ZAFAR & ASSOCIATES - LLP | Joint Ventures Setup - Pakistan

A joint venture is a legal entity that takes the form of a short term partnership in which the persons jointly undertake a transaction for mutual profit, generally each person contributes assets and share the risks, like a partnership, joint ventures can involve any type of business transaction and the parties can be individuals, group of individuals, companies or corporations.

Joint venture is a legal organization in the nature of a partnership engaged in the joint prosecution of a particular transaction for mutual profit, an association of persons jointly undertaking some commercial enterprise, it requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and loses, unlike a partnership, a joint venture does not entail a continuing relationship among the parties.

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Joint Venture Setup in Pakistan

Joint ventures are also widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets. The foreign companies generally bring new technologies and business practices into the joint venture, while the domestic companies already have the relationships and requisite governmental documents within the country along with being entrenched in the domestic industry.

Joint Ventures are governed by state Partnership, Contracts, and Commercial Transactions Law. A Joint Venture is also treated like a Partnership for Federal Income Tax purposes. A joint venture corporation involves the same type of activity as above but within a corporate framework. Foreign joint ventures are subject to the International Trade Laws and the laws within the foreign countries.

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Reasons for Forming a Joint Venture

Internal Reasons

• Build on Company's strengths;

• Spreading costs and risks;

• Improving access to financial resources;

• Economies of scale and advantages of size;

• Access to new technologies and customers; and

• Access to innovative managerial practices.

Competitive Goals

• Influencing structural evolution of the industry;

• Pre-empting competition;

• Defensive response to blurring industry boundaries;

• Creation of stronger competitive units;

• Speed of market; and

• Improved agility.

Strategic Goals

• Synergies;

• Transfer of technology / skills; and

• Diversification.

Why do we need to form Joint Ventures?

As there are good business and accounting reasons to create a joint venture (JV) with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance. Joint ventures are becoming an increasingly common way for companies to form strategic alliances. In a joint venture, two or more parent companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control.

Factors to be considered prior to forming a Joint Venture

• Screening of prospective partners;

• Joint development of a detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan;

• Due Diligence - checking the credentials of the other party ("trust and verify" - trust the information you receive from the prospective partner, but it's good business practice to verify the facts through interviews with third parties);

• Development of an exit strategy and terms of dissolution of the Joint Venture;

• Most appropriate structure (e.g. most joint ventures involving fast growing companies are structured as strategic corporate partnerships);

• Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners;

• Special allocations of income, gain, loss or deduction to be made among the partners; and

• Compensation to the members that provide services.

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Types of Joint Ventures

How you set up a joint venture depends on what you are trying to achieve. One option is to agree to co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company's distribution network. The two partners could agree a contract setting out the terms and conditions of how this would work.

Alternatively, you might want to set up a separate joint venture business, possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree how it should be managed.

In some circumstances, other options may work better than a limited company. For example, you could form a business partnership or a limited liability partnership. You might even decide to completely merge your two businesses.

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Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects. A successful joint venture can offer:

• Access to new markets and distribution networks;

• Increased capacity;

• Sharing of risks and costs with a partner; and

• Access to greater resources, including specialised staff, technology and finance.

A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure.

Risks involved in Joint Ventures

Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:

• The objectives of the venture are not hundred per cent clear and communicated to everyone involved;

• Partners have different objectives for the joint venture;

• There is an imbalance in levels of expertise, investment or assets brought into the venture by different partners;

• Different cultures and management styles result in poor integration and co-operation; and

• Partners don't provide sufficient leadership and support in early stages.

Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.

Setting up a joint venture can represent a major change to your business. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy. It’s important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect. In fact, you might decide that there are better ways to achieve your business aims. If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits. Joint ventures often enable growth without having to borrow funds or look for outside investors. You may also be able to use your joint venture partner's customer database to market your product, or offer your partner's services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.

Relationship of Parties in existing Joint Venture

Before starting a joint venture, the parties involved need to understand what they each want from the relationship.

Smaller businesses often want to access a larger partner's resources, such as a strong distribution network, specialist employees and financial resources. The larger business might benefit from working with a more flexible, innovative partner or simply from access to new products or intellectual property.

Similarly, you might decide to build a stronger relationship with a supplier. You might benefit from their knowledge of new technologies and get a better quality of service. The supplier's aim might be to strengthen their business from a guaranteed volume of sales to you.

Whatever your aims, the arrangement needs to be fair to both parties. Any deal should:

• Recognize what you each contribute;

• Ensure that you both understand what the agreement is expected to achieve; and

• Set realistic expectations and allow success to be measured.

The objectives you agree should be turned into a working relationship that encourages teamwork and trust.

Choosing a right Joint Venture Partner

The ideal partner in a joint venture is one that has resources, skills and assets that complement your own. The joint venture has to work contractually, but there should also be a good fit between the cultures of the two organizations.

A good starting place is to assess the suitability of existing customers and suppliers with whom you already have a long-term relationship. You could also think about your competitors or other professional associates. Broadly, you need to consider the following:

• How well do they perform?

• What is their attitude to collaboration and do they share your level of commitment?

• Do you share the same business objectives?

• Can you trust them?

• Do their brand values complement yours?

• What kind of reputation do they have?

If you opt to assess a new potential partner, you need to carry out some basic checks:

• Are they financially secure?

• Do they have any credit problems?

• Do they already have joint venture partnerships with other businesses?

• What kind of management team do they have in place?

• How are they performing in terms of production, marketing and personnel?

• What do their customers and suppliers say about their trustworthiness and reputation?

How to enter into a Joint Venture Agreement?

Selection of a good local partner is the key to the success of any joint venture. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement.

A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting lawyers well versed in International Laws and Multi-jurisdictional Laws and Procedures.

Before signing the joint venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties.

Before signing a Joint Venture Agreement the following must be properly addressed:

• Dispute Resolution Agreements

• Applicable Law

• Force Majeure

• Holding Shares

• Transfer of Shares

• Board of Directors

• General Meeting

• CEO/MD

• Management Committee

• Important Decisions with Consent of Partners

• Dividend Policy

• Funding

• Access

• Change of Control

• Non-Compete

• Confidentiality

• Indemnity

• Assignment

• Break of Deadlock

• Termination

The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.

Creating a Joint Venture Agreement / Treaty

When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help in preventing any misunderstandings once the joint venture is up and running.

A written agreement should cover:

• The structure of the joint venture, e.g. whether it will be a separate business in its own right;

• The objectives of the joint venture;

• The financial contributions you each will make;

• Whether you will transfer any assets or employees to the joint venture;

• Ownership of intellectual property created by the joint venture;

• Management and control, e.g. respective responsibilities and processes to be followed;

• How liabilities, profits and losses are shared;

• How any disputes between the partners will be resolved; and

• An exit strategy.

You may also need other agreements, such as a confidentiality agreement to protect any commercial secrets you disclose.

It is essential to get independent expert advice before any final decisions are taken - contact your local Business Link as a starting point for advice.

Joint Venture Relationship

A clear agreement is an essential part of building a good relationship. Consider these ideas:

• Get your relationship off to a good start. For example, you might include a project that you know will be a success so that the team working on the joint venture can start well, even if you could have completed it on your own;

• Communication is a key part of building the relationship. It's usually a good idea to arrange regular, face-to-face meetings for all the key people involved in the joint venture. For ideas on ways to improve communication;

• Sharing information openly, particularly on financial matters, also helps avoid partners becoming suspicious of each other. The more trust there is, the better the chances that your relationship will work;

• It's essential that everyone knows what you are trying to achieve and works towards the same goals. Establishing clear performance indicators lets you measure performance and can give you early warning of potential problems;

• At the same time, you should aim for a flexible relationship. Regularly review how you could improve the way things work and whether you should change your objectives; and

• Even in the best relationship, you'll almost certainly have problems from time to time. Approach any disagreement positively, looking for solutions rather than trying to score points off each other. Your original joint venture agreement should set out agreed dispute resolution procedures in case you are unable to resolve your differences yourselves.

Ending a Joint Venture

Your business, your partner's business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but sooner or later most partnering arrangements come to an end. If your joint venture was set up to handle a particular project, it will naturally come to an end when the project is finished.

Ending a joint venture is always easiest if you have addressed the key issues in advance. A contractual joint venture, such as a distribution agreement, can include termination conditions. For example, you might each be allowed to give three months' notice to end the agreement. Alternatively, if you have set up a joint venture company, one option can be for one partner to buy the other out. The original agreement may typically require one partner to buy out the other.

The original agreement should also set out what will happen when the joint venture comes to an end. For example:

• How shared intellectual property will be unbundled;

• How confidential information will continue to be protected;

• Who will be entitled to any future income arising from the joint venture's activities; and

• Who will be responsible for any continuing liabilities, e.g. debts and guarantees given to customers?

Even with a well-planned agreement, there are still likely to be issues to resolve. For example, you might need to agree who will continue to deal with a particular customer. Good planning and a positive approach to negotiation will help you to arrange a friendly separation. This improves the chances that you can continue to trust each other and work together afterwards. It can also raise your profile in the business community as a reliable and productive partner.

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