Equity joint venture

Oct, 10 2020

An equity joint venture (EJV) is an agreement between two companies to enter into a separate business venture together. The business structure for an EJV is a separate limited liability company (LLC). This shields each partner and business from liability. Each partner participates in gains and losses according to the percentage equity ownership they have in the joint venture. 

The purpose of the EJV is to diversify risk, provide capital-raising opportunities, reduce barriers to entry and create economies of scale while establishing a definitive time the joint venture exists. 

Equity joint ventures provide small companies the chance to combine forces to create a larger company without actually merging together. This allows them to take on larger projects than what they can do individually. Additionally, it reduces the risk to each company because the LLC in the new EJV is subject to all the risk. The EJV also provides access to more capital because banks and investors will look at the combined financial strength of the companies’ balance sheets and profit-and-loss statements.

It is also important to distinguish equity joint venture from non-equity joint ventures. The latter is usually based on a purely contractual agreements between companies where no equity structure or separate joint venture company is created.

In fast-moving industries like software, electronics, financial services, pharmaceuticals, and retail, non-equity alliances are the dominant form of partnership. These industries thrive on purely contractual relationships that offer a quick way to access capabilities and markets without the time, rigidity, and other issues associated with creating a separate company with a counterparty. Indeed, single non-equity alliances are often being structured as part of broader alliance ecosystems, where firms are assembling complementary and sometimes overlapping partnerships to introduce entirely new business models. 

Benefits of Equity Joint Ventures

  • Lower barriers to entry. High costs and specialization required to begin business in certain industries or projects. Each company can provide its area of expertise and bring in a portion of the capital and equipment necessary to complete the project.
  • Combining forces also creates economies of scale, which drive down per-unit production costs. Lower production costs enhance margins and profits earned by each company that neither company could have garnered alone.

Stages or Joint venture creation

The process of creating a joint venture can be divided into the following stages:

  • Goals setting
  • Search and selection of partners
  • Negotiations of conditions and preparation of a letter of intent
  • Carrying out due diligence
  • Preparation of incorporation documents and registration with the authority

What is needed to create a joint venture

Normally, after the letter of intent has been signed and the essential conditions of the joint business have been determined, the parties conclude an agreement on joint activities, where they undertake to jointly create a business company or a similar structure, or directly agree on the provisions of the charter and register the company.

The following documents are required for registration:

  • the resolution of the founders;
  • notarized copies of incorporation documents;
  • a notarized copy of the decision of the owner of the property to establish an enterprise or a copy of the decision of the body authorized by him, notarized copies of the incorporation documents of each domestic legal entity participating in the creation;
  • a document on the solvency of a foreign investor, issued by the bank or other financial institution (with a certified translation into Russian);
  • an extract from the trade register of the country of origin or other similar proof of the legal status of a foreign investor in accordance with the legislation of the country of his location, citizenship or permanent residence.

Joint venture structure

Russian legislation has no strict structure for joint venture. The participating companies are allowed to establish it by themselves.

For example, the EJV structure may look as follows:

  • the shareholders’ meeting (the supreme governing body)
  • Board of Directors
  • General director
  • An audit committee (optional)

Risks of establishing and operating a joint venture

  • less freedom in decision-making and action;
  • the complexity of a full-fledged partnership with potential competitors of investors; 
  • the possibility of a takeover by a stronger company.

The efficiency of the joint venture can be negatively influenced by some factors, which are largely the result of differences in economic models and the way of thinking of foreign partners: partners misunderstanding of goals and objectives; conflicts existing or arising in the process of interaction; differences due to cultural differences, entrepreneurship and management style. However, in general, EJV has proved itself to be a pretty much effective business structure.

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