Your Guide to Joint Venture Agreements in Singapore
If you are a small business owner who wishes to enter into a joint venture agreement with another company, you may be wondering how best to go about doing it. This article will discuss:
What is a Joint Venture Agreement?
A joint venture agreement typically refers to an agreement where two or more individuals or businesses (whether foreign or local) collaborate in a venture for specific purposes, usually to complete a commercial task.
There are many advantages of choosing to enter into a joint venture. These include sharing strengths (e.g. expertise, capital, access to market), sharing business risks (e.g. risk of project failure, where a company may not be able to or have the financial means to manage such risk alone) and increasing competitive advantages in the marketplace.
For example, Singapore Airlines (SIA) and German airline Lufthansa entered into a joint venture agreement in 2016 to increase destination points for passengers of both airlines. The objective was to enhance passenger air services between the destinations that SIA and Lufthansa operate in, which would increase both parties’ outreach to passengers.
Separately, Singapore Technologies Engineering entered into a joint venture with Israel Aerospace Industries, one of Israel’s main aerospace and defence companies, in 2020. The purpose of their joint venture was to leverage the strengths and track record of both parent companies to market and sell advanced naval missile systems.
Types of Joint Ventures
Singapore does not impose any restrictions on the types of joint ventures that are permissible. Nonetheless, joint ventures generally take either of 2 forms:
- Corporate joint ventures; or
- Contractual joint ventures.
The choice between the 2 will generally depend on the parties’ commercial objectives.
1. Corporate joint ventures
Corporate joint ventures require the formation of a separate legal entity to act as the vehicle for the collaboration. Generally, this will often take the form of a private limited company, but it can also be structured as a general partnership, limited liability partnership or a limited partnership.
Generally, for corporate joint ventures that opt for the structure of a private limited company, the main incorporation document needed is the company’s constitution. This typically sets out the objects of the company and governs the rights, powers, duties and obligations of the company, its board of directors and shareholders. Nonetheless, it is common for parties to separately enter into a joint venture agreement to cement each party’s rights and obligations in the joint venture.
The company will also need to comply with the regulatory framework for private limited companies, which you can read more about in our other article.
For corporate joint ventures that opt for the structure of a general partnership, limited liability partnership or limited partnership, the rights and obligations of the partners are governed by the partnership agreement.
Aside from certain important terms identified in the next section that should ideally be included in the partnership agreement, it is imperative that the agreement complies with the respective statutory legislation (whether it is the Partnership Act, Limited Liability Partnerships Act or the Limited Partnerships Act). For example, there are statutory restrictions concerning the distribution of profit or repayment of capital by limited liability partnerships.
2. Contractual joint ventures
In contrast to corporate joint ventures, contractual joint ventures do not involve the setting up of a separate legal entity.
Instead, parties contractually undertake to collaborate in a specific project for a fixed period of time, and their rights and obligations are principally regulated by the joint venture agreement.
Some Important Terms A Joint Venture Agreement Should Include
For the joint venture to provide smoothly, the parties should ensure that the joint venture agreement is drafted comprehensively and clearly states the fundamental rights and obligations of both parties.
While the parties are generally free to state the terms of their agreement, there are certain terms that should ideally be present:
Purpose of the joint venture
Parties should clearly set out the purposes and goals of the joint venture in the agreement. This helps to prevent misunderstandings and future disputes over any business later undertaken by the joint venture.
Management of the joint venture
This clause relates to how decision-making takes place in the joint venture. It should identify the parties who have the authority to make business decisions on behalf of the joint venture, particularly in unforeseen circumstances.
Provisions to address any deadlocks or disagreements in management may also be necessary. For example, to overcome the possible situation of a vote being deadlocked (i.e. tied), the chairman of the management board or a neutral third-party expert can be given the deciding vote to resolve the deadlock.
In the absence of provisions to address any disagreements, a party may allege that any reactive action taken by the management was disadvantageous or oppressive to him, which further exacerbates the discord between the parties. Providing for these eventualities in the beginning helps minimise confusion and disputes over the decision-making process at a later stage.
The agreement should clearly state the respective contributions of the parties to the joint venture. In addition, it should state a mechanism for further injections of capital if it is subsequently necessary, including contributions from whom and in what form (e.g. cash, expertise).
These provisions will clarify any matters regarding capital contribution at the outset and prevent any later disagreements which may arise (e.g. over the specific amounts contributed by each party, or the obligations of the parties to inject further capital).
Allocation of profits and risks
The parties should clearly state in the agreement how any profits and risks generated by the joint venture will be allocated between the parties. This decreases the likelihood of future disputes arising over the allocation of profits and risks.
The agreement should ideally state the obligations of the parties in complying with any regulatory requirements. These regulatory requirements could be those under competition law, tax law, as well as laws governing the corporate vehicle (in the case of a corporate joint venture).
Stating such regulatory compliance obligations of the parties in the agreement ensures that the joint venture adheres to the requisite statutory framework and does not fall afoul of the law.
This ensures that parties can resolve any disputes efficiently and cost-effectively without needing to resort to litigation, which may be lengthy, public, expensive and damaging to the parties’ long-term relationships.
Governing law and jurisdiction
In addition to a dispute resolution clause that determines the mechanism by which disputes are resolved, it is ideal to include a clause that states the governing law of the dispute. This governing law will be used to interpret the terms in the joint venture agreement, the legal effect of which may be different depending on which jurisdiction’s laws are chosen.
It is also beneficial to include a clause that states the jurisdiction in which the dispute will be heard. This clause is particularly important if the parties come from different jurisdictions, as it may not be immediately clear whether a dispute should be heard in either party’s jurisdiction or a neutral jurisdiction.
As joint ventures are typically fixed in duration, there should be a clause that states the procedure for terminating the joint venture prematurely. For example, it may state that one party has to notify the other(s) in writing that it wishes for the joint venture to be terminated early.
Further, adequate exit mechanisms should be provided to allow one or both parties to exit the joint venture upon the occurrence of certain events, such as:
- A deadlock that cannot be resolved through any existing mechanisms arises between the parties
- The parties’ relationship sours
- One party becomes insolvent.
Possible exit mechanisms include the acquisition of one party’s interest by the other, and the dissolution and sale of the joint venture.
The termination clause can also include how any assets or capital will be valued and distributed upon termination.
For corporate joint ventures, there are certain procedures that must be satisfied when the joint venture is terminated, such as complying with statutory liquidation regulations. For example, the liquidation of a private limited company has to be completed in accordance with the Companies Act.
Similarly, the winding up of a limited liability partnership has to follow the procedures in the Limited Liability Partnerships Act.
Common Mistakes When Drafting a Joint Venture Agreement
There are several common mistakes when drafting a joint venture agreement. One of them is the failure to plan for an exit strategy.
As mentioned earlier, it is possible for the parties’ relationship to sour or for unforeseen circumstances to arise subsequently, and it is imperative that parties have a way of exiting the joint venture as painlessly as possible.
In addition, it is advisable that parties draft their joint venture agreement in a way that provides a clear working framework to govern their relationship. This framework should ideally include the joint venture’s purposes, the method of sharing returns, the decision-making process for business matters, as well as dispute resolution and termination mechanisms. Without this fundamental understanding between the parties, the joint venture relationship may be prone to breaking down without any means of reconciliation.
However, it may not be necessary for the parties to exhaustively state the parties’ rights and responsibilities, such as comprehensively stating every single duty of each party to the joint venture. This is provided that there are mechanisms in place for the parties to suitably react to any unforeseen circumstances that may arise.
Executing a Joint Venture Agreement
When executing a joint venture agreement, there are no formalities required as long as the contract is validly formed. Nonetheless, the agreement is generally signed by all parties to the joint venture.
Can You Draft a Joint Venture Agreement Yourself?
It is possible for parties to draft a joint venture agreement by themselves. Nonetheless, it is strongly recommended that you enlist the help of a corporate lawyer in drafting the agreement which forms the foundation of your relationship with your partner(s).
A corporate lawyer will be able to advise on a suitable structure for your joint venture and any ancillary legal concerns that may be relevant to the agreement (e.g. tax and competition issues), as well as ensure that the rights and obligations of the parties as stated in the agreement are legally valid.
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