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Legal Issues To Consider When Planning A Joint Venture Agreement

Joint ventures can take many different forms and can be defined in various ways. A common example of a joint venture involves two business entities or individuals with aligned strategic interests entering a legal arrangement where each party will contribute resources to accomplish a common goal. This entry explores several legal issues to consider when planning a joint venture.

The parties to a joint venture will need to document how they will share profits and losses experienced by the venture. Contributions of cash, property and/or services should also be clearly defined, as well as distributions during or at the termination of the venture. However, because a joint venture will often involve a mutual undertaking between parties with some overlap in their strategic business operations, capabilities and goals, the parties should clearly spell out the legal boundaries of the overall relationship.

Noncompetition Agreement

One issue is whether the parties will agree not to compete with one another or the venture entity during or for some period of time after the termination of the venture. Noncompetition provisions could apply based on customer or geographic boundaries. For example, if one party to a joint venture has a pre-existing customer relationship prior to entering the joint venture, will the other party be precluded from working with that customer after termination of the venture? If two parties that have preexisting operations in different geographic territories form a joint venture, will each party be prohibited from operating in the other party's territory after termination of the joint venture?

Confidentiality Provision

The joint venture agreement should also define the parties' obligations with respect to confidential information that is shared or developed during the term of the joint venture arrangement. Information sharing is often a sensitive matter within a joint venture. Each participant must feel comfortable that information that is shared within the scope of the joint venture and which is vital to helping the venture achieve its goals will be protected during and after the term of the venture, or the venture will not be able to achieve its goals.

Company Opportunities

Joint venture participants should agree on a process for determining whether a participant is obligated to refer a business opportunity to the venture or whether the individual participant may consider the opportunity on a stand-alone basis. The most important element in agreeing upon company opportunity provisions is often in defining what types of opportunities fall within the scope of the joint venture's business activities. A related issue is how the joint venture will decide whether to pursue a business opportunity that is identified by one of the venture parties. If one of the joint venture's members is in favor of pursuing an opportunity and the other party is not in favor, will the joint venture pursue the opportunity in same fashion? Will the proposing party have the right to pursue the opportunity individually if the joint venture does not elect to pursue the opportunity?

Unwind/Liquidation Clauses

Another significant issue is whether one of the parties to the joint venture may elect to unwind and terminate the venture or whether both parties must mutually agree on a termination. Related questions involve whether one party would receive the opportunity to buy-out the other party's interest in the venture under agreed upon circumstances, and if so, for what price? What would happen to joint venture projects that were in progress at the time of the termination?

Joint ventures can be very rewarding for both parties to the venture, but the parties should agree to clear terms for the boundaries of the joint venture and the rights and responsibilities of the parties in the event of an unwind or termination of the arrangement.

Requirements and restrictions

Largely, any foreign entity can set up a joint venture in India; however, some entities may face restrictions as provided under the FDI Policy and FEMA, with respect to certain sectors where foreign investment is still prohibited and there are other prerequisites for investment. Commercial arrangements (such as exercising put and call options) generally provide for the protection of party interests. However, the extant FDI Policy and RBI notification in relation to pricing guidelines for instruments with optionality clauses categorically prohibit such exercising of an optionality clause by a foreign investor at an ‘assured return’. Similarly, exercising other exit options (such as IPOs in India) requires fulfilment of certain conditions, such as the minimum requirement of promoters’ contribution towards the post-IPO capital and minimum lock-in requirements. It may be pertinent to note that, if the joint venture company is converted into or is incorporated as a public company, it will be required to list its shares on the stock exchange and to comply with all the formalities and compliances of SEBI, which is the stock market regulator in India.

However, with the introduction of the Bankruptcy Code, supplemented by the Delhi High Court’s recent rulings in Cruz City 1 Mauritius Holdings v Unitech Limited and NTT Docomo Inc v Tata Sons Limited, it can be seen that disputes raised by foreign investors have been treated favorably, as it has been settled that, subject to compliance with the terms of the joint venture agreement, the claims of the foreign investors with respect to any assured return on exit of the foreign party in lieu of the damages suffered, would be enforceable in India and would not be treated as a violation of the FDI Policy and other related laws.

The focus has now also shifted on reviving stressed assets in the economy. The Bankruptcy Code has provided new fora of opportunities for joint ventures to acquire stressed assets, for instance the Arcelor Mittal and Nippon Steel & Sumitomo Metal Corporation joint venture for acquiring Essar Steel. While there is great interest from several players for making investments in stressed assets and debt, including private equity funds, the uncertainty of the process under the Bankruptcy Code has led to limited cases of active participation in the bidding process by joint ventures.

Several legislative and judicial developments in the past year have directly impacted the functioning of joint ventures in the country. Steps have been taken by the government to harmonize extant laws by way of amending the Bankruptcy Code and the Companies Act in the past year. The recent Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations 2017 have also brought about significant changes in, inter alia, investment routes, instruments, procedure and reporting process, etc.


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