A joint venture (“JV”) is a business entity formed by two parties sharing similar vision and goal to develop a business. This joint entity is usually formed to achieve broader business opportunity. A typical example is where a company with good reputation in the local market envisions to expand its business to a foreign market. In that circumstance, this company will look for opportunity to form a JV with another company earning good reputation in that targeted foreign market for expansion of business jointly. The most ideal outcome is to arrive at a win-win situation for both companies.
While forming a JV sounds ideal, any interested company is reminded to consider carefully before incorporation of a JV. In this short article, we will share some prominent features to remind parties for consideration.
Make sure you are properly advised under the governing law
If you consider forming a JV with a foreign company, it is likely that the JV agreement is governed by that foreign law. It is important to understand the applicable law and its impact to the formation of a JV.
For instance, an obvious example is where in Malaysia, at least one of the directors of the company incorporated in Malaysia must be a Malaysian citizen having his/her place of residence in Malaysia to comply with the Companies Act 2016 of Malaysia. If a company is not aware of such requirement under the applicable law and sets up a JV company in Malaysia, any ill-formed board of directors may hinder the daily operation and management of the JV company.
In addition, in Malaysia, the amount of profit tax to be payable differs between resident companies and non-resident companies. In short, to qualify as a resident company, a JV must have at least 51% shares owned by a resident of Malaysia. The ratio of profit tax is higher in non-resident companies.
Thus, an interested company shall consult appropriate legal advice from a qualified practitioner of that jurisdiction.
Embrace the difference in management style
Speaking of management, although a JV is considered as collaboration of different companies, the individuals from each company play a vital role in managing the collaboration and relationship. One of the obstacles that a JV faces is the different management styles. Under normal circumstances, the two companies each hold 50% of shares in the JV and are entitled to appoint one director to the Board respectively. While these individuals come from distinct backgrounds, they deliver the same objective for the JV with various skill sets. To strive a balance in that, parties to a JV may consider appointing a chairman from the board to preside the meetings and directors of the JV will preside the board meetings on a rotation basis. By taking a rotating approach, directors appointed by each party will receive a chance to coordinate and develop regular board meeting agenda. This can enhance corporate governance practice. While it is crucial to bear in mind that when two cultures meet, conflicts are unavoidable. If parties are ready to make effort to merge the differences, this risk can be minimised.
Consider alternative dispute resolution but not litigation
Like many other business collaborations, things may not go as smooth as parties envisage at the beginning. Parties form a JV because they share similar vision and goal in a certain industry, it is unfortunate if parties do not honour their obligations under the JV. Therefore, it is of paramount importance for parties to consider in advance what to do should any undesirable outcome arrive.
If disputes arise, parties to a JV may still want to resolve amicably but not escalating the matters to court directly. Submitting to arbitration is a common way of alternative dispute resolution. One of its best features is confidentiality. From the business perspective, maintaining a good reputation is imperative. Further, under normal circumstances, resolving by arbitration costs less and is more efficient than court adjudication.
An alternative dispute resolution clause requires clear and unambiguous drafting. If parties to a JV choose to resolve disputes by arbitration, they may refer to sample clauses provided by their preferred international arbitration centre. These model arbitration clauses can be adopted where appropriate. Attention shall be drawn to features such as reference to rules governing the arbitration, the seat of the arbitration, the number of arbitrators and the language of arbitration. These can be freely determined by parties upon consensus.
At the end, it is about companies’ consensus in forming a JV. No one wants to terminate a collaboration in bad terms. Nonetheless, it is essential for parties to determine in advance the way to resolve a dispute. Interested parties in forming a JV should feel secure to carry a JV forward if their interests are well considered.
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