Let all men arise to rescue the Africa Nation from collapsing and this economy recession veil on the Africa continent must be lifted and so the light of business strategy shall be seen.
The joint ventures have become an important strategic option for many businesses. Due to increased globalisation, the proliferation of modern technology as the means of conducting business, and increased international travel and exposure, businesses are now operating in a world without borders but guided by rules, norms, regulations and laws, albeit that there are still cultural and language issues. This guide summarises the key considerations in establishing a joint venture or other strategic partnership.
What is a Joint Venture?
The term ‘joint venture’ is an umbrella term which describes the commercial business arrangement between two or more economically independent organisation to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or reviving existing business.
In practice, the legal form of a joint venture is likely to be determined by a number of factors including the nature and size of enterprise, the anticipated length of the venture, the identity and location of the venturers and the commercial and financial objectives of the participants.
Choosing a Joint Venture Vehicle
Three basic legal structures can be used for joint venture, these being:
- a limited liability company (i.e. a corporate vehicle);
- a partnership or limited partnership (i.e. an unincorporated vehicle); or
- a purely contractual co-operation agreement.
A partnership is the relation which subsists between persons carrying on a business in common with a view to a profit. There are also certain “hybrid” vehicles or arrangements, such as a limited liability partnership, with characteristics from more than one of the above categories.
Whilst tax and commercial factors may sometimes lead to the use of an unincorporated vehicle, e.g. a partnership or limited partnership, the majority of ongoing business ventures tend to use a corporate vehicle whose share capital is divided between the joint venturers.
The advantages of using a corporate vehicle are:
- a company is a universally recognized medium and gives a strong identity for dealings with third parties;
- it allows for a management and employee structure to be put in place;
iii. the participants have the benefit of a limited liability and the flexibility to raise finance; and
- the company will survive as the same entity despite a change in its share ownership;
The simplest form of association for joint ventures is an arrangement under which the participants agree to associate as independent contractors rather than shareholders in a company or partners in a legal partnership.
This type of agreement is often referred to as a consortium or co-operation agreement and is suitable where the parties wish to avoid the formality and permanence of a corporate vehicle.
Here the rights and duties of participants as between themselves and third parties and the duration of their legal relationship will be derived from the provision of the joint venture agreement, any associated agreements and general common law rules.
Such an agreement should set out the obligations and commitments of the individual partners and how a return on investment will be achieved. Even though no corporate vehicle is involved and the venturers will not be partners in a legal sense, it is possible for them to be exposed to claims and liabilities because of the activities of their co-participants on a contractual or quasi-contractual basis.
Therefore, an indemnity should be included in the agreement under which one party will indemnify the other for any losses that are caused through the actions of the co-participants.
Joint venture transactions call for clear well drafted documentation. Basic legal documents for establishing a joint venture are likely to be: a joint venture/shareholders’ agreement; and the memorandum and articles of association of the joint venture company.
The purpose of a shareholders’ agreement will be to establish the basic rights and obligations of the parties and to ensure the company and its business are established and run in accordance with the participants’ objectives. A further purpose is to prescribe, as far as possible, for what will happen if difficulties occur.
In the case of non-corporate joint venture structures, the basic objectives of any formal arrangement between the participants will be substantially similar to that of a shareholders’ agreement with essential differences reflecting where appropriate the absence of a separate legal vehicle and the fact that the joint venture may relate to a project of finite duration.
Managing the joint venture company:
An important function of the shareholders’ agreement and articles of association is to reflect the agreed arrangements for managing the joint venture vehicle. Different considerations will apply if it is a 50/50 joint venture where there is likely to be equal representation on the board as opposed to a joint venture involving a minority shareholder who requires special protection.
- Board of the joint venture company
Firstly it should be established whether the board of the joint venture will have an executive role or whether there will also be an executive body with a secondary supervisory body consisting of shareholder representatives who approve the strategy and important decisions.
There will be some matters that the venturers will regard as crucial to protect the value of investments. It is not unusual for these to be subject to shareholder approval rather than board approval.
It is not essential for the management rights and responsibilities to correspond with equity ownership. Therefore, a party may be given greater management rights, for example, rights over decisions affecting technical and management areas.
A director may face a conflict between the interests of the venture and interests of his appointing company.
There is a balance to be struck between his duty to exercise his power for the benefit of the venture as a whole and his duty to protect the shareholder who appointed him. In practice, the appointee can exercise his powers in accordance with the wishes of the appointing shareholder provided that, in doing so, he does not act blindly, but considers the venture as a whole. To the extent that there are areas for conflict, it may be better for these to be dealt with at shareholder level.
Deadlock can arise either in a 50/50 joint venture where the shareholders’ appointed directors take opposing views or where a director appointed by a minority shareholder exercises the right to veto.
Similarly, deadlock can arise at shareholder level in relation to matters which require shareholder approval.
There are various ways in which deadlock situation can be dealt with. These include:
Chairman’s casting vote – although this may unlock a deadlock, itü gives one party the advantage which effectively negates the concept of joint control.
Outsider – an independent third party for example, a non-executiveü director, could be appointed to assist in the decision-making process. However, it is often difficult to find somebody with appropriate business expertise wishing to take on significant risks and responsibilities in return for limited rewards.
Reference to shareholders – often the most practical method is forü an unresolved deadlock to be referred to the chairman or chief executive of the shareholders. This often concentrates the mind of the venture and ensures that it finds a solution for itself.
- Capital and Funding:
A further issue to consider is how the joint venture company is to be funded both initially and in the future. The choice of funding method will be influenced by the existing and future cash requirements of the joint venture company and by tax considerations.
The following factors should be considered:
Straightforward subscription of ordinary shares or possibly ofü different classes is the simplest and most common method for new ventures coupled usually with the appropriate level of loan capital.
Consideration for the initial issue of shares by the joint ventureü capital may be cash but can also be a non-cash consideration – for example, the transfer of assets to the joint venture company.
Complex funding techniques can emerge where a joint ventureü involves outside investors who are not involved in the management of the company and are more concerned with the security term and capital growth. Equally this can lead to some form of preference share capital, ordinary share capital or possibly loan stock convertible into shares.
It is usual for the parties in establishing a joint venture to each transfer a number of employees with relevant expertise into the joint venture. Whether or not the joint venture will be bound to take on those employees on the existing terms and conditions of employment or whether it will be free to renegotiate largely depends on the purpose for which the joint venture has been established.
It is important to identify at the outset any events which it is agreed will terminate the joint venture. Events which terminate the joint venture commonly include the following:
- the expiry of the definite term;
- insolvency of either party (although it may be more appropriate in such circumstances to grant the other party a call option to allow that party the opportunity to buy the insolvent party’s shares in the joint venture company);
- a change of control of one of the joint venture parties;
For further detailed legal advice contact:
Bolaji Ogungbemi Esq.