Joint Ventures

Q. What do you mean by Joint Venture? What are the types of Joint Venture
and the essentials of Joint Venture?

Answer:

Joint Venture is an association of two or more persons to carry out a single business
enterprise for profit, for which purpose they combine their property, money, effective
skills and knowledge. It can also be defined as an agreement between two or more
legally independent companies which pool their capabilities and resources together to
a shared business.

A Joint Venture is defined as any arrangements whereby two or more parties co -

operate in order to run a business or to achieve a commercial objective.

When two or more persons join together to carry out a specific temporary or seasonal
business venture and share the profits and losses on an agreed basis it is called as joint
venture.

There is no much difference between joint venture and partnership. In practice, the
difference is essentially zero. Partnership law generally applies to joint ventures. The
most significant difference between a partnership and Joint Venture is that a
partnership is formed for carrying on of general business with some degree of
continuity and the latter is formed for execution of a single transaction generally.

The Supreme Court of Michigan has defined joint venture as follows;

“It can be said that a joint adventure contemplates an enterprise jointly undertaken;
that it is an association of such joint undertakers to carry out a single project for
profit; that the profits are to be shared, as well as the losses, though the liability of a
joint adventurer, for a proportionate part of the losses or expenditures of the joint
enterprise, may be affected by the terms of the contract. There must be a contribution
by the parties to a common undertaking to constitute a joint adventure and a
community of interest as well as some control over the subject matter or property
right of the contract. Whether the parties to a particular contract have thereby created,
as between themselves, the relation of joint adventurers or some other relation
depends upon their actual intention, and such relationship arises only when they
intend to associate themselves as such. This intention is to be determined in
accordance with the ordinary rules governing the interpretation and construction of
the contracts”.

There are two types of Joint Venture:

Domestic joint venture: The domestic joint venture means all partners with the same
nationality.

International joint venture: The international joint venture is set up by parties of

different nationalities.

Essentials of joint venture:

1. It is formed by two or more persons.

2. The purpose is to execute a particular venture or project.
3. No specific form is used for the joint venture business.
4. It is a temporary nature. Hence, the agreement regarding the venture
automatically stand terminated as soon as the venture is completed.
5. The co-venturers share profit and loss in the agreed ratio. However, in the
absence of any other agreement between co-venturers, the profits and losses
are to be shared equally.

Q. What are the advantages and disadvantages of joint venture?

Answer:

Advantages of joint venture are:

➢ Joint venture offers an advantage to set up business at a right time which

otherwise may not be possible for one party because of availability of limited
resources and capacities.
➢ A joint venture may help a firm diversify into unrelated areas of business with
lower degree of risk as the firm can bank upon the expertise and experience of
another joint venture partner.
➢ A joint venture may offer a product, range of products or technology to
manufacture them to a firm lacking them and on the other hand the other joint
venture partner can get access to new market
 ➢ A joint venture may offer growth and higher profitability to both the joint
venture partners. There may be additional gains due to synergy.
➢ A joint venture can help both the joint venture partners improve their
respective competitive positions. There may be positive spill over effect of
joint venture activity.

Disadvantages of joint venture:

➢ Joint venture can be a failure if parties do not trust each other. There must be
complete trust reposed by one partner on another to sustain the relationship.
Joint venture will be at serious disadvantage if there is conflict of interest
amongst partners.
➢ Political equations among countries keep changing all the time. A foreign
collaboration joint venture may suffer if either of the countries of respective
joint venture partners suffers relationship with the other on account of change
in the political equation.
➢ Radical changes in environmental factors in a country especially the
governmental and legal can negatively influence the interest of either joint
venture partner. This may in turn upset the joint venture if a joint venture
partner turns hostile or non - cooperative.
➢ Bargaining power of a joint venture partners may suddenly change
significantly and a joint venture partner having more power may manipulate
the other. This may jeopardize the prospects of joint venture as well as that of
the other partner.
➢ A joint venture partner might have simply over-committed and may fail to
perform the role it is bound to perform or fail to contribute financial or non-
financial inputs which may damage the performance of joint venture and also,
that of the other joint venture partners.
➢ A joint venture partner selected by a firm may be found to be unsuitable later.
By the time this fact becomes manifested substantial resources, efforts and
time might already have been invested. This would amount to huge loss to a
firm.
Q. Explain the principles of joint venture.

Answer:

There are certain principles which are must for existence of a Joint Venture. They are:

➢ An agreement
➢ Joint Interest
➢ Sharing of Profit and loss
➢ Control
➢ Fiduciary relationship
An Agreement: A Joint Venture is established through an agreement between parties.
The agreement mentions about the purpose of establishment and rights of each
members and also how the joint venture must be managed, how decisions are to be
taken etc. The agreement also mentions about the modes of termination of Joint
Ventures. Therefore, agreement becomes basis for a Joint Venture.

Joint Interest: this means that the parties must have a joint interest in the business i.e,
in the money, skill and services of a Joint Venture.

In Hasday v. Barocas the New York Court opined on joint interest as under;

“It is not enough that two parties have agreed together to act in concert to achieve
some stated economic objective. Such agreement, by itself, creates no more than a
contractual obligation, otherwise every stockholder agreement would give rise to a
joint venture. The fiduciary obligation arises upon the coagulation of property, profits,
or other interests which the parties can then be said to hold jointly and which are
made accessible to each other in terms of the confidential relationship which exists
between joint associates”.

Sharing of Profit and losses: In a Joint Venture, parties must agree not only to share
profits but also losses. This is one of the essential elements for this kind of an
association. In some cases if there is no express provision for sharing of losses, even
then it can be implied that parties intended to share losses.

Control: In a Joint Venture both the parties must actively take part in the business
and control the enterprises. Control emphasises the right to undertake majority
decisions. Thus, control is one of the critical aspects for successful management of a
Joint Venture.

Fiduciary relationship: Fiduciary relationship is a relationship of trust and faith.

Each partner in a Joint Venture must repose trust on the other partner and thus stands
in a fiduciary relationship with other. One party cannot profit at the cost of another
partner and become accountable for each other.

Q. How joint venture is practiced in corporate governance?

Answer:

Corporate governance is a set of principles, rules and practices which a company must
follow in order to properly govern the company. These principles emphasize on
increasing the shareholder as well as stakeholder’s value in a company. Therefore, it
governs all aspects relating to the management of an enterprise. Most of the Joint
Ventures try to adapt these rules in order to address governance concerns. This
mechanism aims at curtailing the problems that may arise between self – interested
management and dispersed shareholders. Some of the major initiatives taken by Joint
Ventures are;

Independent Directors: Having a provision for Independent Directors on the Joint

Venture Company goes a long way in proper functioning of Joint Venture as the
Independent Director can bring in his independent and unbiased opinion about the
policies undertaken by Joint Venture and can positively contribute towards better
governance. Independent Director is one who is not affiliated to any of the partners of
the Joint Venture Company. He can assist company in following ways;

➢ He can provide independent perspective regarding any issue among the parties
and help resolve conflicts;
➢ He can provide his expert advice on the business; provide suggestions with
respect to raising of capital etc. which partners in Joint Venture may not
possess.
➢ He can represent the interest of all those small shareholders or partners in a
Joint Venture whose smaller ownership does not enable them to appoint their
own representative on the Board of a company.
The Corporate Governance norms usually address these important issues:

1. An active and fair protection of the rights of all shareholders,

2. An accountable board and management and proper supervision thereof,
3. Transparent information about the financial and non-financial position of the
firm, and
4. Responsibility for the interests of stakeholders, including the minority
shareholders.