JOINT VENTURE

SUBMITTED TOWARDS THE FULFILMENT OF THE COURSE TITLED

COMPANY LAW

Submitted by: Shrehan siddhartha year, V Semester)

Submitted to: Mr.Anand Kr.rai (Bharti Airtel Ltd.) (3rd

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

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TABLE OF CONTENT
Page no.s

TABLE OF CASES LIST OF STATUTES LIST OF ABBREVIATIONS INTRODUCTION RESEARCH METHODOLOGY RESEARCH PLAN CHAPTER I UNDERSTANDING
THE

i i ii 1-2 2 2 CONCEPT
OF

A JOINT VENTURE

3-8

Defining a Joint Venture: The What of a Joint Venture The How of a Joint Venture The When of a Joint Venture The Why of a Joint Venture? Forms of Joint Ventures CHAPTER II INCORPORATING A JOINT VENTURE CHAPTER III TRANSNATIONAL JOINT VENTURES The Method of International Joint Venture Drafting Considerations Joint Venture Agreement CHAPTER IV JOINT VENTURE : CASE STUDIES
AND IN

INDIA

9-11 12-19

EXAMPLES

20-23

Starlinger and Co. v. Lohia Starlinger Limited Onyx Musicabsolute.com Pvt. Ltd. v. Yash Raj Films Pvt. Ltd. Novavax, Cadila form JV for developing vaccines Morgan Stanley and Citi to form joint venture

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CONCLUSION BIBLIOGRAPHY

24 iii

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TABLE
Names of Parties Page no.s Ross v Willett 1

OF

CASES

Starlinger and Co. v. Lohia Starlinger Limited 18-19 Onyx Musicabsolute.com Pvt. Ltd. v. Yash Raj Films Pvt. Ltd. 19 New Horizons Ltd. v. UOI Novax and Cadila Citi and Morgan Stanley 3 22 22

LIST
Name of Statute Page no.s Companies Act, 1956 8-9

OF

STATUTES

Foreign Exchange Management (Establishment in India of Branch Office 9 i

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or other place of business) Regulations, 2000

ii

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LIST

OF

ABBREVIATIONS

1. BomBombay/Mumbai 2. BoD.Board of Directors 3. CEO...Chief Executive Officer 4. Comp Cas...Company Cases 5. ed... edition 6. eds...editors 7. et al. et alia 8. Ibid . ibidem 9. Id. Ibidem 10. 11. 12. JV.Joint Venture MD..Managing Director MoUMemorandum of

Understanding 13. n. ................................................................ note 14. p. page 15. pp. ...pages 16. RBI..Reserve Bank of India 17. rev. . Revised 18. SC .. Supreme Court 19. SCC Supreme Court Cases 20. SEBISecurities Exchange Board of India 21. Sec. section 22. v. .versus 23. vol... volume

ii

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INTRODUCTION
Joint ventures have become an integral part of international business life. They serve as an important strategic option for companies which, by reason of global aspirations or due to other competitive pressures, do not have the capital, skills or market access necessary to achieve their commercial objectives in a particular sector through their own resources.1 A joint venture has been defined as an association of persons who intend to engage in and carry out a single business venture for joint profit and for which purpose they combine their efforts, property, money, skills, and knowledge, pursuant to an agreement of having a community of interest and that each participant will stand in the relation of principal, as well as agent with an equal right to control the means employed to effect the common purpose of the venture. Originally, the courts used the term joint adventure almost exclusively in designating such an association, but at present joint adventure and joint venture are regarded synonymous. The concept of a joint venture was unknown at common law, which recognized no relationship between persons as co-venturers aside from that of a partnership established by proof of its requisite elements. The joint venture is purely the creature of American courts. It appears that the term joint adventure was used for the first time in its modern connotation in Ross v Willett a New York case decided in 1894. The development and popularity of the joint venture as a form of association have been primarily a matter of business expediency. Use of joint ventures has become increasingly common as a convenient and almost necessary means of acquiring the great concentration of economic resources, knowledge, and skills required to accomplish large-scale construction projects, for the exploitation and development of natural resources, for joint participation in public offerings of stocks and bonds, for commercial shipping ventures, for

Ian Hewitt and Gerhard Picot, Structuring the Joint Venture, Eva Micheler and DD Prentice, (eds.), Joint Ventures in English and German Law, 1st ed. 2000, p.12.

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the development and sale of real estate subdivisions and housing projects, and for the promotion of patents, copyrights, and even theatrical productions. Aside from their usefulness where one person or entity desires to expand into a new area of business activity but lacks the necessary skills or resources and finds a licensing agreement or some similar contractual relationship unsatisfactory, joint ventures bestow certain benefits when used as vehicles for tax-oriented investments as they are treated as partnerships rather than as associations taxable as corporations.2

RESEARCH METHODOLOGY
The present research project titled Joint Ventures has been made using the doctrinal research methodology which employs resources such as books, articles on the web and case laws on the same. The researcher has referred to the CNLU Library and the internet for the research material of the research paper.

RESEARCH PLAN
The research paper begins with a general overview of joint ventures and in the First Chapter dwells deep into the conceptual understanding of a joint venture. The what, how, when of a joint venture are examined for a clearer understanding. The Second Chapter looks at how a joint venture is incorporated in India, the procedure and the law surrounding it. The Third Chapter then goes on to look at transnational joint ventures, their method, the drafting considerations and the components and issues pertaining to a Joint Venture Agreement. Next, the researcher has undertaken case studies of two very recent Judgments pertaining to Joint Ventures. Finally, the researcher presents the Conclusion to the research paper.

American Jurisprudence Proof of Facts 2d, 12 Am. Jur. Proof of Facts 2d 295.

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CHAPTER I UNDERSTANDING
DEFINING
A

THE

CONCEPT

OF

A JOINT VENTURE

JOINT VENTURE: THE WHAT

OF A

JOINT VENTURE

The most commonly accepted definition of a joint venture has been expounded by Hanigan KR as follows: is a partnership though which two or more firms create a separate entity to carry out a productive economic activity in which each partner takes an active role in decision making. In the case of New Horizons Ltd. v. UOI 3, the expression joint venture was defined by the Supreme Court as: a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit wherein all contribute assets and share risks. Typically, it refers to collaboration between two or more parties each of them holding equity in the new entity formed by them and contributing by way of cash, land, expertise or other assets, with the intention of undertaking economic activity together. However, a joint venture may not involve the formation of a new entity as in the case of a strategic alliance or a partnership.4 THE HOW JOINT VENTURE

OF A

While deciding to enter into a joint venture there are certain strategic business decisions that need to be made: 1. What type of legal vehicle should be established as the legal framework for the joint venture? 2. Where should the legal vehicle be located? (in case of international JVs) 3. What legal steps or structures should take place in order to form the chosen vehicle?5

3 4

(1995) 1 SCC 478. Joint Ventures in India: Key Structuring and Legal Aspects, http://www.lawgazette.com.sg/20079/regnews.htm, (last referred to on February 23rd 2010). 5 Ian Hewitt and Gerhard Picot, Structuring the Joint Venture, Eva Micheler and DD Prentice, (eds.), Joint Ventures in English and German Law, 1st ed. 2000, p.14.

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A broad range of potential legal vehicles exist for joint ventures and they can be readily classified as under: 1. Contractual Joint Ventures 2. Partnerships 3. Corporate Joint Ventures While deciding which legal vehicle should be adopted, there are various key issues that are to be considered: 1. Liability exposure 2. Tax Costs 3. Regulatory Requirements- Depending upon the vehicle chosen, the regulations applicable will vary and thus, one must compare the requirements and look for the most suitable. 4. Identity requirements- A corporate JV would have a clearer framework with which senior management can identify and the same can also be crucial for marketing purposes. 5. Financing- A corporate structure would have the attendant advantage of owning and holding assets in its own name and thus would also offer greater possibilities of for raising finance 6. Restructuring options- A JV may often lead to a programme for combining and rationalizing human resources in order to achieve a higher qualified but also streamlined workforce. The JV, should thus in such circumstances allow flexibility for any such post-transaction restructuring. 7. Formalities of incorporation 8. Ease of unwind6 THE WHEN
OF A

JOINT VENTURE

It must be borne in mind that there are no rigid set of criteria that need to be proved to establish the existence of a joint venture, barring some essential characteristics. The determination is usually done by the Courts on a case-by-case basis.

Ian Hewitt and Gerhard Picot, Structuring the Joint Venture, Eva Micheler and DD Prentice, (eds.), Joint Ventures in English and German Law, 1st ed. 2000, p.16

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However, in order to ascertain when a venture qualifies to be referred to as a joint venture, there are certain essential characteristics which can be enumerated as under 1. As a rule, the relation of joint-venturers is created where two or more persons combine their money, property, or time in the conduct of some particular line of business agreeing to share profits and losses. Hence, facts showing the joining of funds, property, or labor in a common purpose to attain a result for the benefit of all the parties, in which each participant has a right in some measure to direct the conduct of the others, will justify a finding that a joint venture exists. 2. As between the parties to the enterprise, actual intent to form a joint venture is the most basic element of the relationship and this is determined in accordance with the ordinary rules governing the interpretation and construction of contracts. As a legal concept, a joint venture cannot be created or imposed by law, but is a relationship voluntarily assumed and arising wholly ex contractu. 3. As a third prerequisite to creating a joint venture, it is clear that the participants must combine their property, money, labor, knowledge, and skills in some common undertaking, the contributions of the respective parties need not be equal or of the same character, but there must be a contribution by each co-venturer of something promotive of the enterprise. 4. It is generally agreed that there must be a community of interest in the subject matter of the agreement as well as a right to equal control. As to the former, some jurisdictions require a joint proprietary interest in the property used pursuant to the undertaking, while others require only a joint interest in the objects and purposes of the venture. As to the latter, some jurisdictions require that each of the parties have an equal voice in the manner of performance, while others allow a disparity in the amount of control allotted to the participants. 5. A fifth factor essential to the creation of a joint venture is an agreement, express or implied, for the sharing of profits, although the mode of participating in the fruits of the undertaking may be determined by the parties. 6. The final element of a joint venture is limitation of the relationship to a single undertaking or to an ad hoc enterprise; it is the characteristic on the basis of which a joint venture has most often been distinguished from a partnership. An association

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must be of limited scope and duration in order for it to constitute a joint venture, although associations organized for diversified operations of a continuing nature have sometimes been recognized as joint ventures by the courts, as have agreements entered into by persons uncertain as to how long it would take to complete their business.7 THE WHY JOINT VENTURE ?

OF A

Joint ventures are appropriate when complementary needs exist between firms and when partners strategies are compatible, thereby ensuring an effective degree of cooperation and commitment when a company wants to expand into a field or market alien to it. It is found to be a profitable method as it serves as a counter to governmental barriers such as trade, investment barriers, and restrictions on repatriation of earnings and regulatory and tax barriers. The external factors which cause investors to consider joint ventures include: 1. Market access: Joint ventures are often the means of expanding into new markets. Market access may, for instance, depend on linking up with established distribution channels or operating under a brand name already well recognised in the market-place. For example, in case of a foreign buyer, the difficulty of securing resources from a country with a different culture, different language and different legal system may be too severe. In such a situation a joint venture can be the most sensible way for two or more parties to pursue business. 2. The challenge of scale: Often, the capital required to enable a new business venture to attain competitive economies of scale may be so great that an investor may be incapable of proceeding alone. Here, a strong financial partner would be of great assistance. 3. Unfamiliar jurisdictions: The risks of operating in an unfamiliar jurisdiction, particularly the challenge of coping with political variables, can be daunting. However, if there is a compatible local partner familiar with local business practices, political processes, government procedures, laws and customs risks would be greatly mitigated.
7

American Jurisprudence Proof of Facts 2d, 12 Am. Jur. Proof of Facts 2d 295.

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4. Host country participation policies: The foreign investment policies of many host countries favour a minimum level of local participation. In some of the more defensive jurisdictions, foreign investors are required to allocate a preordained minimum share of the joint venture equity to the host government. Such requirements can distort the joint venture structure, although they do not always provide an insuperable obstacle--the foreign investor can easily assess the real rate of return at the establishment stage of the venture. If, however, subsequent inputs of technology, services and capital by each of the partners are not based on impartial, arms length market-based calculations, the economic equilibrium of the joint venture is likely to become skewed and provide fertile ground for later arguments.8 FORMS JOINT VENTURES

OF

From the point of view of legal nature and organization, joint ventures can be classified into two forms: 1. Equity joint ventures involves the participation of two or more partners in the creation of a new corporate entity in which each partner owns a given share of the equity capital, or in the re-distribution between the parties of the shares of an existing company.9 This represents an opportunity to enter into a new market with minimum risk as each partner is closely linked to the success of the venture, each having a vested ownership position in the venture itself. 2. Contractual joint ventures the parties do not establish a jointly owned new company for the carrying out of the joint ventures activities. The internal legal relations as well as those with the third parties are structured and regulated on a contractual basis.10 Ownership remains in the hands of each partner. It is solely the
8 9

Robert Pritchard, The Ins and Outs of Joint Ventures, I.C.C.L.R. 1997, 8(9), 303-306 at pp.303-304. There are three models that may be opted from: a. Two parties, who or which may be individuals or companies, one of them non resident or both residents, incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash. b. Alternately, the above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business. 3. Promoter shareholder of an existing Indian company and a third party, who or which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash. 10 Ian Hewitt and Gerhard Picot, Structuring the Joint Venture, Eva Micheler and DD Prentice, (eds.), Joint Ventures in English and German Law, 1st ed. 2000, p.16.

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contract and not the background of corporate laws and procedures that governs the unincorporated venture.

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CHAPTER II INCORPORATING A JOINT VENTURE

INCORPORATION

IN

INDIA

In case a new joint venture company has to be formed in India the following are pertinent issues to decide: A. Formalities 1. Whether the joint venture company will be a public or a private limited company11? 2. The place of Registered Office of the Joint venture Company12 3. Propose a name of the joint venture company and check its availability from the Registrar of Companies (ROC) where the registered office of the company is to be situated and the company is to be incorporated13, 4. Choose the subscribers to the Memorandum of Association14 which will obviously include the partners to the joint venture and their nominees 5. Prepare the Memorandum and Articles of Association15 in consultation with the joint venture partners, get them printed and suitably stamped, and submitting the same with required documents like Statutory Declaration under Sec.33 of the Companies Act, 1956 and Form no.18 under Sec.146 of the Act regarding address of the registered office, to ROC along with fees payable. 6. On receipt of Certificate of Incorporation, the new company may start business, {i} in case of private company, immediately. {ii} in case of public company ,after obtaining certificate of Commencement of Business. B. Articles of Association To avoid contradictions, the Articles of Association should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners.
11 12

Sections 3(1)(iii) and 3(1)(iv) of the Companies Act, 1956. Section 13 (b) of the Companies Act, 1956. 13 Section 20 of the Companies Act, 1956. 14 Section 12 of the Companies Act, 1956. 15 Section 13 and 26 the Companies Act, 1956.

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C. Non-resident Partner In case one of the partners of the joint venture company is a non-resident, approval of the RBI will be required for acquiring shares of the company and establishing the place of business in India under Foreign Exchange Management (Establishment in India of Branch Office or other place of business) Regulations, 2000.16 3. Inter-corporate Investment under Sec. 372Aof Companies Act, 1956 Where an Indian company (partner) acquires shares of the joint venture company which is exceeding 60% of its (Indian companys) paid-up capital and free reserves or 100% of its free reserves, whichever is more, Section 372A17 will apply, requiring prior Board decision of the Indian company as well as Special Resolution of its shareholders. If a foreign
16

Setting up a Joint Venture in India, http://www.sethassociates.com/setting_up _a_joint_venture_in_india.php, (last referred to on February 28th, 2010). 17 (1) No company shall, directly or indirectly,- (a) make any loan to any other body corporate; (b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and (c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate, exceeding sixty per cent of its paid-up share capital and free reserves, or one hundred per cent of its free reserves, whichever is more: Provided that where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceeds the aforesaid limits, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting: Provided further that the Board may give guarantee, without being previously authorised by a special resolution, if,- (a) a resolution is passed in the meeting of the Board authorising to give guarantee in accordance with the provisions of this section; (b) there exists exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution passed in a general meeting for giving a guarantee; and (c) the resolution of the Board under clause (a) is confirmed within twelve months, in a general meeting of the company or the annual general meeting held immediately after passing of the Board's resolution, whichever is earlier: Provided also that the notice of such resolution shall indicate clearly the specific limits, the particulars of the body corporate in which the investment is proposed to be made or loan or security or guarantee to be given, the purpose of the investment, loan or security or guarantee, specific sources of funding and such other details. (2) No loan or investment shall be made or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution referred to in section 4A, where any term loan is subsisting, is obtained: Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit of sixty per cent. specified in sub-section (1), if there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

10

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company acquires the shares, this Section will not be invoked as it applies only to a company defined under section 3(1)(i) of the Act which does not take into account a foreign company. 4. Approvals The Joint Venture Agreement should be conditional upon obtaining all necessary approvals or consents or licenses or permissions of appropriate agencies of Government of India like RBI or SIA etc. within the specified period. If any of the approvals are not received, or received late, the joint venture cannot proceed. 5. Important clauses of a Joint Venture Agreement. Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with due diligence. Next, a MoU or letter of intent is signed by the parties. A JVA requires dexterous legal drafting and should incorporate all relevant clauses. A brief checklist of important clauses may be as follows: proportion of shareholding company, share transferability conditions, composition of BoDs, appointment of Chairman and CEO or MD, Quorum, Casting vote provisions, dividend policy, funding provisions, access conditions, exit clauses, Anti-compete clauses, Maintaining Confidentiality, Indemnity clauses, Break of deadlock, Dispute Resolution, Applicable law, Force Majeure and Termination provisions.18

18

Joint Venture Agreements, http://madaan.com/jointventure.html, (last referred to on February 28th, 2010).

11

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CHAPTER III TRANSNATIONAL JOINT VENTURES

The term transnational joint venture is a general term encompassing a wide variety of transactions intended to co-operatively pool the resources of the participants which frequently involves the entry of one company into a foreign market through a Joint Venture arrangement with a foreign firm. Parties can decide whether to opt for an equity or nonequity joint venture arrangement on the basis of the following factors: 1. goals and expectations 2. willingness to accept risks and liabilities 3. needs regarding control and management 4. special legal or business considerations of the local jurisdiction19 THE METHOD OF INTERNATIONAL JOINT VENTURE The methods and form of international Joint Venture decide the legal consequences that affect a significant variety of issues affecting ownership and management. 1. ACQUISITION By mode of an acquisition interest in any legal structure a share corporation, a private limited company, or a limited partnership can be purchased. An acquisition can be for the totality of the equity interests of another entity or only a part of its equity. The legal form of what has been purchased can usually be modified into another legal form. Thus, a limited partnership can purchase the entire interests of a private limited liability company and convert it into a share corporation. Pros and Cons: The advantage of adopting a model of acquisition is the resultant legal simplicity owing to the existing legal form. Due to the prior history at hand, the commercial risk is also mitigated and the existing infrastructure and personnel can be employed. However, in case of an acquisition a due diligence is conducted by the purchaser which may be with some resistance. The existing management and corporate structure if found unsuitable, may be difficult to modify.20
19

Nirvakar Singh and Sugata Marjit, Joint Ventures, International Investment and Technology Transfer, 1st ed. 2003, p.10. 20 Raj Aggarwal, (ed.), PM Bakshi (rev.), Joint Ventures Law and Management, 1st ed. 2002, pp.86-90.

12

---------Joint Venture-----

2. SUBSIDIARY One of the most frequent methods of forming an equity joint venture is by the creation of a local subsidiary, whose legal outlines, capital structure, and managerial aspects are negotiated between the parties. Pros and cons: The ability to customize a subsidiary to the interests of all the participants confers an enormous utility. However, the disadvantage is that finding the right compromise may not always be possible and there may be numerous approvals to be obtained.21 3. PARTNERSHIP It indicates an agreement of persons, individuals, corporations, to form an organization in which each is the agent of the other. Every partner can bind the totality of partners unless the articles of partnership establish special rules. When the partners do not foresee an alliance of indefinite duration, for instance in situations where the principal object is to complete a specific task, it is common to do the same through an unincorporated Joint Venture. Pros and Cons: The advantage is that the partnership agreement can be drafted to be specific to the purpose. However, the problem is that the drafting of the Articles requires prolonged negotiations and being a new entity there is no way of determining viability of commercial object. 4. CONSORTIUM It is also an unincorporated Joint Venture which is based solely on contract that will determine the rights and obligations of each participant. Funds are made available through contributions made by each participant. Unlike a merger, there is no fusion of two companies and no disappearance of any entity. Rather, the existing entities continue and in fact form a partnership which is a new commercial entity, though not a legal entity. As it is primarily contract-based, it is referred to as contractual joint venture. 5. MERGERS
21

Raj Aggarwal, (ed.), PM Bakshi (rev.), Joint Ventures Law and Management, 1st ed. 2002, p. 93.

13

---------Joint Venture-----

The underlying motif of a joint venture is the collaboration whereas mergers are usually hostile in origin vis--vis the target company and results in the survivorship of the stronger. This mode is rarely used in forming an international joint venture. Pros and Cons: Though the advantage is in terms of corporate reorganization there are numerous other issues such as, valuation of assets, management and personnel, legal requirements in the foreign country, etc. 6. MANAGEMENT CONTRACTS A management contract is on the legal frontier between traditional joint ventures and contract rights. The profit sharing management contracts offer a method for doing business in which one party has no capital risk although there is an abdication of future profits. The disadvantage is that it is usually temporary in nature with a foreseen expiration date.22 DRAFTING CONSIDERATIONS Pre-Negotiation Agreements: The two most important documents to be drawn upon before the Joint Venture agreement is finalized are the Confidentiality Agreement and the Letter of Intent. The Confidentiality Agreement is a pre-negotiation agreement that seeks to protect the confidentiality of information disclosed between prospective joint venture parties and establish a framework for pursuing the joint venture agreement. After which, the Memorandum of Understanding or Letter of Intent may then be produced, providing a more detailed outline of what the parties want to develop in the joint venture agreement. Objectives of the Joint Venture and identity and participation of the parties may be reiterated, including the details regarding the kind of entity that is to be created. The intended level of capitalization, as well as the level of ownership and control to be held by the parties can be stated here, along with significant representations with reference to representations and warranties. The responsibilities of both parties at this start up phase should be identified. The local law will determine the extent to which this Joint Venture will be able to participate in that country, and local counsel, i.e. in the intended country of operation, should be consulted before any such document is drawn up.23
22 23

Raj Aggarwal, (ed.), PM Bakshi (rev.), Joint Ventures Law and Management, 1st ed. 2002, pp.98-99. Raj Aggarwal, (ed.), PM Bakshi (rev.), Joint Ventures Law and Management, 1st ed. 2002, pp. 17-18.

14

---------Joint Venture-----

JOINT VENTURE AGREEMENT A Joint Venture agreement (JVA) may be a single document, or multiple agreements setting out the contributions and levels of involvement of the parent companies in the Joint Venture. A JVA defines the business equation between or among the parties. Whether it is a simple document or an extensively detailed one, there are certain essential parts that have to be included. A MoU and JVA must be signed after consulting lawyers well versed in international laws and multi-jurisdictional laws and procedures and only after undertaking thorough discussions and negotiations to avoid any misunderstanding. A MoU or Letter of Intent has to be signed between the parties to enter into a joint venture. The JVA can take any form in which the parties agree. It should be made subject to obtaining all necessary governmental approvals and licenses within a specified period.24 Before signing a Joint Venture Agreement, certain issues such as the following must be properly addressed: 1. Holding shares: The proportion of shareholding in the joint venture company should be clearly agreed. It may be also agreed that any increase of the share capital in future shall be with the consent of the partners. 2. Transfer of shares: The partners usually agree that shares to be held by them will be non-transferable, for a specified period. Thereafter, sale or disposal will require prior written consent of other partner(s). It may be provided that where shares are to be sold or transferred; the same will have to be offered to the other partner at an agreed price. If the said partner fails to purchase the shares then they will be offered to a third party. Alternately, other partner could designate an affiliate or subsidiary company to purchase the shares and in that case shares have to be sold to only to such affiliate.
24

Joint Venture Agreements, http://madaan.com/jointventure.html, (last referred to on February 28th, 2009).

15

---------Joint Venture-----

3. Board of Directors: The composition of the Board is very critical as it constitutes the top decision making body of a company. It may be provided that each partner will nominate stipulated number of directors and the nominee of one partner will be the Chairman of the Board for a specified period after which other partners nominee will hold this post and so on and so forth. For a valid Board meeting quorum is vital and that must also be decided upon. 4. General meeting: It may be provided that at the general meeting at least one member nominated by each partner should be present and a resolution passed should be through affirmative vote such members. The Chairman will not have casting vote in case of equality of votes. 5. Chief Executive Officer or Managing Director: Chief Executive Officer or Managing Director is responsible for carrying out day-to-day operations and will function subject to superintendence, control and direction of the Board and be responsible to it. Either the partners could decide the candidate and provide for his appointment through the agreement or the Board could make the appointment. 6. Committee: Generally, a joint venture agreement stipulates for a management committee constituted by the Board consisting of one nominee of each partner to assist and advise the CEO or MD. It may be agreed that decisions will be taken by such committee on a unanimous basis. In the event of deadlock, the matter will be referred to the Board. 7. Dividend policy: Dividend is an important return on investment in shares made by the joint venture partners. They may therefore agree that the minimum percentage of profit after tax shall be required to be distributed each year. 8. Funding: Funds are the lifeline of any business, but availing funds from outside source could result in dilution of the control in the Board or shareholding. The partners may therefore agree that in respect borrowings from banks or institutions it should be ensured

16

---------Joint Venture-----

that lender shall not have any right to nominate a Director on the Board or participate in equity directly or indirectly through conversion of loans. 9. Access: In order to maintain absolute cordiality access to the documents of the company is essential. Thus, the partners may decide that they will have full access to the premises, books, records, properties etc of the joint venture company. 10. Change of control: In case there is change in control of one partner where first partner is a company and its shareholding pattern has altered to the extent that its management has changed, that change in control will give right to the second partner to the joint venture company to require: a. the first partner to sell all its shares to second partner, or b. the first partner to purchase all shares from the second partner. 11. Competition: It is usual to provide that the partners will not in any way compete with the business of the joint venture company. 12. Secrecy: It is but predictable that in the course of the business of the joint venture the partners will have privy to many confidential information about each other, which they may agree not to disclose to outsiders. 13. Indemnity: In case a partner incurs loss due to omissions and/or commissions of the other partner, he would indemnify the first partner and keep him harmless. 14. Assignment: It is usual for the partners to provide that the agreement will not to be assigned by any partner without the prior written approval of the other. 15. Break of deadlock: The deadlocks in decisions between the partners, especially in case where partners hold equal stakes in the joint venture, are distinct possibilities. To overcome this, the partners may provide that a reference of deadlocked matter should be made to a person nominated by both partners. It is better to specify the arbitrator, the procedure, the

17

---------Joint Venture-----

venue and the law of the country which will apply where one of the partners is nonresident. 16. Applicable law: It is always advisable to state the law of the country which will govern the agreement where a partner is a non resident. But, the Indian authorities and resident partner generally insist that Indian laws should apply. This should be negotiated and agreed between the partners unambiguously. 18. Force Majeure: The agreement should provide for events or circumstances occurring beyond the control of the partners which may result in partners not being able to perform their obligations of the agreement. No partner should be held responsible. 19. Termination: It is advisable to provide for termination of the joint venture to avoid problems later. It can be by mutual consent or by winding up of the venture, etc.25 A detailed agreement might focus on: governance, contributions, responsibilities and risks, technology transfers, governing laws, dispute resolution, formalization (i.e. compliance with local laws, regarding registration and the required government approvals), accounting procedures, control and management issues, territory and exclusivity, transaction and currency issues, division of profits, termination of Joint Venture under what circumstances, legal concerns such as the antitrust laws of a country, pre-merger notification requirements, labour law compliances, intellectual property rights, financing issues and all other related laws, depending on the nature and purpose of the Joint Venture.26

25

Joint Venture Agreements, http://madaan.com/jointventure.html, (last referred to on February 28th, 2010). 26 Raj Aggarwal, (ed.), PM Bakshi (rev.), Joint Ventures Law and Management, 1st ed. 2002, pp.19-40.

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CHAPTER IV - JOINT VENTURE: CASE STUDIES EXAMPLES

AND

RECENT

In the present Chapter the researcher attempts to look into some of the most recent judgments pertaining to joint ventures. Starlinger and Co. v. Lohia Starlinger Limited 27 The appellant in the present case Starlinger & Co. entered into a JV agreement with Maschinenfabrik Starlinger & Co., to form a new company by the name of Lohia Starlinger Ltd., the respondent for undertaking the manufacture of the machinery for production of PP/ HDPE Woven fabrics and wherein Starlinger held 40% of the equity shares and the balance (60%) was to be held by the respondent. From the ensuing facts it became apparent that there arose differences between both the parties. The appellant then filed a petition claiming oppression and mis-management. During the pendency of the same the respondents sought to amend the objects clause of the agreement for manufacturing automotive parts and accessories. The appellants submitted that owing to the differences, lack of confidence between them, the exclusion of petitioner from the affairs of the company, coupled with the fact that the company wanted to start business in an area in which the petitioner is not involved the use of Starlinger as part of its corporate name, would be illegal as it would imply the trade connection between petitioner and the said products and thus, that the respondents be directed to buy out the shares of the petitioner at a price determined by the Board and that the respondent omits the word Starlinger from its corporate name since the joint venture between the parties had come to an end. In such circumstances the Court rightly observed that the respondents had obtained an unfair advantage by not only using the corporate name of the minority shareholder but also by prejudicing the appellants goodwill for which they may be answerable in terms of
27

[2008]1444 CompCas 642 (All).

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damages for a passing off action, but will also adversely affect others wishing to enter such ventures in India! The use of the corporate name was a contractual right conferred by virtue of the JVA, but such right no longer survives as the agreement has itself fallen apart. Onyx Musicabsolute.com Pvt. Ltd. v. Yash Raj Films Pvt. Ltd.28 In the present case Plaintiff no.1 is engaged in the business of producing internet and net enabled solutions and related services whereas defendant no.1 is engaged in the business of production, distribution, marketing and sale of cinematographic films. They entered into a JVA and formed Defendant no.2 to engage in and undertake business of providing mobile and internet content of Bollywood movies and other related businesses. Defendant No.1 granted an exclusive licence for internet rights and mobile rights in the Bollywood films produced and to be produced by the defendant No. 1 to Defendant No. 2 who could grant sub-licences to third parties. The licence was to remain in force till the joint venture agreement remained in full force and effect. The present case arose as plaintiff alleges that the defendant No.1 was trying to give the internet and mobile rights in its film Tashan to the defendant No. 3 (who is not a party to the JVA or the license agreement). The suit was brought by Plaintiff No.s 2 to 5 who hold the entire shareholding in Plaintiff no.1. The main issue to be determined here is whether the JVA is in full force because only then does the license agreement also have any effect. Though the JVA does not specify when it would stand terminated, it provides a provision for deadlock in Clause 11. In case of a deadlock one of the parties is to give a notice to the other. Subsequently, a Chartered Accountant is to be appointed by each of the parties and the highest bidder buys out the other to become the absolute owner of the venture. Here, defendant no.1 had issued a deadlock notice to the plaintiff which marks the beginning of the end of the JVA and thus, of the license agreement.

SOME RECENT EXAMPLES

28

OF

JOINT VENTURES

2008 (6) BomCR 418.

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Novavax, Cadila form JV for developing vaccines US-based biotechnology firm Novavax has formed a joint venture with Cadila Pharmaceuticals for developing and commercialising virus-like particle-based (VLP-based) vaccines. The joint venture will develop and commercialise Novavaxs VLP-based vaccine and Cadilas therapeutic vaccine candidates against cancer as well as its adjuvants, biogeneric and biological diagnostic products for the Indian territory, Navavax said in filing to Security Exchange Commission (SEC). Novavax would provide the technology and Cadila would invest US $ 8 million (Rs 40 crore) over three years to support the joint venture operations. In the proposed joint venture, Cadila would have 80 per cent stake while remaining 20 per cent will held by Novavax. Novavax will also have the right to negotiate license arrangements of certain vaccines developed by the joint venture for commercialising it outside the India. As part of the agreement which both companies signed on March 31, 2009, a whollyowned subsidiary of Cadila will purchase 12.5 million shares of Novavaxs common stock at the market price of USD 0.88 per share, for an aggregate of USD 11 million (Rs 55 crore). Cadila Managing Director Rajiv Modi will join the Novavax Board of Directors immediately.29 Morgan Stanley and Citi to form joint venture Morgan Stanley and Citi formed an industry-leading wealth management business through joint venture. Citi will exchange 100 percent of its Smith Barney, Smith Barney Australia and Quilter units for a 49 percent stake in the joint venture and an upfront cash payment of $2.7 billion. It will exchange 100 percent of its global wealth management business for a 51 percent stake in the joint venture. The transaction has been approved by the boards of directors of
29

http://economictimes.indiatimes.com/News/News-By-Industry/Healthcare-Biotech/Pharmaceuticals/Novavax-Cadila-form-JV-for-developing-vaccines/articleshow/4345740.cms, last accessed on April 12th, 2010.

21

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both companies. After year three, company and Citi will have various purchase and sale rights for joint venture. At closing, Citi will recognize a pre-tax gain of approximately $9.5 billion. Citi will continue to own a significant stake in the joint venture at least through year five. The joint venture is expected to achieve cost savings of approximately $1.1 billion. The co-president James Gorman will serve as chairman of the new company.30 Citigroup Inc, which, said its brokerage and asset management profit surged in the first quarter, reflecting lower merger-integration expenses and a one-time gain. Citigroup said net revenue from these businesses rose 25 per cent from the fourth quarter while expenses fell 9 per cent. As a result, net income more than doubled, to $86 million from $31 million in the fourth quarter. Citigroup did not disclose detailed results for Smith Barney, which was sold to Morgan Stanley last June in exchange for a 49 per cent stake. The venture comprises 87 per cent of Citigroup's asset and wealth management assets. First-quarter profit in these businesses was weighed down by a 44 per cent spike in credit costs, reflecting soured loans, the bank said. Citigroup did not disclose other details about the joint venture, but the glimpse it provided portends good news for Morgan Stanley, due to report first-quarter results on Wednesday. So far, Morgan Stanley Smith Barney results have been hurt by merger costs and the impact of fleeing brokers. Citigroup has announced plans to divest several money management businesses over time, to raise cash and help repay its 2008 government bailout. The bank said its first-quarter net loss attributable to minority interests, in the wealth management arena, narrowed 71 per cent from a year earlier to $5 million. 31

30

http://economictimes.indiatimes.com/quickieslist/articleshow/3975260.cms, last accessed on April 12th 2009.

31

http://economictimes.indiatimes.com/quickieslist/articleshow/3975260.cms, last accessed on April 21st 2010.

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CONCLUSION
A joint venture is gaining ground as a common mode of conducting business both in India as well as abroad. A joint venture is to be based on mutual trust, co-operation and faith in order to be successful and profitable. With the relaxation of the laws and the economy in India, it has become much easier to establish transnational joint ventures in India. Hence, joint ventures are a very good option for those seeking to expand business while being unfamiliar with the laws, market situation in the host country. It presents a viable option and a symbiotic relationship to all the coventurers. A detailed joint venture agreement with clauses covering all anticipated situations also forms the basis for a successful joint venture. Good legal counsel and careful drafting would certainly aid the co-venturers in making the venture profitable. Even the financial reports of the newly formed Joint Ventures point towards profit-making and in addition to it the support given by the government by relaxing laws has made India a hot spot for joint ventures which would ultimately attract investors and promote Indian economy. But the Government while relaxing laws for joint ventures on Indian soil must keep the interest of Indian investors and public in mind, so that at any point of time they are not the ones at the receiving end.

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BIBLIOGRAPHY
Books Referred: Raj Aggarwal (ed.), PM Bakshi (rev.), Joint Ventures Law and Management, 1st ed.2002, Bharat Publishing House, New Delhi. Nirvakar Singh and Sugata Marjit, Joint Ventures, International Investment and Technology Transfer, 1st ed.2003, Oxford University Press, New Delhi. Ian Hewitt and Gerhard Picot, Structuring the Joint Venture, Eva Micheler and DD Prentice, (eds.), Joint Ventures in English and German Law, Hart Publishing, Oxford. Articles Referred:

American Jurisprudence Proof of Facts 2d, 12 Am. Jur. Proof of Facts 2d 295. Joint Venture Agreements, http://madaan.com/jointventure.html, (last referred to on February 28th, 2009). Joint Ventures in India: Key Structuring and Legal Aspects, http://www.lawgazette.com.sg/2007-9/regnews.htm, (last referred to on February 23rd 2009).

Setting

up

Joint

Venture

in

India,

http://www.sethassociates.com/setting_up_a_joint_venture_in_indi a.php, (last referred to on Fenruary 28th, 2009).

Robert Pritchard, The Ins and Outs of Joint Ventures, I.C.C.L.R. 1997, 8(9), 303-306. http://economictimes.indiatimes.com/News/News-ByIndustry/Healthcare--Biotech/Pharmaceuticals/Novavax-Cadilaform-JV-for-developing-vaccines/articleshow/4345740.cms, accessed on April 12th, 2009. last

iii

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http://economictimes.indiatimes.com/quickieslist/articleshow/3975 260.cms, last accessed on April 12th 2009.

iv