joint ventures agreements: definition, disputes and...
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The contents of this document are confidential 1
Joint Ventures Agreements:
Definition, disputes and resolution.
Trilegal
CONFIDENTIAL
2016
Yogesh Singh
Partner
25 September 2016
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Introduction to Joint Ventures in India
Funding a Joint Venture
Key Commercial Terms in JV Agreements
CCI Implications
OVERVIEW
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Introduction to Joint Ventures in India
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JOINT VENTURE
Separate
legal entity
Common
objective
Asset contribution
Sharing of risks and profits
Elements of a JV
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Company A Company B
New JV
Equity Equity
Assets/
Cash
Assets/
Cash
Typical JV Structure
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Types of JVs
6
JVs
Incorporated
Company
Subscription of Shares
Transfer of Business/Technology
Collaboration with Existing Company
LLP
Contribution
Transfer of Business/Technology
Unincorporated
Partnership
Cooperation Agreement/Strategic
Alliance
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• Object and scope of JV
• Participation of JV Partners
• Future issuance of capital
• Financial arrangements
• Composition of board
• Management of JV company
• Distribution of profits
• Transferability of shares
Documentation for JV Company
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• Deadlock resolution
• Restrictive covenants on JV Partners and the JV company
• Reserve matters
• Appointment of higher management
• Non compete clause
• Confidentiality clause
• Indemnity clause
Documentation
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Funding a Joint Venture
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Funding a JV
10
Equity• Foreign Exchange
Management Act, 1999
Debt
• Domestic borrowing and external commercial borrowing
Funding
Options
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Key Commercial Terms in JV
Agreements
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Rights of JV Partners
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Voting Rights
Nominate Director
General Meetings
Receive Dividend
Transfer of Shares
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13
ROFR
ROFO
Drag Along Right
Tag Along Right
Pre-Emptive
Right
Transfer Restrictions
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Types of Votes
• Affirmative: requiring the affirmative vote of the right-holder
• Negative: granting a veto to the right-holder
Matters that may be listed
• If outside the scope of the normal day to day working of the company.
• If impact shareholders’ current or future shareholding in the company.
Common Examples
• Appointment/removal of senior management or statutory auditors of the company.
• Changes in capital structure, mergers and acquisitions, creation of subsidiaries.
• Large capital expenses, acquisitions of outside entities, entering into indebtedness.
Reserved Matters
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Non-Compete and Non-Solicit Clauses
Non-Compete Clause
Restriction on entering into a similar trade or business.
Non-Solicit Clause
Restriction on soliciting company’s employees or customers may be enforced on a case to case basis.
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Deadlock
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Deadlock Events
Refusal by shareholder to give its consent at shareholders'
meeting
Failure of the Board of
Directors to agree on any
matter Failure to gather
the requisite quorum at the
Board meetings
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Resolution of
Deadlock
Russian Roulette
Sale of Shares on Fair Price
Sale of Shares to
Third Party
Sale of Business to
Third Party + Winding-Up Winding Up
Casting Vote of Chairman
Appointment of Third
Party Expert
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Deadlock Resolution
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When the JV Partners form a JV, they may conduct business
under a new brand name or the JV Partners may decide to assign
or license the right to use the intellectual property of the JV
Partners.
Intellectual Property
18
Transfer of IPRPost-term use
of TMs
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acquire the shares of the defaulting party at
a discount to fair value
sell its shares to the defaulting party at a
premium to fair value
Event of Default
19
Rights of the
non defaulting
party in case
of an event of
default
Put an
d C
all Mech
anism
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• Any commercial matter, if it arises out of or relates to a contract, can be
referred to arbitration.
• Standard clause:
“In the event of any dispute, controversy or difference between the Parties
arising out of or relating to this Agreement (including a dispute relating to
the validity or existence of this Agreement and any non-contractual
obligations arising out of or in connection with this Agreement) (a
Dispute), any party to the Dispute shall be entitled to refer the Dispute to
arbitration (Notice of Arbitration) to be resolved in the manner set out in
this Clause. This Agreement and the rights and obligations of the Parties
shall remain in full force and effect pending the award in such arbitration
proceeding.”
Arbitration
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• Disputes between JV Partners often relate to transfer of shares, non-
compete, intellectual property etc.
• Whether or not oppression and mismanagement is arbitrable
• Unsettled law
• Arguments against reference to arbitration
• Sukanya: If there is bifurcation of reliefs, there can be a situation where 2 fora could decide on
similar issues
• Bennett Coleman: Companies Act requires the CLB to decide the dispute
• Mere arbitration clause cannot oust jurisdiction of the CLB
• Arguments for reference to arbitration
• High courts have also held that S.397-398 do not cast an exclusive jurisdiction on
the CLB
• If civil courts can hear petition under S. 397-402, an arbitral tribunal should also
be able to hear the same dispute.
Arbitrability of Disputes
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• Foreign governing law.
• Jurisdictional nexus between the JV Parties and the
governing law.
Governing Law and Jurisdiction
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CCI Implications
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Assets Turnover
India Acquirer and target
(collectively)
INR 20 billion INR 60 billion
Acquirer's group together
with the target
INR 80 billion INR 240 billion
Worldwide Acquirer and target
(collectively)
USD 1 billion worldwide
including assets of at least
INR 10 billion in India
USD 3 billion worldwide
including turnover of at
least INR 30 billion
from/within India
Acquirer's group together
with the target
USD 4 billion worldwide
including assets of at least
INR 10 billion in India
USD 12 billion
worldwide including
turnover of at least INR
30 billion from/within
India
Note: Please note that ‘group’ will include all entities controlled by the ultimate parent entity (UPE) where the
UPE directly or indirectly (i) exercises 50% or more of the voting rights; or (ii) appoints more than 50% of the
members of the board of directors; or (iii) controls the management or affairs.
CCI Implications
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Case Study
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• JV between Party A (non resident) and Party B.
• Exit clause: If certain targets are not met in a specified
period:
• Party A will sell its shares to a third party buyer, or
• Party A will exercise Put Option at a pre-determined price
(higher than FMV).
• Put Option Enforceable at FMV.
Case Study
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