Businesses are usually the creation of multiple persons coming together to pull their resources and have a separate legal entity created. There are usually anticipations of success in the business, the founders expect the best and are often filled with optimism at the start of the business-building stage.
While this optimistic feeling can be a good leverage to the businesses’ overall outlook and management, most times the reality of business turns out to be a rocky lane filled with pessimism unknown to the founders at the time.
A joint venture is a necessary step to avoid such pessimistic surprises from any founder when they arise. This article offers insight into the meaning and explanation of the joint venture agreement.
What is a Joint venture agreement?
A joint venture agreement is made when two or more individuals or companies come together to engage in business without the business having a legal personality at the onset. The joint venture is similar to the shareholders’ agreement, but while the joint venture agreement is applied to business names the shareholders’ agreement is mostly appropriate for businesses with a legal personality.
The joint venture agreement seeks to provide guidance or clarity as to the functioning of the businesses before it is registered, this allows the investors to gain a clear picture of the consequences of engaging in the business even before investing their money into it. The joint venture is binding on all the individuals that signed it and cannot be bidding on third parties, except if the due notice is given to the third party.
Features of a Joint venture agreement
The following are the major characteristics of a joint venture agreement:
1. Purpose of the venture must be ascertained
The main purpose for establishing the business must be specifically spelt out on the joint venture. This is highly vital because it guides the parties to know where their money goes to.
For instance, if the joint venture agreement is created to go into a beverage business, and suddenly wants to shift to an alcoholic sale, an Islamic faithful or someone who doesn’t want their money going into the alcohol business can pull out using the joint venture agreement as a breach of the agreement.
This is perhaps the basic reason for having a joint venture agreement, the contribution to be made by each investor must be stated specifically in the joint venture agreement. This is significant because a joint venture agreement is executed at the time of negotiations, so no investor has made any meaningful donation at that time.
To lock all investors, thereby shifting their pledges from a promise to a contractual duty, a joint venture agreement would be best suited.
3. The parties and the commencement date must be stated
The parties to the joint venture agreement as well as the date of commencement of the business must be stated. This allows the investors to be locked in and also be aware of the business formation and existence.
Difference between Joint venture agreements and other pre-incorporation agreements.
The joint venture agreement is largely similar to the three agreements used in the business world. These agreements are distinct and possess varying features from the joint venture agreement; the agreements are shareholder agreements, partnership agreements, and memorandum of understanding.
1. Shareholders’ agreement: the shareholders’ agreement seeks to bind the shareholders of a company together. The shareholders’ agreement is mostly used for businesses with legal personality while the joint venture agreement is used for business names.
2. Partnership agreement: the partnership agreement is the agreement drafted between two or more partners (not exceeding 20 partners). The partnership agreement differs from the joint venture agreement because the joint venture agreement seeks to protect the interests of the investors before the business is in existence, while the partnership agreement protects the interests of the investors after the business has been put into existence and is running.
3. Memorandum of association (MOU): the MOU is similar to the joint venture agreement in all areas. Both seek to lay down the position of things at the discussion stage. Nonetheless, while the joint venture agreement is enforceable in law, the MOU is not enforceable.
Basic contents of a Joint venture agreement
1. Parties Clause
The parties clause is a very significant part of the joint venture agreement; it is the clause that seeks to bind whoever is named a party to the agreement.
The party clause must state the name, and address of each party. If the party is a corporation, the name, address and RC number of the company must be stated.
2. Date Clause
Just as the party clause, the date of execution must be stated. This shows that the agreement was entered into before the registration of the business or before the commencement of activities in the business.
3. Nature of the business Clause
The nature of the business to be commenced by the parties must be clearly stated in the agreement.
The objects for which the business is formed to the way and manner future objects would be added to the object of the business.
4. Capital contribution Clause
The amount of capital to be contributed must be stated clearly in the joint venture agreement. Also, the agreement must state the time at which the amount must be paid.
5. Supremacy Clause
This is the most significant clause in the joint venture agreement. The supremacy clause seeks to place the provisions of the joint venture agreement above every other previous discussion or agreement whether oral or written made by the parties.
6. Sharing ratio Clause
The sharing ratio for the joint venture should also be stated in the agreement. This allows each party to understand the extent to which they would receive once the business begins drawing profits from the trade.
7. Settlement of disputes and governing law Clause
The governing law that would guide the investors must be stated in the joint venture; this is most necessary when a foreigner is also a party to the joint venture agreement.
Also, the manner and place disputes would be settled when they arise must be stated in the joint venture. In practice, the settlement technique adopted is usually arbitration.
The joint venture agreement is a significant part of the per-contract document that every investor must possess if they intend to have full protection from liability or disagreement that comes with the business.
Frequently Asked Questions (FAQs)
Yes, a joint venture agreement can be tendered as evidence in any court in the world.
This depends on the country governing the joint venture agreement. In Nigeria, a child can be a party to any contract, including a joint venture agreement, if two adults invest in the business with the child.