Joint Ventures (JV)

Introduction to JV

Many projects in South East Asia are carried out by 2 or more companies from different legal systems who join together to exploit their human and financial resources, expertise and local knowledge for their mutual benefit. The companies may carry out the project jointly, sharing the risks and rewards equally or in pre-defined percentages or they may decide that the risk and reward should relate solely to the separate work each carries out.

The companies may decide to form a separate joint venture company to carry out the work (an incorporated Joint Venture) or they may decide merely to have an agreement between themselves to undertake the work together (an unicorporated Joint Venture).

These are commercial decisions and many factors will influence the eventual structure of the Joint Venture (JV).

In an incorporated JV there will be Articles of Association and Memoranda of Incorporation which will normally set out the formal structure of the company and a shareholders agreement between the parties which will set out how the company is to be run, what authority the management team may have and what matters must have the approval of the shareholders. It will also establish the relationship between the shareholders.

In an unincorporated JV there will agreement which will cover all aspects of the JV's operation and the relationship between the parties.

The nature of a JV is or should be one of the mutual (if sometimes wary) trust. At the time they are negotiating the JV the parties are often reluctant to contemplate the possibility of the relationship going wrong. No matter how friendly the parties are at the outset the relationship could be a disaster waiting to happen. The parties should ensure that the JV agreement is drafted in such a way that :-

• it is enforceable
• it contains provision for resolving deadlock and
• it provides for termination in specified circumstances and sets out the consequences of any such termination

Dealing with Deadlock

In an incorporated JV deadlock can arise either at board level where the directors appointed by the Shareholders take opposite views in a 50:50 JV or in one where unanimity is required, or at shareholder level (and the same would apply to an unincorporated JV) in relation to matters which require shareholder approval.

Obviously it is best to try to avoid the potential for deadlock at the outset. This can be achieved in a number of ways including

• agreeing that one party should have a casting vote
• agreeing that a particular party should have control over certain specified issues or areas - this sometimes works well where each party is contributing different things to the JV
• delegation by the JV parties to individuals within the JV management
• restricting the matters which need to be referred to the shareholders

However, many parties will be reluctant to concede the right to "agree" major decisions. Therefore the potential for deadlock on key issues still normally exists. Some people consider the in-built potential deadlock of a 50:50 JV agreement (eg through equality of voting rights at board and shareholder level) in itself provides the strongest structure for encouraging settlement and a common policy between the parties. They argue that the potentially severe commercial consequences of an isoluble deadlock generally ensures that a sensible compromise will be agreed. I do not agree. When a problem arises it is usually because the partners have fallen out and the good - will to resolve the problem has rarely been present. It needs to be broken by one means or another.

Generally there are 2 means of resolving deadlock

• Mechanism which allow the JV to continue (Dispute Resolution Mechanism)
• Mechanism which terminate the JV