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Joint Ventures In Singapore
In these hyper-connected times where territories and boundaries are increasingly porous and ambiguous, and especially where target markets and complementary businesses to partner with may not be within Singapore, more companies are choosing to do business by partnering up with other businesses.
In this article, we discuss the following matters:
- What is a joint venture?
- Types of joint ventures
- Joint venture partnerships
- Joint venture companies
- Project joint ventures
- Matters to consider before embarking on a joint venture
What Is A Joint Venture?
A joint venture is a commercial agreement between two or more parties to enter into a formal and contractual relationship to form a company or undertake to perform and complete a project. Although it may seem similar to partnerships, parties to a joint venture often opt not to bind one another in their dealings with third parties.
Types of Joint Ventures
There are three main types of joint ventures, as follows:
- Joint Venture Partnership
- Joint Venture Company
- Project Joint Venture
Let’s discuss these in turn.
Joint Venture Partnerships
This type of joint venture is a simple partnership, where both parties enter into Partnership Agreements, which set out in detail each partner’s obligations and liabilities.
Joint Venture Companies
This is the most common form of a joint venture. In such joint venture endeavours, shareholders in the joint venture company agree to the way the joint venture company is to be managed, governed and operated. This agreement is normally formalized in a Shareholders’ Agreement, which typically sets out the following important points:
- Contributions: the respective contributions of each party to the joint venture, with details of capital or assets provided.
- Rights: the respective rights of each joint venture party, with special attention given to the appointment of representatives from each party to the board of directors of the new joint venture company.
- Major Issues: the confirmation, usually captured in the Memorandum and Articles of Association as well, of exactly what percentage of majority shareholder consent needs to be obtained for important matters such as limits on annual expenditure, disposal of the joint venture company assets, important matters on which the board of directors’ approval is required, and the business object and purposes of the joint venture company.
Project Joint Ventures
Instead of a long-lasting joint partnership or a joint venture company, parties to a joint venture may instead opt to operate the joint venture as a project. In such a scenario, the project may be performed by the parties by way of a partnership that is not formally registered and which terminates upon the completion of the project. This structure also enjoys the advantage of being easily deregistered upon completion of the project. This kind of joint venture structure is normally seen for huge construction projects, where main contractors form up a consortium to undertake (and even bid for) the project.
Such project joint ventures are normally formalized in a Project Joint Venture Agreement, which carefully apportions different percentages of liability amongst the parties to the joint venture. It would be prudent to note that even when such percentages are carefully laid out, as long as the entity is actually registered in Singapore, the law would tend to construe them as full partners who share liability jointly and severally.
Matters To Consider Before Embarking On A Joint Venture
We shall now briefly explore the important considerations to keep in mind and resolve before starting the joint venture officially:
- Structure: decide on the corporate structure that best suits your goals. It could be a partnership or a separate company altogether.
- Contributions: How much does each partner/party bring to the table? What is it worth in terms of rights in the joint venture?
- Representation: How many representatives does each party have on the board of directors or management committee?
- Shareholding: How many and what type of shares are allotted and issued to each party? New shares, if at all issued, are typically reserved for the original joint venture parties. You may also ask an experienced lawyer for further strategies with which you may prevent share dilution in future.
- Organization and Management: Decide on the types and respective frequencies for board meetings, the quorum required, the chairman, voting processes and notice periods. Decide on the types and respective frequencies for shareholder meetings, the quorum required, the chairman, voting processes and notice periods.
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- Administrative Matters: Decide on the location of the registered office, the corporate secretary, the appointment of auditors and the selection of the financial year.
- Transfer of shares between each other: Set the procedure and pricing mechanisms for such transfers, if at all envisaged and agreed upon.
- Competition: Make sure that each joint venture party is not directly or indirectly competing with the joint venture business.
- Dispute Resolution: Where joint venture parties disagree on major issues, especially when they hold equal bargaining positions, mechanisms should be put in place to ensure that deadlocks are broken effectively and quickly without affecting the joint venture business. Where there are defaulting parties, it should be clear from the very outset how such defaulting parties would be taken to task. This very often means that the defaulting parties are compelled to exit the joint venture by selling their shares to the non-defaulting parties at discounted prices. You may also include clauses and stipulations requiring all parties to refer the matter to mediation, arbitration or litigation in the courts.
- Choice of law: Depending on the nature of business and the laws of the jurisdictions in question, you may find that the laws of another country would be more advantageous to the joint venture. Always approach an experienced lawyer to present viable options and possible repercussions to your business.
- Decisions: Come up with a list of major decisions that cannot be made except with unanimous or majority consent of all parties to the joint venture. These could include:
- Amendments to the Joint venture agreement and Memorandum and Articles of Association;
- Sale or transfer of all or substantial portions of the assets, business or contractual undertakings of the joint venture;
- Liquidation, re-structuring, dissolution of the joint venture;
- Distribution of profits by dividends, capitalization of reserves and distribution of surplus funds;
- Decisions to issue, take up or disburse loans, credit, guarantees, mortgages,
- Alteration of authorized share capital;
- Material changes in the nature of the business of the joint venture;
- Subscription, purchase, acquisition of shares, debentures, mortgages, charges or other security;
- Commencing legal proceedings, and withdrawing/resolving/settling the same;
- Admission of new shareholders, new board members, the new member of management committees; and
- Amendments to voting rights amongst shareholders and board members.
Conclusion
It is always exciting when you start something new and embark on a joint venture, especially when the same means that you will explore new markets and build something bigger with the assistance of joint venture partners. However, you should always proceed with caution and ensure that your joint venture starts off on the right footing, with all legal issues and procedures in place. This always starts with the advice of an experienced lawyer.
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