A joint venture is a business entity/ agreement entered into or created by two or more parties to accomplish a specific task or business goal while retaining their separate identities. There are varying reasons why companies create a joint venture agreement, it could be for the purpose of accessing a new emerging market; to gain profits margins by combining their assets and operations; accessing skills and capabilities, or to share the risk for major investments or projects. This concept makes it similar to a partnership where every risk, finance, profits are shared. The difference between a partnership and a Joint venture contract is the duration. A partnership exists as long as possible while a Joint Venture is terminated once the purpose it was created for has been realized or extinguished.
In a joint venture there is usually shared ownership, shared governance, shared profit returns and risk. For individuals, where two or more persons come together to form a temporary partnership or joint undertaking for the purpose of performing a particular project that partnership can be called a Joint venture Contract.
In the ordinary parlance there are steps to a Joint Venture Contract in Nigeria, which includes having to define the business strategy to be undertaking; selecting the partners after due diligence in checking their credentials; develop a joint venture deal that negotiates all terms and conditions; planning; and execution of the Joint Venture Contract. A distinct characteristic of a Joint Venture is that it is for a specific period of time, for example, in the oil and gas supply business, once the purpose is achieved, liabilities are discharged and profit is shared; and then the venture is extinguished.
The purpose of a Joint Venture is that every business or person has the strength, resources and advantage to deliver what is required for the effective delivery of a product or service to the market to foster economic relationships. Joint venture contract in Nigeria can be created in these instances:
- A foreign investor buying an interest in a local company in Nigeria
- A local company buying an interest in an existing foreign company
- Both local and foreign companies joining to form a new enterprise
Relevant Clauses or Terms in Joint Venture Contract/Agreement
A contract is duly required when a joint venture has been agreed upon. This is important for the smooth running of the venture. It guarantees clarity on the purpose of the joint venture, the parties, the rights of the parties, and the duties expected of each party. Below is the list of terms to be found in the Joint Venture contract.
- Name in which the joint venture business is to be conducted
- The principal office of business which most often is the registered address of a company
- The term duration of the contract is the date of commencement of the agreement and its duration which is subject to the disposal of the venture and satisfaction of all debts.
- The purpose of which the business is formed, it also restricts the joint venture to just that business except there is consent to do otherwise.
- The initial capital to be contributed by each partner according to his percentage interest, loans etc.
- Interest owned by each partner in the joint venture should also be clearly stated to avoid disagreements
- Profits and expenses- the net distribution of profits, losses and disbursement to be borne out of the joint venture.
- The powers to be exercised with the consent of the partners such as the power to borrow, third-party obligations, the power to acquire property and the power to sell or mortgage.
- Transfer of interest, where the parties agree that the joint venture is precluded from selling, assigning transferring any interest in the joint venture without the consent of parties, it should be clearly expressed in the contract.
- Legal Title to the Joint Venture assets usually remains in the name of the joint venture where applicable
- A confidentiality agreement, which is one of the most important clauses in a Joint venture Contract in Nigeria. In a Joint venture, ideas, knowledge, information and resources are shared that are confidential and not privy to a third party. This information is assets to parties concerned. So it is important to protect ones’ ideas/information by an agreement stating that during and after the duration of the Joint Venture, all confidential information be treated as a secret and not disclosed to any person except under very strict terms and conditions.
- Arbitration clause: this is also an important clause that must be found in a Joint venture Contract, especially where a business transaction is to be brokered. There are expectations of disputes likely to arise and arbitration should be provided for, upon agreement on the arbitrator or an arbitration panel, country, place and who would constitute the arbitration.
- Termination of a Joint venture: it is also an important element found in the contract stating the liquidation of the Venture and the manner of distributing proceeds upon determination of the contract.
- Governing law: this is important since a joint venture may involve parties from different countries and jurisdictions. The need to know the law applicable and the court to have jurisdiction over the agreement is sacrosanct.
A joint venture is a common form of foreign investment in Nigeria. Parties to a joint venture agreement in Nigeria can be individuals or incorporated bodies. It is very important that the various aspects listed above are carefully documented. A Joint venture agreement is entered into before the company is incorporated. It outlines the terms of the Joint Venture which forms the basis of the memorandum and Article of association of the proposed company.
Parties should ensure that the important clauses of the Joint Venture agreement such as sharing formula, management structure, obligations of the parties, termination, governing laws are entrenched into the joint venture contracts to make it legally binding on parties.
By Corporate & Commercial Law Department at Resolution Law Firm, Nigeria