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What to consider before signing joint venture agreements?

A joint venture between two corporate entities is considered to be an agreement drafted or initiated with a sole agenda of earning profit by working simultaneously and exploiting each other’s assets and business.

The given article by commercial lawyers of Dubai scrutinizes the imperative stipulations or important provisions to be considered prior to signing joint venture agreements. In addition to this, it enumerates the clauses that will be inclusive in the following agreement and thus should be kept in mind by the drafter during drafting of agreement.

Why and What to Consider?

In case, the companies are getting together in form of a joint venture, they are required to set their priorities right towards the joint venture agreement as it is a supreme documents which can even lead to change in memorandum of association and article of association of the concerned companies, if the agreement provides for. While making these agreements, one is expected to undertake practical as well as legal consequences of the same into consideration.

A joint venture is always setup for a specified objective that the parties to it, seek to achieve. As a result the prime focus, while making a joint venture agreement is that it should be embracing an objective clause within it. On the basis of the requirement of the parties, joint venture can also be differentiated in various kinds. It can take up the form of contractual or structural or for that matter, it can even be both. This way of carrying business is really popular amongst the foreign investors.

The following is the list of considerations, which one should treat as focal point in order to set up am joint venture agreement:

  1. It is advised to undertake a background check by the parties to the agreement with respect to each other. As it is said, the joint venture’s prestige and success will be totally dependent upon the prestige and success as that of the employers. This act of taking due diligence will ensure the prevention and promotion of the goodwill of the joint venture which will eventually lead towards the success of the firm. These investigations should include the searching of any court record or the police records.
  2. In order to avoid the above mentioned risk of a tinted background of the parties, a clause of boilerplate can be taken into consideration by the parties. It make sure that the parties are not agents of each other in order to avoid any liability rising out of the other party’s act.
  3. As mentioned above, the Joint venture are always created to fulfill any business objective. This objective shall be mutually decided by the parties along with the roles which they will be undertaking to achieve these objects, and as there are objects, one must have a performance indicator to look at the growth of the venture and the parties to it. The other questions that one have to answer during the drafting of the agreement is that, “how will this venture be owned?”, “who will be forming the management and will be the part of it?” and what are the obligations that are rested upon both the parties. In addition to this, another thing that has to be considered is the scope of the organization. Further there is a need to answer yet another question as to will there be any part that will be exclusively enjoyed by the parties. As soon as the answers of all these questions are agreed upon, the parties must take it down in the written form.
  4. The next consideration of drafting a joint venture agreement is to consider the structure of the venture that the parties wish to operate. The joint ventures are highly characterized by the dispute amongst the parties on later stage for things such as individual liability and tax liability and most of the times it ends in a really bad way. As a result, it is advisable to all the parties of the venture to hire their separate legal advisor who can assist them to adopt or design a structure that is in the best of their interest. These structures are again of two types, firstly the incorporated joint venture and on the other hand an unincorporated joint venture. Along with this consideration, the parties should also decide the mood of funding which they are expecting for the functioning of the joint venture. Other capital related issues such as whether or not a partner can use up their interest from the venture to finance their own business and the sharing ratio among the partners shall also be discussed at this stage.
  5. It is advisable that the parties to the joint venture, at the very beginning only map out an exit route from the venture if the things are not going as per their plans. In other words, as the business is always about risk taking, a party shall practically find out the way to get out of these risks, if they take a bad turn. In addition to this, as the joint venture is an agreement between two or more parties, the concept of dispute between the parties to the agreement is not a hidden phenomenon, due to which it is necessary that the parties agree upon a dispute resolution process, to equip themselves for such times.
  6. According to the court, joint ventures shall mandatorily keep the book of records so that the same could be used as assistance during any dispute between the venture partners. Regularly auditing the books may even keep the partners informed about the profit or loss owing to the business. Thus provisions should be made in this regard in the joint venture.
  7. In some cases, the partners of the venture are totally of two different backgrounds and may have a feeling of not getting along sometimes. This potential difference shall be of great consideration before shaking the hands with the partner. One should thus create provisions for the alignment of the differences along with the provisions against fiduciary relationship which may be the result of negotiation and operations.
  8. A team of independent experts such as lawyer, accountant, financial advisor shall be hired by the parties in order to assess the actual position of the joint venture and to prevent future drowning.
  9. The last and most important amongst them is to communicate with not just the partners but all the stakeholders to get a fair image of the future of the joint venture and its success.

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