Joint venture


A joint venture is a type of business entity created by two or more parties that normally has shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access a new market, particularly an emerging market; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities.
Most joint ventures are incorporated, although some, as in the oil and gas industry, are "unincorporated" joint ventures that mimic a corporate entity. With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such a partnership can also be called a joint venture where the parties are co-venturers.
A joint venture can take the form of a business. It can also take the form of a project or asset JV created for the purpose of pursuing one specific project, as an "industry utility" that provides a narrow set of services to industry participants, or may be created for the purpose of defining industry standards.

Terminology

In European law, the term "joint venture" is an exclusive legal concept, better defined under the rules of company law. In France, the term "joint venture" is variously translated as "association d'entreprises", "entreprise conjointe", "coentreprise" or "entreprise commune".

Process

A joint venture can be formed in the following major ways:
  • A foreign investor buying an interest in a local company
  • A local firm acquiring an interest in an existing foreign firm
  • Both foreign and local entrepreneurs jointly forming a new enterprise
  • All of the above, together with public capital and/or bank debt

    Formation

In the UK, India, and in many common law countries, a joint venture must file its memorandum of association with the appropriate authority. This is a statutory document which informs the public of its existence. It may be viewed by the public at the office in which it is filed. Together with the articles of association, it forms the "constitution" of a company in these countries.
The articles of association regulate the interaction between shareholders and the directors of a company and can be a lengthy document of up to 700,000 or so pages. It deals with the powers relegated by the stockholders to the directors and those withheld by them, requiring the passing of ordinary resolutions, special resolutions and the holding of Extraordinary General Meetings to bring the directors' decision to bear.
By its formation, the JV becomes a new entity with the implications that:
  • it is officially separate from its founders, who might otherwise be giant corporations, even amongst the emerging countries
  • it has separate legal liability from that of its founders, except for invested capital
  • the JV can contract in its own name, acquire rights
  • it can sue in courts in defense or its pursuance of its objectives.

    Shareholders' agreement

The agreement between the members of a joint venture may be called a Memorandum of Understanding. It is created in association with other activities necessary to form the JV.
Some of the issues that may be addressed by members of a JV in a shareholders' agreement are:
  • Valuation of intellectual rights, say, the valuations of the IPR of one partner and, say, the real estate of the other
  • The control of the company either by the number of directors or its "funding"
  • The number of directors and the rights of the founders to their appoint directors which shows as to whether a shareholder dominates or shares equality.
  • Management decisions – whether the board or the founders manages the JV
  • Transferability of shares – assignment rights of the founders to other members of the company
  • Dividend policy – percentage of profits to be declared when there is profit
  • Winding up – the conditions, notice to members
  • Confidentiality of know-how and founders' agreement and penalties for their disclosure
  • First right of refusal – purchase rights and counter-bid by a founder
There are many features which have to be incorporated into the shareholders' agreement which is quite private to the parties as they start off. Normally, it requires no submission to any authority.
The other basic document which must be filed is the Articles, which is a published document and known to members. This repeats the shareholders' agreement as to the number of directors each founder can appoint to the board of directors; whether the board controls the joint venture or the founders; the percentage of votes required to make a decision; the deployment of funds of the firm; the extent of debt permissible; the proportion of profit that can be declared as dividends; and so on. Also significant is what will happen if the firm is dissolved, if one of the partners dies, or if the firm is sold.
Often, JVs are created as 50:50 partnerships with each party having the same number of directors but rotating control over the firm, or rights to appoint the Chairperson and Vice-chair of the company. Sometimes a party may give a separate trusted person a proxy vote to cast in their place at board meetings.

Dissolution

A JV is not a permanent structure. It can be dissolved when:
  • Aims of the original venture met
  • Aims of the original venture not met
  • Either or both parties develop new goals
  • Either or both parties no longer agree with the aims of the joint venture
  • The agreed duration of the joint venture has expired
  • Legal or financial issues
  • Evolving market conditions mean that the joint venture is no longer appropriate or relevant
  • One party acquires the other

    Risks

Joint ventures are risky forms of business partnerships. Literature in business and management has paid attention to different factors of conflict and opportunism in joint ventures, in particular the influence of parent control structure, ownership change, and volatile environment.

Supplying to governments

regulations, such as the Federal Acquisition Regulation in the United States, may specify how joint ventures are to be approached as suppliers or confirm that a joint venture or other form of contractor partnering is seen as a "desirable" arrangement for supplying to government. The FAR states that Under the rules applicable to public procurement in the European Union, public bodies may insist that suppliers intending to provide goods and services through a joint partnership accept joint liability for the execution of the contract.

Worldwide

China

According to a 2003 report of the United Nations Conference on Trade and Development, China was the recipient of US$53.5 billion in direct foreign investment, making it the world's largest recipient of direct foreign investment, exceeding the US for the first time. Also, it approved the establishment of nearly 500,000 foreign-investment enterprises. The US had 45,000 projects by 2004 with an in-place investment of over 48 billion.
Until recently, no guidelines existed on how foreign investment was to be handled due to the restrictive nature of China toward foreign investors. Following the death of Mao Zedong in 1976, initiatives in foreign trade began to be applied, and law applicable to foreign direct investment was made clear in 1979, while the first Sino-foreign equity venture took place in 2001. The corpus of joint venture law has improved since then.
Companies with foreign partners can carry out manufacturing and sales operations in China and can sell through their own sales network. Foreign-Sino companies have export rights which are not available to wholly Chinese companies, as China desires to import foreign technology by encouraging JVs and the latest technologies.
Under Chinese law, foreign enterprises are divided into several basic categories. Of these, five will be described or mentioned here: three relate to industry and services and two as vehicles for foreign investment. Those five categories of Chinese foreign enterprises are: Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures, wholly foreign-owned enterprises, though they are not actually joint ventures and mentioned only for comparison, foreign investment companies limited by shares, and investment companies through foreign investors. Each category is described below.

Equity joint ventures

An EJV is formed between a Chinese partner and a foreign investor. It is incorporated in both Chinese and in English, with limited liability. Prior to China's entry into the WTO – and thus the existence of WFOEs – EJVs predominated among Chinese joint ventures. In an EJV, the partners share profits, losses, and risk in equal proportion to their respective contributions to the venture's registered capital.
The JV contract and the articles of association are the EJV's two most fundamental legal documents. The Articles mirror many of the provisions of the JV contract. In case of conflict the JV document has precedence. These documents are prepared at the same time as the feasibility report. There are also ancillary documents covering know-how and trademarks and supply-of-equipment agreements.
Minimum levels of equity are prescribed for investments
where the foreign equity and debt levels are:
  • Less than US$3 million: equity must constitute 70% of the investment
  • Between US$3 million and US$10 million: minimum equity must be US$2.1 million and at least 50% of the investment
  • Between US$10 million and US$30 million: minimum equity must be US$5 million and at least 40% of the investment
  • More than US$30 million: minimum equity must be US$12 million and at least 1/3 of the investment.
The total foreign investment in the project must be at least 25%. No minimum investment is set for the Chinese partner. The timing of investments must be mentioned in the Agreement, and failure to invest at the indicated time draws a penalty.