The word joint venture is describes as a business activity by two or more people or companies working together wherein each person contributes assets and share risks. Like a partnership, joint ventures can involve any type of business transaction and the "persons" involved can be individuals, groups of individuals, companies, or corporations. Famous examples of such ongoing joint ventures include Dow Corning, Sony Ericsson, and Owens-Corning.Cost of starting many projects can be very high so in this case a joint venture allows the persons involved to pool their collective resources in order to achieve the common aims without having to undertake potentially insurmountable or crippling financial obstacles to do so.
A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits.
How to enter into Joint Venture agreements?
Selection of a good local partner is the key to the success of any joint venture. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting lawyers well versed in international laws and multi-jurisdictional laws and procedures. Before signing the joint venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties.
Before signing a ‘Joint Venture Agreement’ the following must be properly addressed:
· Dispute resolution agreements
· Applicable law.
· Force Majeure
· Holding shares
· Transfer of shares
· Board of Directors
· General meeting.
· Management Committee
· Important decisions with consent of partners
· Dividend policy
· Change of control
· Break of deadlock
The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.
Challenges of Joint Ventures
Although joint ventures are a great way to pool capital and expertise while simultaneously reducing the risk of loss to all involved, they create some unique challenges as well. For example, if one party to the joint venture independently develops an idea that allows the joint venture entity to make a substantial profit, should the resulting profits of the joint venture be split evenly or should the inventing entity receive a larger portion of the profits? Problems such as these, often not considered at the inception of a joint venture, may be one reason that nearly half of all joint ventures last less than four years and typically end in a legal battle. For that reason, it is important to understand what a joint venture is, anticipate potential problems, and account for those possible eventualities in a joint venture agreement.