Bangladeshi being one of the most preferred investment destinations has seen an influx of foreign investments in recent years. Except some areas, Bangladesh’s Foreign Direct Investment (“FDI”) Policy allows 100% FDI for setting up Companies. However due to cultural differences and lack of strict adherence of the legal principles, many foreign investors are keen to take a local partner for the smooth operation of the proposed ventures in Bangladesh. It is seen and observed that except some few institutionalized investors, many Small & Medium Enterprise Investors shy away from executing a Formal Joint Venture Agreement and directly incorporates a Joint Venture Company. In reality, when the dispute arises, the Joint Venture Partners are left to scuffle through the complicated terms of the Company Laws, without having a codified clear and simple terms to protect them.
What is a Joint Venture Agreement?
A Joint Venture Agreement is an Agreement between two or more people or organizations that comes together to form a Consortium or Company. The Joint Venture Agreement in essence codifies the intention and the various terms and conditions relating to the proposed venture between the parties.
Why it is essential of have a formal JVA ?
In many cases it is seen that the majority of the equity is injected by the Foreign Partners and in many cases the equity of the local partner is also paid by the foreign partners. Local partner’s use their influence and knowledge and becomes a partner in venture which may be eventually become a multi million dollar business. Bangladeshi Companies Act 1994 does not recognize the Trust Concept and hence the Joint Venture Agreement is vital importance to recognize the additional contribution by foreign partners and may include mechanism to adjust the liability of the local partners from profit. Furthermore, the Joint Venture Agreement remains to be a confidential documents, whereas, the Memorandum become a public document. On the other hand, it may also be of equal importance for local partner due to dilution of shares, so that his/her percentage in the company remains intact without direct injection of equity.
Main points involved in the Joint Venture Agreement are-
- Identification of the Parties
- The business of the joint venture
- Contribution of the Parties
- Asset and ownership
- Management & Control of the Joint Venture
- Voting Rights
- Majority and Minority Issues
- Dividend Policy
- Pre-emption Rights
- Lock In Period and Put Option
- Material Breach
- Term and Termination
- Due Diligence and Compliance Issues
- General Legal Clauses
- Dispute Resolution
The formation of the board and administration courses of action-
The JVA normally allows each member of a joint venture agreement to select a specific number of executives in the main body of the JVC. The privilege of choosing chiefs with particular parties, for example, an administrator and official managers, should also be considered.
The JVA will also establish the scope of the basic controls on board leadership and can accommodate some vital or sensitive elections that will be held on the Board and in addition to the investors.
In addition, the company will normally establish tasks related to the day-to-day management of the joint venture, including accounting obligations, defining strategies for success and spending plans, and planning and transmitting monetary data.
Financial Contributions- One of the key elements of Joint Venture Agreement is to codify the financial responsibilities of the Parties. It is necessary to pin point what is the present and future financial contributions of each of the parties and also to clarify what qualifies as financial contributions. Financial contribution in Joint Venture may include land, capital, raw materials, machineries, equipment, other assets, IP, Technical know-how, business names, Laying this out in your joint venture agreement details will ensure that you and your partner’s expectations are aligned.
Management and Operation of Joint Venture Entities- Majority of the disputes of Joint Venture Parties revolves around the management and operation of the Company. This includes the position in the board, how the day to day management of the Company should run and who should take the serious decision of the Company. It is important to clearly elaborate the operating procedure in the Company including power of the Managing Directors, Power of the Board, Account operating Mandates and rights to be on the board of directors. Parties may incorporate minimum shareholding requirements as qualifying shares for the Board members or distribute the board according to the shareholding ratio. Parties may also adopt a rotation of director policy. It is also necessary in some situations to have equal representations in the Board.
Protection of minority- A minority investor will be especially concerned to ensure that it has some degree of control over the role of the joint venture and that it is able to guarantee its speculation. Very often, minority investors try to organize a reduction of veto rights or to keep matters that require the consent of minority investors before they can make any changes. The basic topics include the topic of new offers and the production of rights on offers; the presentation of new investors; the delivery of profits and other issues related to money; the transition to real exchanges; and other big changes in the business of the joint venture. The problems can be carried out at the board level or at the investor level.
Pre-emption Rights- One of the key elements in Joint Venture is to incorporate a pre-emption clause which restricts the parties from selling of their interest/shareholding in Joint Venture to third parties without the due consent of the other parties. Although this is codified in the Companies Act 1994; nonetheless a detailed clause in this regard would serve the best interest of the parties. Parties may also put a ‘Lock in Period’ and a ‘Put Option’ along with the pre-emption clause.
Due Diligence and Compliance Issues- It is vital for the Joint Venture Parties to conduct a due diligence, as to the financial strengths of the other party as well as financial prospects and key regulatory issues including required licenses and permission. Also it is essential to incorporate clauses to obligate the parties to take all necessary steps for legal and regulatory compliance of the venture.
Dividend/Profit Sharing- It is essential the parties clearly define the dividend declaration and disbursement procedure. Many Joint Venture fails due to lack of coherent understanding as to profit sharing. Also parties should include clauses to adjust profit against any loans or liabilities of the parties.
Dispute Resolution– One of the detailed clause which should be reflected in the JVA is how to resolve a dispute. Dispute arises due to many reasons in commercial enterprises and it is vital that a mechanism should be available to amicably resolve the disputes either informally or though formal mediation. Only if and when it is not possible to resolve the disputes, Arbitration Panel referrals can be made. The Arbitration is conducted in Bangladesh under the Arbitration Act
Termination- By participating in joint ventures, there may now have been progress in terms of the conditions under which, and in planning, the joint venture will end. The usual endings include the affirmation of the meetings for the end, the expiration of a fixed term or the completion of a predetermined company, where there are two investors, a meeting that offers their offers when leaving, a material break of the agreement that is not has materialized.
Conclusion- Joint Venture Agreement plays a key strategic role in defining the relationship of the parties, which can later be converted into shareholders’ agreement. Prospective Investors are advised to do minimum due diligence as to key legal and regulatory issues and to formalize understanding of the parties through the execution of Joint Venture Agreement before embarking into a new Joint Venture.