In setting up a business, one sometimes looks for partners who can contribute cash, assets or even know-how. In the case of corporations, partnerships usually take the form of a joint venture as documented in a joint venture agreement or JVA. The JVA can be an agreement binding corporations with a mutual purpose or it can actually be a new corporation made up of corporations with a mutual purpose.
It would be best to liken this agreement to a marriage to have a viewpoint on what you need to have. First things first, have you conducted due diligence on your prospective partner? This is something you sort of do in real life, trying to know what you can about someone, if he or she is worthy of you or not. Is the company proposing a joint venture partnership a reputable one and does it honor its obligations? Since the JV is a business, it could be important to know: if it has a track record, its financial state, and anything else you can think of that would matter to you.
Assuming the partner passes muster, what’s next? One of the first provisions in a JVA usually relates to the purpose of the venture, to capture what the parties wish to undertake exactly.
Like a conjugal partnership, you also determine each party’s duties and responsibilities. Next, you will talk about capital structure which is akin to what you do in a pre-nuptial agreement: list each party’s assets pre-nup, during the marriage, and post-nup (just in case). In a JVA, a party’s share of ownership, profits and losses are best set out asap. So the JVA should also provide for guidelines on dividends or distribution of profits and assets during and after the JV. If the JVA relates to a project for example, what happens to pending receivables? What if the company has outstanding liabilities for taxes or expenses? It won’t be ‘til death do you part and you have to provide on what will be the term of the JV, the grounds of dissolution and on what will happen thereafter.
Who calls the shots? In a marriage, the Family Code says it is to be administered jointly (of course, reality may be a different matter which we will no longer discuss to protect the names of the innocent). In the joint venture, you have to craft provisions on how it will be managed. Otherwise, you could have an unwieldy and possibly unwise set-up where decisions cannot be made or made as quickly as you would like them to be. Which officers can be named by each party to the JV? How may directors can each party elect? How will they decide and how frequent can they meet? Who can call meetings? What if a party absents himself/itself on purpose, what can be done?
It’s been said that those who have more in shares should have more in rights or at least they feel they have to. To counterbalance this, the agreement can provide for special voting requirements such as supermajority rights for certain crucial items. For example, you may wish to be in control if you own 60% of the venture but your partner might wish to have a say on certain major matters like selling the company or incurring substantial debt. In these instances, more than a simple majority vote may be required.
Can you get a third party to join in just like that? Of course, we are referring to the joint venture and not marriage. Usually, transfers of shares in the JV are subject to restrictions and can have a provision giving one party’s first crack on any disposition of shares. This is called the right of first refusal. Just like in a marriage, you don’t want a stranger like a mistress or mother-in-law coming into the picture just like that. At the very least, the new party must not be a competitor
Even the name of joint venture can capture the essence of the partnership or even the product or service it wants to grow. It can set you apart if you want to make your mark. This is like the spouse deciding if she will use the husband’s last name or not. Or use a hyphen. This could be an issue for the joint venture, if both companies will have naming rights or if one’s name will come first.
If the other party does not fulfill its promises, what does one do? Give him the silent or cold treatment? That may not be enough in a JV set-up although it could be a start. When the parties cannot agree, what is the counterpart of marriage counseling? You can provide for dispute resolution which usually requires the preliminary discussions between the companies’ top officers to resolve the matter. Then you can proceed to mediation, conciliation or arbitration or directly to litigation. You can even provide for the venue, at your home ground if you can swing it, then otherwise at some venue which is neutral to both parties.
In the end, the joint venture agreement is there to help, just in case it turns out that the partnership you have forged is not made in heaven after you have already said I do. We have to remember that in a business enterprise, one is in it only for better and not for worse, for richer and not for poorer. That is where the similarity ends and business begins.