose, a separate Name Licensing Agreement should be entered into between the party lending its name and the Joint Venture Company.
     

11. Installation of Plant and Machinery
     

12. Research and Development
     

13. Buy/Sell Agreement
     

14. Non-Competition Agreement
     

15. Secrecy Agreement
    Clauses (m), (n) and (o) are intended to protect the business of the Joint Venture Company as also rights of constituting partners. Such clauses may define markets / territories and agreements for assisting promotion of sales or for obtaining export orders or bid for them.
    
    Such clauses may also record the agreement between the parties to maintain secrecy of information relating to the technical processes and business know-how of the Joint Venture and agreement not to carry on competing business to that of the Joint Venture so that the business of the Joint Venture Company can flourish.
     

16. Control
    Management of the joint venture is regulated and management rights of parties inter se is maintained by provisions providing for the number of Directors, their appointments and removal, rights, duties and functions of directors of each party. Provisions for manner and extent of further issue of share capital are also necessary to safe guard rights and interests of parties.
     

17. Meetings of Directors and Voting at Meetings.
    Clauses (p) and (q) and similar are intended to protect equality.
     
    A director owes a duty to the company and not to individual shareholders. A joint venture director will not owe any duty to the other partner as in case of a pure partnership business.
    
    In Elliot vs. Wheedon ( Refer: 1993 BCLC 53 (CA)), where two persons had entered into a joint venture to be carried on by incorporating a company and one of them agreed to be a continuing guarantor of the company’s liabilities, it was held to be an arguable case whether one joint venture owed a duty to the other in the matter of conduct of the company’s business in a manner so as not to increase the liability under the guarantee.
    
    To avoid controversy and unnecessary exposure it would be advisable to draft suitable protection provisions. A skillful draftsman will require to draw upon his imagination and experience to safeguard the possible situations and contingencies likely to arise.
    
    Sometimes where parties have hidden agendas for protecting or for consolidating their rights and interests in the long run it may be necessary to draft suitable provisions.
     

18. Period of Agreement
    This clause would stipulate the period for which the Joint Venture Agreement would remain in force so as to bind the parties together and the circumstances in which the agreement would cease to be effective and binding on the parties.
     

19. Arbitration
    An Agreement to arbitrate on possible disputes between parties provides for a forum other than a Court of Law so that disputes may be resolved expeditiously.
     

20. Governing Laws
    This clause stipulates the System of Law - Indian or Foreign - by which the agreement is to be incorporated and enforced.
    
    Since the Joint Venture Agreement, is basically an agreement entered into for the purposes of defining the rights and obligations of the parties entering into Joint Venture, the detailed terms and conditions of the agreement for grant of licenses, trade marks, provision of technical assistance, plant and machinery, etc. to be provided by one party to the Joint Venture Company to be set up are not ordinarily set out in the body of the Joint Venture Agreement but are made subject matters of separate agreements which are executed simultaneously or a little later between the party providing the Licence, trademark, technical assistance, plant or machinery, as the case may be, with the Joint Venture Company. The incorporation of the detailed Terms and Conditions on which one party to the Joint Venture is to supply say, technical assistance, plant or machinery, trademarks or licenses is not usually made in the Joint Venture Agreement as -

    1. The privity of contract would be between the Joint Venture Company and the party who takes upon the obligation to supply the technical know-how, plant or machinery or trademarks as the case may be

    2. The Joint Venture Company may not have been incorporated at the time of entering into the Joint Venture Agreement.

    3. Joint Venture Agreement do not normally contemplate transfer of technical know-how, patents, trademarks or plant and machinery between the parties inter se.

    The Joint Venture Agreement accordingly only sets out the agreement between he parties whereby one party agrees to provide, the agreed patents, trade marks, technical know-how, plant or machinery as the case may be to the Joint Venture Company, on certain terms agreed upon between parties to the Joint Venture.

Restrictive Covenants

The covenants in a Joint Venture Agreement cannot be contrary to the provision of the Companies Act, 1956 and provisions of the Memorandum and Articles of Association of the Joint Venture Company.

Section 36 of the Companies Act, 1956 states that subject to the provisions of the Companies Act, the Memorandum of Association and the Articles of Association shall, when registered, bind the Company and its members as if they constituted a contract between them and had been signed by the Company and by each member. The Articles of Association contain covenants on the part of the Company and on the part of each member to observe all the provisions of the Memorandum of Association and of the Articles of Association. Section 9 of the Companies Act, 1956 provides that provisions of the Companies Act, 1956 shall override the Memorandum and Articles of Association, and any agreement executed by or resolution passed by the Company in a general meeting or by its Board of Directors in so far as the same are repugnant to the provisions of the Companies Act, 1956.

Where a Shareholder’s Agreement or the Articles of Association of the Joint Venture Company contains a provision absolutely restricting or forbidding the exercise of a shareholders corporate rights, i.e., Rights conferred under the Companies Act, 1956 such provisions are void and of no effect whatsoever. The Company cannot contract so as to deprive itself of the statutory rights and powers.

In the leading case of V. B. Rangaraj vs. V. B. Gopalkrishnan and Others ( Refer: (1992) Company Law Journal 11), the Supreme Court while considering certain provisions of a Shareholders’ Agreement which stipulated certain restrictions on transfer of shares held that:

"The only restriction on the transfer of shares of a company is as laid down in its articles, if any. A restriction which is not specified in the Articles is, therefore, not binding either on the Company or on the shareholders".

Where a Joint Venture Agreement contains provisions which impose restrictions on a member’s rights (e.g. to transfer shares as in that case) contrary to the provision of the Articles of Association of the Company, such terms will not bind the Joint Venture Company nor the shareholders. The Joint Venture Company will not be bound when it is not a party to the Joint Venture agreement. The Articles of Association regulate the internal administration of the Company and will override a Joint Venture Agreement.

As the Articles also constitute an agreement binding the shareholders and the Company, the Articles of Association should be kept in consonance with the provisions relating to rights of the parties in the Joint Venture Agreement. In this way, the provisions of the Joint Venture Agreement would continue to remain in force.

One way of doing this is to incorporate the clauses of the Joint Venture Agreement into the Articles of Association of the Company.

Where one of the parties to the Joint Venture feels that in order to protect its interests and to retain control over the administration of the Joint Venture Company, it should be provided that the Articles of Association shall remain in the existing form as long as the Joint Venture Agreement is effective.

THIS AGREEMENT is made at Mumbai, India on ______ day of _______________ 2005 BETWEEN South India Trade Alliance Co. Ltd., a Company registered in India and having its registered office at 12, Mahatma Gandhi Road, Mumbai - 400 001, India (hereinafter called SITA which expression shall unless repugnant to the context include SITA’s permitted successors and assigns).

AND South American Machinery Company Inc., incorporated under the laws of Florida, USA, and having its Registered Office at 50, High Street, Orlando, U.S.A., (hereinafter called SAM which expression shall, unless repugnant to the context include SAM’s permitted successors and assigns).

WHEREAS SITA is engaged in manufacture, sale and distribution of _________________ in India.

AND WHEREAS SAM by itself and its subsidiary companies is engaged in manufacturing, sale and distribution of _________________ in U.S.A. and in several parts of the world, including Europe and Australia.

AND WHEREAS, SITA and SAM have entered into an Agreement for the purposes of regulating their relations with each other and certain aspects of the affairs of and their dealings with the management of the Joint Venture Company (hereinafter called the JVC") to be set up in India for the purposes of manufacturing, exporting and distributing _________________.

IN CONSIDERATION OF mutual agreements and undertaking hereunder set out the parties to this agreement have granted the rights and accepted the obligations as follows :

1. SAM and SITA shall undertake to incorporate and form a company (hereinafter called the Joint Venture Company ("JVC") to be registered in India under the Companies Act, 1956 by the name of SAMITA Ltd.
    

2. The JVC will be registered in the State of Maharashtra in India. The Registered Office of the JVC shall be at 12, Mahatma Gandhi Road, Mumbai - 400 001 or such other place/s as the parties may agree upon. The headquarters of the JVC shall be at New Delhi, India.
    

3. The main objects of the JVC will be as set forth in its Memorandum of Association attached hereto.
   The main objects shall include establishment of manufacturing, facilities and distribution, organisation, relating to ____________________.
    

4. The JVC shall be entitled to operate sell and distribute goods manufactured by it in India or any other place outside India as mutually agreed between the parties.
    

5. The initial authorised capital of the JVC will be Rs. 1,00,00,000/- divided into 10,00,000 equity shares of Rs. 10 each. SITA and SAM have agreed to subscribe the share capital of the proposed JVC in the proportion of 3 : 2, i.e., SITA to take 30,000 equity shares of the aggregate value of Rs. 3,00,000 and SAM 20,000 equity shares of Rs. 10/- each of the aggregate value of Rs. 2,00,000/-.
    

6. In addition to the initial subscription mentioned hereinabove, the parties agree to subscribe to the further issue of share capital of the JVC as may be required in the proportion of 3 : 2, i.e., SITA 60% and SAM 40%.
    

7. The Memorandum and Articles of Association of the JVC will be as set forth in the draft attached as Annexure 1. These documents may be amended from time to time by written agreement between the parties, subject to the provisions of the Companies Act, 1956.
    

8. On signing this Agreement, the parties agree to take necessary action for the registration of the Joint Venture Company within 30 (thirty) days hereafter.
    

9. The parties hereto agree to jointly own, operate and manage the JVC.
    

10. The JVC shall be owned, operated and managed by the parties jointly in accordance with this agreement and the Memorandum and Articles of Association.
     

11. The proposed Memorandum and Articles of Association of the Joint Venture Company shall include the following provisions :

    1. The JVC shall have a Board of Directors composed initially of 5 directors, three of which shall be of the choice of SITA and two of whom shall be of the choice of SAM.

    2. The Chairman of the Board of Directors shall, for the first accounting period of the JVC, be one of the members of the Board of Directors appointed by SITA and for the duration of the 2nd accounting period be one of the members appointed by SAM, whereafter the parties shall alternatively have the right to appoint the chairman during the subsequent accounting periods of the company.

    3. The Board of Directors shall meet regularly at least four times a year, i.e., once in each quarter.

    4. At least 21 days prior notice shall be given to all directors of the Board whether residing in India or otherwise. In case of directors residing outside India, notice shall be sent by telex/fax/cable. Each notice shall set out in sufficient detail, the Agenda of items to be transacted at each meeting. A meeting may be held at short notice if it is agreed by all the directors in writing.

    5. The quorum necessary for transacting any business of or taking any decision of the Board of Directors shall consist of at least 4 members, of whom at least 2 shall have been those appointed by SITA and 2 by SAM.

    6. If the minimum number of directors of each of the parties is not present at the Board Meeting, the meeting shall be adjourned for a day, which shall not be less than 10 days from the original meeting and if at such adjourned meeting the quorum as required is not present, then the adjourned meeting may proceed, provided that the Board shall not take any action concerning matters specified in Annexure 1 hereto and any attempted action by the Board shall be null and void.

    7. The parties have agreed that they will obtain an undertaking from each person nominated by them to be a director of the Joint Venture Company with an undertaking that each of them will implement each and every provision of this agreement.

    8. Parties shall exercise their powers to ensure that the appointment of directors nominated by each other is not terminated except as may be mutually agreed. In case any director vacates his office due to any reason, including operation of law, the party which had appointed such director shall have the right to fill in such vacancy by appointment of another director to fill such vacancy and parties shall ensure that the Board fills such vacancies as provided above.

    9. The day to day implementation of the projects and operation of the JVC shall be controlled by the Managing Director of the company to be appointed by SAM, who shall be in charge of the technical and administrative operations of the Company within the policy guidance set by the Board.
        

12. Important Decisions

    10. All major policy matters of the JVC shall be decided by the Board of Directors of the JVC. The day to day implementation of the projects and operations shall be controlled by Managing Director of the Company. In the meeting of the Board of Directors, normally all matters should be decided unanimously. However, in case of difference of opinion, matters shall be decided by a majority of directors present at the meeting. However, following matters shall be decided only by the affirmative vote of the holders of at least 3/4ths of the equity shares of the company or of, at least one vote in favour from the group of directors appointed by SITA and one vote in favour of the directors appointed by SAM, it being the intent of the parties that the following matters will not be decided by the Board of Directors without the consent of at least one director appointed by SITA and one director appointed by SAM:

        1. Amendment of Articles of Association of the Company.

        2. Increase of share capital of the Company.

        3. Terms relating to engagement of Managing Director of the Company.

        4. Declaration of dividends.

        5. Merger of the Company.

        6. Dissolution or winding up of the Company or disposition by the Company substantially all of its assets.
            

13. Secrecy and Non-competition

    1. It is agreed by the parties that during the term of this agreement they shall hold in confidence and shall not disclose to any third party without mutual agreement, any technical know how, advice, statistical or other data or information that the parties or the Company may receive from each other or their employees except as is necessary in the ordinary course of business for implementing this agreement.

    2. Parties hereto agree and undertake during the term of this agreement not to compete with each other in India directly or indirectly of the business of the JVC.
        

14. Specific Obligations

    1. On incorporation of the JVC, SAM agrees to enter into (a) Licence Agreement and (b) a Trademarks and Logo agreement concerning the licensing of certain technology, trade marks and logos and other service by the JVC which agreements in all material respects shall be as set forth in Annexure 2 and Annexure 3 hereto.

    2. On incorporation of the JVC, SAM agrees to enter into a main Licensing Agreement which agreement in all material respects is as set forth in Annexure 4 hereto. The Name Licensing Agreement shall be valid and binding so long as the Joint Venture agreement remains in force and effect.

    3. On incorporation of the JVC, SAM agrees to enter into a Technology Transfer Agreement with the JVC for transfer and sale of technology and a production line of ______________ as well as technical assistance to the company which Technology Transfer Agreement in all material respects shall be as set forth in Annexure 5 hereto.
        

15. Auditors
    The Auditors of the JVC shall be Messrs. Ganu & Count of Mumbai or such firm of Chartered Accountants as may be agreed by the parties hereto.
     

16. The business policy of the JVC shall be as set out in Annexure 6 hereto.
     

17. The bankers of the JVC shall be Bank of India, having its office at New Delhi or such other bank or banks as may be agreed to by the parties hereto.
     

18. Parties shall not pledge, hypothecate or encumber their shares in the JVC except with the prior consent in writing of the other party.
    
    Terms of Agreement

19. The terms of this Agreement shall remain in force until _____________ or so long as the parties hold the shares in the JVC. In case any party hereto transfers all or any shares to any other party, then this Agreement shall be deemed to have been terminated.
    
    Arbitration

20. In the event of any dispute arising between the parties in respect of their duties, rights and obligations under or arising out of this Agreement, such disputes shall be resolved by arbitration to be held in accordance with the Indian Arbitration Act.
    
    Governing Laws

21. This Agreement will be governed by and construed in accordance with Indian law.