A Joint Venture is a commercial arrangement between two or more participants who agree to co-operate to achieve a particular objective. Indeed, Joint Ventures cover a wide range of collaborative business arrangements which involve differing degrees of integration and which may be for a fixed or indefinite duration.
Many reasons exist for a business to seek a joint venture partner. It may very well desire to develop new products or markets, expand or grow returns from existing ones. Alternatively, it may be looking to tap into a partner’s greater or more specialised expertise or resources, be it technical, financial, marketing or employee-related. It may also wish to share the costs and risks associated with developing new markets or technologies.
Whilst Mergers and Acquisitions are one of the major aspects of corporate finance world, Joint ventures and other alternative structures (such as consortiums and alliances) may be regarded as superior to mergers and acquisitions in many market entry situations. While full company or carve-out acquisition and divestitures are a critical tool in the strategic toolset of nearly every business, Joint Ventures typically offer the following advantages:
The funding of the Joint Venture’s business normally takes place by having the parties to the said Joint Venture contribute cash and/or assets to the business. Interests in the Joint Venture entity are in return received, which is invariably evidenced either through their capital accounts or equity.
When it comes to drafting a Joint Venture agreement, it is vital to memorialize when mandatory initial capital contributions and any mandatory additional capital contributions must be made. It is also essential to furnish details on specific circumstances under which mandatory capital contributions must be made, including the amounts and timing of such contributions.
The drafter should also provide details on procedures by which such contributions may be made are should also be enlisted and drafted in the said agreement. Additionally, it is pertinent to include in the said agreement any consequences or penalties which may arise in the event that a joint venture party fails to make any required contributions in the future. At this stage, it is vital to point out that mandatory contributions constitute the minimum amount of capital the Joint Venture needs for the success of the said Venture for its foreseeable future.
Moreover, with respect to initial capital contributions, it is important to include the following:
If the Joint Venture agreement allows for optional future contributions (they represent all funding in excess of the mandatory contributions), the specific instances in which such contributions are permitted should be set forth, including the amounts that are permissible and when such contributions may be made.
The Joint Venture agreement shall also contain provisions which address how often profits will be distributed and on what basis, as well as whether estimated tax distributions will be made to members or otherwise. The purpose of the Joint venture is also a requisite of such an agreement
The joint venture agreement should describe the purpose of the joint venture and what action or agreement is required to change the fundamental scope of the joint venture.
The joint venture agreement should provide for a business plan and budget which would be approved by the board of managers/directors or by a supermajority of the joint venture parties.
