Joint Ventures offer great opportunities for small businesses and enterprises to grow by combining assets or intellectual capital with others to achieve specific goals. In this article, we explore Joint Ventures to help you determine when you can benefit from it, and how to implement it.
What is a Joint Venture?
A Joint Venture, or so-called JV, refers to a strategic partnership between two or more enterprises. It is usually implemented when these enterprises combine their skills, infrastructure, and/or knowledge to attain a specific objective when they cannot achieve it without each other.
The objective of a Joint Venture could be based on a specific project, tender, for a specific period of time, or a combination of these.
There are 2 types of Joint Ventures you can enter into: An Incorporated Joint Venture, and an Unincorporated Joint Venture. The difference between these two types of Joint Ventures is the legal framework regulating each – an Incorporated Joint Venture is regulated by the Companies Act of 2008 and Contract Law, while an Unincorporated Joint Venture is regulated only by Contract Law.
Why would you opt for a JV?
There are a couple of reasons why business owners will consider entering into a Joint Venture:
Growing your business
The ownership structure of a Joint Venture allows new entrants or small businesses to compete with larger, established competitors by pooling their resources. In this way, businesses can grow more rapidly by entering into Joint Ventures.
Protecting your ownership
The parties of a Joint Venture can pool their resources (assets, knowledge, or operations) in respect of specific activities, without sharing ownership of their existing enterprises or businesses.
You can enter into multiple Joint Ventures for different reasons
Another advantage of Joint Ventures is that participants may enter into as many Joint Ventures as they like, increasing their market share within a specific industry or even various industries.
How do you establish it?
Once you have established that a JV is a good strategy for your particular needs or situation, you should consult with different experts to help you choose the right type of Joint Venture and then draft a Joint Venture Agreement.
The formation and operation of a Joint Venture may create various tax obligations for its participants, and it is highly advisable to obtain specialised tax advice in advance, as it will influence your choice in respect of which type of Joint Venture you will choose.
At this point, you will need the help of a legal practitioner to draw up the right agreement for the right type of Joint Venture you are entering into.
Your legal practitioner must understand the legal framework regulating your specific Joint Venture type. In order to make a Joint Venture official, a Joint Venture Agreement must be drawn up.
What must be in the JV Agreement?
For any type of Joint Venture, the agreement drawn up must comply with the following basic framework:
• The purpose for the formation of the JV.
• Limitation to creating a partnership or agency.
• The name, address, and other identifying details of the Joint Venture.
• Whether the Joint Venture will exclude the participants from participating in other Joint Ventures with a similar purpose or not.
• The duration of the Joint Venture.
• The stakeholders and their participation ratios in terms of voting, profits, and losses.
• Contributions and obligations of the various participants.
• Composition of the Exco, Management Council, or Board of Directors.
• The duties of the Exco, Management Council, or Board of Directors.
• Meetings and procedures at meetings of the Exco, Management Council, or Board of Directors.
• Powers of the Exco, Management Council, or Board of Directors.
• Alternative dispute resolution.
• Administration and Financial Management of the Joint Venture.
• Corporate Governance structures.
• Termination of the Joint Venture.
• Take note that a modified Shareholders’ Agreement will be used for Incorporated Joint Ventures, regulated by the Companies Act of 2008 and Contract Law.
(Crucial aspects and clauses to consider when compiling a JV contract).
It is very important to remember that this framework will look different for each case. It will be prudent to refrain from using “templates” for this agreement. The provisions of each section mentioned above should be drafted with skilled consideration for aspects like taxation, sector-specific challenges, and compliance requirements.
Additional requirements for Incorporated Joint Ventures
When an Incorporated Joint Venture is formed, a Memorandum of Incorporation of the company may need to be amended or specifically drafted to accommodate the provisions of the Shareholders’ Agreement.
In addition, Incorporated Joint Ventures will typically contain express provisions dealing with the requirements of the Companies Act of 2008 such as issuing of shares and take-over regulations. Similarly, it will not contain provisions which the Companies Act has already provided for.
Generally, business owners must not try to draft these legal agreements themselves, in order to protect themselves as best they can against possible future litigation.
In summation, Joint Ventures are great “tools” to use that can both protect your business as well as enable you to expand your capacity to achieve your next big goal.
