SETTING UP A JOINT VENTURE COMPANY: ISSUES TO BE CONSIDERED

Meaning of a joint venture:

A joint venture is a term that describes a commercial arrangement between two or more economically independent entities for the purposes of executing a particular business or undertaking. The commercial and legal issues that may arise in the setting up of a joint venture are vast and may differ on a case by case basis. This post will not attempt to identify all the commercial and legal issues that may arise, rather the objective here is to try and highlight some of the key commercial and legal issues that may be considered before going into a joint venture relationship.

Purposes of Joint Ventures:

There are different reasons why companies and come together to form joint ventures. Generally speaking, joint ventures are formed usually because each participant on its own lacks one or more of the resources required for the successful establishment of the business.  The participants involved therefore come together to compliment the resources of each other for the successful establishment of the business. A joint venture may also be established for the purposes of expansion of existing business or for the sharing of risks.

Legal Structure:

There are different legal structures a joint venture might take. It can be argued that some of the legal structures to be listed here are not joint ventures in the strictest sense of the word but rather alternatives to joint venture. Nonetheless, they are joint ventures in a broader sense of the word because they involve one form of collaboration or the other which results in the sharing of the resulting profits. Some of these legal structures (which are by no means exhaustive) are:

(1)  Agency Agreement

(2)  Distribution Agreement

(3)  Intellectual Property License

(4)  Franchise

(5)  Collaboration Agreement

(6)  Consortium Agreement

(7)  Partnership

(8)  Limited Liability Company

Out of all the legal structures listed above, the Limited Liability Company is by far, the most popular joint venture vehicle in Nigeria especially when the participants involved are thinking of a joint venture in the strictest sense of the word. The reasons for this are not unconnected with the inherent benefits of a limited liability company which are discussed below.

Choosing a Legal Structure:

The basic issues to be considered in choosing a legal structure are:

(i)Why? Why set up a joint venture? What are the underlying objectives?

(ii) What? What type of structure is best suitable for achieving the objectives?

(iii) Where? Where will be the physical location of the joint venture?

(iv) When? When will the joint venture be set up and will it be for a definite or an indefinite period.

(v) Who? Who are the participants to be involved? Will the legal structure of any of the participants be a hindrance to the joint venture or require particular considerations?

Notwithstanding the foregoing, there is broader spectrum of issues which must be considered especially in the planning, structure and preparation of the documentations to the joint venture.

Joint Venture Company:

As stated earlier, the limited liability company is by far the most popular joint venture vehicle in Nigeria and all over the world and as such this is the only legal structure that will be discussed in details here. The corporate structure of a limited liability company has been tried and tested all over the world and in Nigeria we have a detailed body of law and practice governing private limited liability companies. Added to this fact is that corporate participants will usually prefer to be shareholders in a company, because this is a form of business organization with which they are familiar and therefore understand.

Some of the basic features of a limited liability company which makes it very attractive as a vehicle for a joint venture are as follows:

(a)  Limited liability:

The most significant advantage of a limited liability company is the ability of the participants to limit their liabilities and losses of the joint venture business. However, the limitation of the liabilities of the participants is not always complete at the early stages of the joint venture business. This is because the participants may need to support the business at its early stage by providing guarantees and assurances to third parties.

(b)  Financial Flexibility:

In terms of general financial and tax planning, the corporate structure presents considerable flexibility through the creation of different types and classes of shares, loan capitals and different types of debentures that makes it easier for the joint venture to raise external finance.

(c)   Relationship between the Participants and Control of the Company:

The relationship between the participants and the control of the joint venture company is usually governed by the Articles of Association and usually a separate Shareholders’ Agreement which they enter into together with other related agreements like Trademark License Agreements etc. Detailed provisions relating to the control of the joint venture and its management   are usually set out in the Shareholders’ Agreement or the Articles of Association. This will cover the obligations of the participants, how the directors are appointed and removed, the powers and duties of the directors etc.

(d)  Realization of the interest of an outgoing Participant:

The goodwill of the joint venture company will belong to the company and each participant’s interest can be realized by transferring its shares which may not affect the business of the joint venture company. In practice however, there are usually restrictions to the transfer of shares and its success largely depends on the cooperation of the other participants.  The outgoing participant will have to follow the procedures stipulated in the Shareholders’ Agreement or Articles of Association in transferring its shares. This may include offering the shares first to the existing shareholders and where the existing shareholders fails or are unable to acquire the shares, the outgoing participant can then offer the shares to outsiders.

 

Importance of adequate Documentation:

Having decided to establish a joint venture company, the participants would be advised to spend quality time, money and effort in ensuring that the joint venture is adequately documented. This is very important to avoid misunderstandings which may ultimately lead to the premature termination of the joint venture.

A non exhaustive list of why adequate documentation should be insisted on is as follows:

(1)  To ensure that each participants obligation to each other and to the joint venture are clear;

(2)  To ensure, as far as possible, that the participants are clear as to their respective aspirations and objectives in relation to the joint venture;

(3)  To provide protection for minorities and to attempt to avoid deadlock;

(4)  To define in what circumstances the venture may be terminated and as far as practicable to provide an exit route for the participants;

(5)  To ensure the chosen structure works; etc

It is advisable to engage the services of a corporate/commercial lawyer for the purposes of drafting the documentations.

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