Joint venture agreement

Oct, 10 2020

Joint venture agreement is one of the key documents that have a crucial meaning in building a joint venture. For this reason, to develop a draft which will protect your interests you should answer the questions and take into account the factors listed below.

Who are your partners?

The company studies the competitors’ technologies on the market and comes to the conclusion that for example, a certain technology is not available on the Russian market. However, this technology is owned by a foreign company interested in entering the Russian market together with a local partner. The foreign company wishes to expand the geography of its customers and is looking for a partner in Russia to enter a new market.

In this case, partnership is beneficial to all: a foreign company will outstrip its competitors by taking over the Russian market, and the Russian company will develop its brands portfolio.

What should you agree on with a partner?

Before starting negotiations with a partner, it is necessary to outline a list of fundamentally important issues to be reflected in the joint venture agreement. Of course, the list can be more detailed depending on each deal, but you need to discuss at least the following points:

  • Strategic vision of a joint venture;
  • Product of the joint venture, its quality and value;
  • Target customers;
  • Geography of the joint venture;
  • Business plan of the joint venture;
  • Contributions and role of each joint venture member;
  • Partners of the joint venture;
  • Non-competition terms between the members;
  • Starting date of the joint venture;
  • Period for the start of product delivery to the market;
  • Functional areas of responsibility in the joint venture and its management bodies;
  • Legal form of the joint venture;
  • Corporate rights and obligations of the members and applicable law.

Start of the negotiations process

Initially, it is necessary to agree with the partner on regulations and documentation flow. Teams of both parties can be authorized to communicate directly with each other. In this case, it is important to keep the progress status information up to date and to maintain the same level of awareness within the team.

The schedule may be affected by the partner’s internal procedures including compliance to approve the partnership establishment and conditions of the joint venture agreement. Therefore, the teams are encouraged to provide each other with information on how each party’s internal procedures may affect the timing of negotiations.

Intentions of the parties

At the initial stage, the parties usually sign two documents – a memorandum of intent and a non-disclosure agreement.

In a memorandum of intent (or memorandum of understanding, letter of intent), the parties state their inherent competencies, confirm their mutual interest in establishing a joint venture and conducting negotiations, determine the applicable law and jurisdiction to consider the parties’ disputes. The Partner may also insist that the Russian company does not conduct any negotiations with competitors for the period of this arrangement validity.

The memorandum should specify a period during which the parties will carry out a feasibility study on the possibility of creating a joint venture. 

To protect the information, the parties enter into a non-disclosure agreement. The agreement defines a range of issues on which information is provided, list of persons to whom such information can be provided and legal implications if the agreement is terminated and the parties make a decision to withdraw from the partnership.

The agreement also defines the channels of information transfer. Please note that global corporations may use protected but not certified communication channels in Russia. 

As the parties may engage external consultants, the agreement must include special conditions on consultants and procedure for transfer of information to them.

Joint venture establishment

As a rule, if a partner is entering the Russian market for the first time, it will be useful to prepare a short presentation for the partner about joint-stock companies and limited liability companies describing differences in regulation and providing recommendations on the choice of a legal form.

If the Russian company intends to minimize the timeline for launching a joint venture and create a new legal entity for the future joint venture by offering a partner to buy a stake in it, the partner will have to conduct an audit not only in respect of the company, but also in respect of this new legal entity. Therefore, the time saving effect may not be achieved.

Joint venture agreement

Following the results of the feasibility study stage and the negotiations, the parties conclude a joint venture agreement.

The joint venture agreement involves conditions on the objectives of the joint venture, product, consumers, market geography, conditions on non-competition between partners, a joint venture creation plan and obligations of partners to transfer production of their items to the joint venture.

The agreement shall be accompanied by a business plan agreed upon by the parties, product delivery categories for consumers, drafts of corporate documents (articles of association, minutes of the founding meeting, corporate agreement of members) and drafts of agreements to be concluded in the future. These agreements may be including but not limited to:

  • Equipment purchase and sale contracts;
  • Supply contracts;
  • Technical support contracts for the joint venture;
  • License agreement;
  • Service agreements. 

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