International Joint Ventures
The main agreement, usually called the "joint venture agreement" is
the core agreement of the entire business operation between the
venturers. Under Indian law, the contributions to a joint venture may
be made either in the form of capital, services, or physical assets and
these may form the basis of International Joint Ventures. This article
discusses international ventures under Indian Law in further detail.
Tue Jul 19 2022 | Business Law | Comments (0)
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The duration of the joint venture agreement may coincide so as to end with the termination of the project; however, in some cases, the venturers may prefer to set a different term, so as to have enough time to carry out reporting and assessment activities. In any case, an early termination clause is always desirable, but the venturers need to carefully evaluate whether termination without cause will not jeopardize the success of the joint venture itself, and be too risky for both parties.
The venturers also should evaluate possible limitations on their contractual freedom. For instance, the parties can agree upon an exclusivity clause as well as a non-compete clause.
In some cases, especially when more than two venturers are part of a contractual joint venture, it could be useful to appoint a management committee to manage the project. The committee should be in charge of the relationship between the venturers, and between the venturers and third parties. The operative aspects of management also may be entrusted to a project leader.
Incorporated Joint Venture
The relationship between the venturers of an Indian equity joint venture is usually regulated by a set of agreements, which include some preliminary agreements, the main agreement, and ancillary agreements.
Preliminary Agreements of International Joint Ventures
Confidentiality Agreement. The disclosure of confidential information is essential for the venturers to evaluate the potentiality of a possible collaborative relationship between them.
Indian law does not impose particular requirements for the validity of such an agreement. In any case, it is important to carefully define what the venturers mean by "confidential information ". According to the Indian Contract Act, 1872, in case of breach of the confidentiality agreement, it is possible to seek compensation for damages, as well as demand a permanent and mandatory injunction to restrict any further breach, to restrict the use or disclosure of any confidential information and trade secrets relating to the business and operations of the disclosing party, and to restrict any endeavour to solicit or induce away any of the customers of the
plaintiff, and to prevent the defendant from doing any acts that would breach the confidentiality terms.
The execution of a confidentiality agreement also can be a useful tool in case of an unincorporated joint venture, where the disclosure of confidential information is essential to evaluate the project that the parties intend to carry on, and the effective contribution that parties are able to make to the project.
Memorandum of Understanding. Considering that the negotiations between the venturers can take a long time, it is useful to develop and establish a clear understanding of each other, and to set forth the time period required for the drafting of other agreements and documents. For this reason, the venturers usually execute a memorandum of understanding. Its purpose is to firmly establish some points that also will be indicated within the main agreement.
Generally, the memorandum of understanding is not a binding document; however, this document does contain some covenants that are immediately binding. This characteristic is, in fact, crucial with respect to a lockout provision, which is the most important covenant in this kind of document. The lockout provision sets forth a time frame in which the venturers are not authorized to negotiate with third parties, but must exclusively negotiate with the other venturers.
According to Indian law, the memorandum of understanding is usually a binding document, provided that the parties always mention the extent to which it is binding between the parties. Any party committing a breach of the memorandum of understanding would be liable in a manner similar to the breach of any agreement, and the
Indian Contract Act, 1872, would be applicable.
The other provisions of the memorandum of understanding should concern the definition of the scope of the joint venture and the role that each venturer should play, and the time period for the execution of the required agreements and documents. It also may contain a non-disclosure covenant, according to which the parties should not disclose the joint venture negotiations to third parties.
Feasibility Study or Business Plan. The venturers should plan the scope of the joint venture and of its activities, as well as of the results that the venturers intend to achieve. To this extent, it is necessary to analyze the potentialities of the market regarding the target sector, and to assess the position of possible competitors by means of a thorough evaluation of the investments required to achieve the purposes established, and the time frame to reach the break even point.
The feasibility study or business plan is a technical tool that will fix the objectives to be achieved by the parties. Accordingly, it also should be used to preliminarily set forth the obligations of the parties within the joint venture.
In addition, it is useful to get a market analysis carried out, to cover the expectations and plans for at least three years or, preferably, for five years.
Main Agreement of International Joint Ventures
The main agreement, usually called the "joint venture agreement", is the core agreement of the entire business operation between the venturers. Even if other ancillary agreements are to be executed by the venturers, these will all be linked by the joint venture agreement.
This concept of a "core agreement" reflects the importance of the joint venture agreement itself. Consequently, the main agreement will contain a number of complex and articulated provisions that need to be carefully drawn up.
Regarding the contents of the main agreement, the first matter that should be discussed and regulated is the type of company that the parties intend to incorporate and the contribution to be made by each venturer. According to the Indian legal framework, a company can either be a public company or a private company with limited liability. Even though a private limited liability company has some restrictions on the rights to transfer its shares, this kind of company is the best solution for a joint venture in its early years of activity.
Under Indian law, the contributions to a joint venture may be made either in the form of capital, services, or physical assets (equipment or intellectual property), or a combination of all of these.
After these aspects have being determined, the parties also should specify another fundamental issue: the management of the company. In particular, the venturers should discuss and specify in the main agreement how the bodies and the officers of the company are to be appointed. In addition, the parties should indicate the quorum for the meetings to take decisions. In some cases, the minority venturer may require that a qualified majority and/or a veto right is set forth.
Another provision that should be carefully considered is the non-compete clause. In particular, this clause should take into consideration three different possibilities of competition:
(1) The competition that the joint venture company can effect against the venturers;
(2) The competition between the venturers; and
(3) The competition that a venturer can effect against the joint venture company.
It will not always be necessary to insert non-compete clauses for the above possibilities; however, the venturers should, in any case, evaluate which kind of competition could potentially affect the business of the joint venture company.
According to the decisions of Indian courts, the enforceability of such a restrictive clause is conditional on the fact that:
(1) There is a proprietary interest that is sought to be protected;
(2) The restriction is reasonable; and
(3) There is a public interest aspect to this restriction.
The Government of India has, through a Press Note, recently suggested that a conflict-of-interest clause should be provided in joint venture agreements to prevent a venturer from setting up another joint venture or a wholly owned subsidiary in the same field of economic activity.
The relationship between the venturers and the joint venture company can be regulated within the main agreement, but it usually also is the subject matter of an ancillary agreement. The types and possible contents of the ancillary agree- ments are discussed below.
The venturers should not underestimate the importance of setting forth a provision that deals with a deadlock situation. The techniques to resolve a deadlock situation include several possible steps.
The first step is to provide a solution that both venturers mutually agree to, in order to enable the joint venture company to continue in a smooth fashion. In case there is no possibility of reaching an agreement, the venturers may evaluate two different solutions that may be either alternatively or jointly applicable.
The first solution is the resolution of the deadlock situation through the process of conciliation, mediation, or arbitration, and the decision given in such proceedings will be binding on both venturers. Besides that, the venturers also should consider the opportunity to set forth an exit plan, authorizing one of the parties to withdraw from the joint venture agreement and consequently from the joint venture company. In any case, the termination of the joint venture agreement can entail the winding up of the joint venture company, especially if the joint venture is based on the know-how of the withdrawing venturer, in which case the joint venture company cannot operate without infringing the proprietary rights of that venturer.
The choice of Indian law is definitely a good solution and, if possible, this law should be applicable to all joint ventures agreements. Besides, a provision indicating how disputes between the venturers will be settled is required. In particular, it is possible to devolve the resolution of disputes to the Indian courts or to arbitration tribunals, as India is a signatory to the New York Convention of the Recognition and Enforcement of Foreign Arbitral Awards, 1958.
A brief checklist of important clauses to look for in a JV agreement are as follows -
- The proportion of shareholding in the joint venture company
- Specify nature of shares, indicate their transferability conditions.
- Composition of the Board of Directors, Appointment of Chairman ,Quorum of Board meetings ,Casting vote provisions.
- General meeting and its procedures to be held as per the Companies Act 1956
- Appointment of CEO/MD.
- Appointment of Management Committee.
- Important decisions with mutual consent of partners.
- Dividend policy.
- Funding provisions.
- Access conditions.
- Change of control/exit clauses.
- Anti-compete clauses
- Maintaining Confidentiality
- Indemnity clauses.
- Assignment.
- Break of deadlock.
- Alternate Dispute Resolution.
- Applicable laws.
- Force Majeure.
- Termination provisions and method for exit.
Ancillary Agreements of International Joint Ventures
Usually, the relationship between the venturers and the joint venture is not fully regulated by the main agreement. The relationship between the venturers and the joint venture gives rise to a number of other agreements/ collaborative relationships that are, in any case, linked to the main agreement, particularly with respect to the scope of the joint venture.
To prevent the main agreement from becoming too extensive and complex, these specific relationships are often regulated within certain ancillary agreements.
Contribution agreements are useful in cases where the contribution scheme is multifaceted and requires carefully drafted and detailed provisions.
Shareholders agreements are intended to regulate the relationship between the venturers. The enforceability of a shareholders agreement is conditional upon its consistency with the Indian Companies Act, 1956.
Transfer of technology agreements are relevant when one of the venturers puts its know-how at the joint venture disposal.
Trade mark license agreements are useful when one of the venturers puts its trade mark at the joint venture disposal.
Lease agreements are concluded when one of the venturers puts its premises at the joint venture disposal.
Distribution agreements are relevant when the joint venture company is to be one of the venturers distributors within the new market, and/or the venturers will be the distributors of the joint venture company.
The importance of ancillary agreements should not be underestimated by the venturers, primarily because these agreements will usually regulate some aspects that are essential to the functioning of the joint venture company. Consequently, the ancillary agreements should be negotiated in parallel to the main agreement, and executed at the same time, if possible.
While negotiating ancillary agreements, the venturers must care- fully discuss and discipline the duration of these agreements. It will be necessary to decide whether these agreements will have an independent life, or if their duration will be linked to the duration of the joint venture.
Foreign Technology Transfer Law
Considering that an unincorporated joint venture usually involves technology transfer, it is important to take into account the provisions of Indian law regarding foreign technology transfer. Foreign technology transfer and/or collaborations are permitted either under the automatic route of the Reserve Bank of India or through the approval (non-automatic) route, which requires prior approval from the government of India.
In particular, the Reserve Bank of India has been delegated powers by the government to allow payment with respect to foreign technology collaboration agreements. Therefore, through its regional offices, the Reserve Bank of India accords automatic approval to all industries for foreign technology collaboration agreements subject to the following limits:
(1) The lump sum payments should not exceed US $2,000,000; and
(2) Royalty payable under the technology collaboration is limited to five per cent for domestic sales and eight per cent for exports, without any restriction on the duration of the royalty payments.
In case of use of trade marks and brand names, the payment of royalty includes the payment of royalty for the use of the trade mark and brand name of the foreign collaborator.
In case there is no technology transfer in the foreign collaboration, payment of royalty of up to two per cent for exports and one per cent for domestic sales is allowed under the automatic route for use of trade marks and the brand name of the foreign collaborator. Royalty for the use of the brand name and/or trademark must be paid as a percentage of net sales: gross sales less agents/dealers commission, transport cost (including ocean freight, insurance, duties, taxes and other charges) and cost of raw materials, as well as parts and components imported from the foreign licensor or its subsidiary and/or affiliated company.
Technical collaborations that do not meet the parameters for automatic approval, or those that fall under the following categories, require approval from the government:
(1) Proposals attracting compulsory licensing;
(2) Items of manufacture reserved for the small-scale sector; and
(3) Proposals involving any existing joint venture or technology transfer and/or trade mark agreement in the same field in India.
In case only a technical collaboration is proposed, approval has to be sought from the Project Approval Board. Applications in respect of such technical collaborations must be submitted in the prescribed form to the Secretariat for Industrial Assistance, Ministry of Industry.
Cases where both financial and technical collaboration are proposed require approval from the Foreign Investment Promotion Board.
Conclusion of International Joint Ventures
The globalization of the Indian economy has encouraged foreign partners across various industry sectors to transact business through joint ventures. It also is common to set up strategic joint ventures in India for production, marketing, or purchasing collaborations.
Joint ventures are formalized by a main agreement and a number of optional ancillary agreements, depending on the nature and scope of business of the new venture. Although there are no particular rules governing the formation, conduction and termination of an Indian joint venture, venturers may not disregard the Indian legislative framework, strictly connected to the setting up of a joint venture, which includes the Indian Partnership Act (when the joint venture is a partnership), the Companies Act (for incorporated joint ventures), and the Indian Contract Act, which governs all contractual aspects, as well as the dispositions concerning technology transfer.
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