Joint Venture difficulties in Forming Corporate Governance Structure

by Author

Edited and Published by Jeet Sinha

INTRODUCTION

In current times the importance of corporate governance is much bigger than we can imagine because it is one of the crucial aspects in corporate laws but entities do not give much importance to this aspect. The difficulty a corporation faces when there is an increase in the conflict between shareholders and board of directors as both have different perspective or outlook on a specific matter, even more trouble when both of them are not able to reach certain level of understanding in diverse business or corporate culture.

Difficulty a Joint Venture faces when it’s newly assigned board of directors and the level of executive faced in reaching certain level of understanding in this culture. The intentions of this research paper to show that the laws in country and corporate governance is different for different companies as such specific to Joint Venture. Through some examples, it will explain what kinds of difficulties companies face while making a Joint Venture.

If Indian company is entering into a Joint Venture with a Foreign corporation, major difficulties will be the culture differences, different managerial tactics, both of the corporation have different cultures and tactics to deal with a situation because different regions, laws etc. so, the concept of corporate governance shows the importance of each opinion as well as it helps the corporations to reach certain level of understanding where they can work coordinately even at a situation of deadlock. The lack of understanding between the board of directors and the shareholders makes it more difficult to stand in situation of Deadlock.

BLUEPRINT OF MAIN CLAUSES OF JOINT VENTURE IN WHICH THERE CAN BE DIFFICULTIES TO FORM GOOD CORPORATE GOVERNANCE STRUCTURE

Objects

The main object of the ______ (name of type of agreement) as stated in its memorandum of association is the development, manufacture and distribution of ______(type of work) as well as of other complementary products and accessories (hereinafter referred to as “the PRODUCTS”) and the ______ (name of type of agreement) ________ and _______agree ______ (name of type of agreement) in _____(year) that any change in the said business activity of the ______ (name of type of agreement) will require the written consent of ________ and _______.

If any party in the Joint Venture wishes or wants to change or modify the Object clause in the Joint Venture agreement so, there must be a good corporate governance structure to keep an eye on the procedure of the same. If there is a situation come, when both the executives of the companies not able to work coordinately in changing the objects of the Joint Venture so, there must be a situation of Deadlock which can be resolved through a governance structure.
One of difficulty while forming the JV is opinion and interest of both the companies while forming or changing an object clause. For example, a corporation needs it very specific because of interest and other corporation need it to be very wide, again because of the opinion to get more opportunities in future.

Transfer and Sell of Shares

Neither Party shall mortgage, pledge or charge the shares, except as collateral security to secure temporary loans obtained in the ordinary course of business, without the prior written authorisation from the other Party.
_______ and _______ agree that there will be a restriction on the transfer of shares to the extent that neither of them will be entitled to transfer its shareholding wholly or in part to any other person or party, save and except to the extent as follows:
The transfer of shares within the ________Group and within the ________Group shall be permitted with the prior written consent of the other party, which consent shall not be unreasonably withheld and subject to the condition that _______ and ________ shall at all times be responsible and liable to discharge all their obligations to the _______ (name of type of agreement) and to each other. The word “Group” shall mean only the parent, holding, subsidiary, associate or affiliate company of ______or _______ as the case may be.
Except as provided in clause ________,_________ (specific clause) shall not sell or otherwise transfer to any third party all or any part of the shares owned by it in the _______ (name of type of agreement) unless the said shares have first been offered to _________(name of the party) at the fair market value as determined on the basis of the relevant audited financial statements of the _______ (name of type of agreement) and certified in writing by the auditors of the _______ (name of type of agreement) who in so doing, shall act as valuers and not as arbitrators or such value as is determined or permitted by applicable law ______ (specific law) shall have twelve weeks (12) after the receipt of the notice to accept such offer and, subject to its obtaining all necessary corporate, Government and other approvals, to pay in cash the full purchase price of the shares offered for sale within four weeks of receiving such approvals. If _______ (name of the party) shall decline to accept such offer, then in that event _______ (name of the party) will be entitled to offer the said shares to any third party (herein called “the Permitted Transferee”), PROVIDED however, that if _______ (name of the party) is unable to acquire any shares so offered by _______ (name of the party who offered the shares) because of restrictions imposed by the Indian Government, _________ (name of the party) shall, in that event, have a right to require. _________ (name of the party) to sell the shares so offered to persons designated or approved by ________(name of the party) who are legally capable of acquiring the said shares. PROVIDED further that, offer of shares for sale by _________(name of the party) to a third party as aforesaid shall not be at a price lower than that which had been offered by _________to _______ for a period of six (6) months from the date of such offer. After the expiry of the period of six (6) months, the offer shall expire.

Related to this clause, when two corporations decided to enter into a Joint Venture to form a new corporation for specific purpose so, the new corporation has to offer their shares to gain money to use to fulfill their purpose.
If the shares will be allotted to the shareholder so, there is a need to transfer or allotment of shares mechanism and to run it smoothly there must be a good corporate governance system in the corporation.
Difficulties in forming the governance system can be the cultural process and bylaws of the country. For example, if an Indian corporation has entering into Joint Venture with a foreign company so, there will be different culture and bylaws they are following into their respective corporations.
Both of the corporations are binding by their country bylaws as well as in one country there must be liberal process follows to transfer the shares and in another, country there must be strict steps needs to be taken before transferring the same.

Board of Directors

The Board of Directors of the _______ (name of type of agreement) shall consist of ______ (no. of directors) Directors or such other even number, as may be mutually agreed.
So long as _______or other Group Companies shall own between forty (40%) per cent and fifty (50%) per cent of the total equity share capital of the _______ (name of type of agreement), ______ (name of the party) shall have the right to appoint ____ (no. of directors) Directors (or other number as per clause 6.1); if ______ (name of the company) and or other Group Companies’ shareholding falls below forty per cent (40%) but not below twenty five per cent (25%), ______ (name of the company) shall have the right to appoint ____ (no. of directors) Director; under twenty five per cent (25%) will not appoint any director; these shall not be liable to retire by rotation, ______ (name of the company) shall have the right to remove any such Director or Directors and to appoint another or others in his or their place and fill any vacancy in the office of such Director or Directors. If ______ (name of the company)’s equity stake falls below twenty five per cent (25%), ______ (name of the company) may nonetheless invite ______ (name of the company) to appoint a director to the Board for consultative purpose. Such a director will, however, no longer possess the powers as per Clause 7.
Similarly, so long as ______ (name of the company) or other Group Companies shall own between forty (40%) per cent and fifty (50%) per cent of the total equity share capital of the ______ (name of type of agreement), ______ (name of the company) shall have the right to appoint ____ (no. of directors) Directors (or other number as per clause 9.1); if ______ (name of the company) and or other Group Companies’ shareholding falls below forty per cent (40%) but not below twenty five per cent (25%), ______ (name of the company) shall have the right to appoint _____ (no. of director) Director; under twenty five per cent (25%) will not appoint any director; these shall not be liable to retire by rotation ______ (name of the company) shall have the right to remove any such Director or Directors and to appoint another or others in his or their place and fill any vacancy in the office of such Director or Directors. If ______ (name of the company)’s equity stake falls below twenty five per cent (25%), ______ (name of the company) may nonetheless invite ______ (name of the company) to appoint a director to the Board for consultative purpose. Such a director will, however, no longer possess the powers as per Clause 4.
The _______ (name of type of agreement) shall also have a Vice Chairman who shall preside at meetings of the Board of Directors or of the shareholders in the absence of the Chairman. The Vice Chairman shall be a Director selected mutually by _________ and _______
In the event of an equality of votes at any meeting of the share – holders or of the Board of Directors, the Chairman shall not have a second or casting vote.

Difficulties in framing of corporate governance structure in Joint Venture is the for the Board of Directors, generally the executives of both the corporations come into the picture that these directors from both of corporation while be in the governance structure.
One more major difficulty is the shareholding percentage of the director in the new formed corporation, if it was decided that only person who holds more than 25% stake can invite another director but this can become an issue while forming governance structure because framing the same the mindset of two different corporations can be differ while deciding this percentage.

Powers of the Board

Neither the JVC itself, nor the JVC’s Board of Directors, nor a committee thereof, (whether at a Board meeting or at a committee meeting or by circular resolution or otherwise) nor its Managing Director / Chief Executive Officer nor any other Director or Officer shall take any action in respect of any of the matters specified below, except upon the affirmative vote of a majority of the Directors, which majority shall include at least one (1) of the permanent non-retiring Directors respectively appointed or nominated by _______and_____ under clauses 6.2 and 6.3 hereof :

Employment or removal of the Chief Executive Officer or Managing Director / Whole-time Director of the JVC, or the Heads of –

(a) Marketing, or

(b) Finance, or

Negotiating for or taking long term loans (for a term exceeding 24 months) or an amount exceeding Rs. ________(rupees __________________ (in words) or altering any material term or condition of any such loan.
Creating any mortgage, charge or other encumbrance on or in respect of any of the _______ (name of type of agreement)’s properties or assets.
Increasing or reorganising the authorised or subscribed share capital of the _______ (name of type of agreement).
The issue of further shares from the authorised, but unissued share capital.
The issue of preference shares or debentures, whether convertible, non-convertible or partly convertible.
Short term borrowings (term not exceeding twenty-four [24] months), in excess of ten per cent [10%] of the amount of the gross sales turnover of the _______ (name of type of agreement) as disclosed in its latest audited Profit and Loss Account for the last preceding financial year of the _______ (name of type of agreement), (hereinafter referred to as ‘the Turnover’).
Recommending a dividend or paying an interim dividend.
Filling vacancies on the Board of Directors other than those Directors nominated or appointed by _______or _______.
Entering into contracts with ________or ________ companies, firms or other persons affiliated or interested with or related to either of them.

Corporate governance structure is needed the most specific to these powers because it keeps an eye as watch dog on the board of directors that they are using their power as per MOA and AOA.
As written in clause 4, that it gives power to the board of directors but the difficulty in framing or setting up the good governance structure is in the governance structure there will be director’s or KMP’s from both the corporation so, they will give support to their original corporation in case of any violation of clause 4.
There might be a situation come where the governance structure could support the newly formed entity but again it depends on the intention as well as their interest and it can be only resolved by clearly stating the interest & goals before entering into Joint Venture also before framing good corporate governance structure.

Deadlock

If no resolution or decision can be passed or taken by the Board at its meeting in respect of any of the matters listed in Clause 8 or clause 4.3 of this Agreement, as the case may be, giving rise to a deadlock or an impasse between ________and________, the Parties shall convene another Board meeting within a period of 20 days from the date on which such deadlock or impasse arose, and shall use their best efforts to resolve such deadlock or impasse to their mutual satisfaction through negotiations conducted in good faith. If at such Board meeting, the above deadlock or impasse continues to remain unresolved, then and in such event, within sixty (60) days of such deadlock or impasse continuing, the Parties shall hold a special meeting of the Chairman of _______ (name of the company) and the Managing Director of _______ (name of the company) to resolve the deadlock or impasse. Any decision taken at such special meeting shall be final and binding on the Parties. In the event such deadlock or impasse is not resolved at such special meeting, then the deadlock or impasses shall be referred to arbitration in accordance with the provisions of Clause ____ (arbitration clause no.) of this Agreement.

When there is a situation arising between the corporation that their executive boards are not able to find a conclusion because of different interest, goals, opinion etc. this situation is known as Deadlock.
Difficulties the corporations facing while deciding the governance structure for solving this kind of situation is different techniques because of different culture as above stated. For example in India there might be some sort of strict technique we use but in foreign they believe in liberal way so, the governance structure should be the mixture of both as well as it takes time and mindful set to framing these kind of corporate governance structure.

Non-Competition

_______ (name of the company) covenants that during any period in which _______ (name of the company) holds shares in the _______ (name of type of agreement) or the _______ (name of type of agreement) is continuing in the business of the manufacture and sale of the Products in accordance with the Technical Collaboration Agreement, ______ (name of the company) will not control or engage directly or indirectly in accordance with the Technical Collaboration Agreement either as owner, partner, shareholder or otherwise, save as a nominal shareholder for information purposes, in any business carried on in India competing with the Products. _______ (name of the company) will ensure that this applies also to other companies belonging to the same group as ______ and its subsidiary companies.
_______ covenants that as long as it holds shares in _______ (name of type of agreement) it will arrange to supply components and machinery to the _______ (name of type of agreement) against written orders and on payment at prices mutually agreed from time to time.
______ covenants that so long as ____ holds shares in the _______ (name of type of agreement) or the _______ (name of type of agreement) is continuing in the business of the manufacture and sale of the Products in accordance with the Technical Collaboration Agreement with ______, or subsequent agreements with ______ of similar nature ____ shall not either directly or indirectly enter into any agreement or arrangement with any party to manufacture and / or to sell any similar or competing Products. ____ will ensure that this applies also to its subsidiary companies.
______ covenants that as long as it holds shares in the _______ (name of type of agreement) it will arrange to supply components and machinery to the _______ (name of type of agreement) against written orders and on payment at prices mutually agreed from time to time.
_______ and ______ covenant that they will similarly not enter directly into or allow the _______ (name of type of agreement) to enter into any agreement or arrangement with any party that could be prejudicial to the interests of either Party.
________ further agrees that it shall not license or transfer any technical knowhow in respect of any of the PRODUCTS for the manufacture of the same in India by any third party as long as ______ or any other company in the ______ group has an equity interest in the _______ (name of type of agreement) unless for imperative commercial reasons and then only with the prior written approval of the _______ (name of type of agreement), which consent shall not be unreasonably withheld.

In the case of Non-Competition there can be a lot of difficulties corporations needs to face wile forming a good governance structure.
Firstly, whatever time has be decided between the corporations that no corporations will compete with each other for the next few years in the same business but if anyone of corporation do the same so, the governance structure needs to come in the picture to take the decision on penalty etc. so, the difficult part in this is decision making because in this governance structure there must be persons from the corporation who is in the default.
Secondly, there can be conflict of interest, which means that one corporation will not open the same business but there can be similar business with different name so, in that case while forming the governance it should be kept in mind that the members who are in governance structure should have prior experience to deal with this kind of situation.
Lastly, similar as above there can be identical products in which corporations do businesses name so, in that case while forming the governance it should be kept in mind that the members who are in governance structure should have prior experience to deal with this kind of situation.

Confidentiality and Exclusivity

Neither ____ nor ______ will discuss or negotiate with any other corporation, firm or other person, or entertain or consider any inquiries or proposals relating to the manufacture in India of the PRODUCTS save with prior written agreement of the other Party.
______ and _______ agree not to discuss, negotiate or enter into any similar arrangement for the manufacture, marketing or sale in India of the PRODUCTS without the prior written agreement of the other Party.
All proprietary or confidential information shall be transmitted in writing with a marking on such transmittals of the term ‘confidential’ or words to that effect. In the event proprietary or confidential information is transmitted verbally, the transmitting party shall within thirty days after such verbal transmission, advise the receiving party, in writing of the fact that such information is proprietary and confidential. Proprietary and confidential information shall not include information which has been disclosed to third parties, is previously known to the receiving party, or which the third party learns of through a third party who legitimately possesses such information, or which is independently developed by the receiving party. In order to further the _______ (name of type of agreement) contemplated herein, it may be necessary for _____ and ______ to reveal to each other certain information concerning operations or technical knowhow which is of a proprietary or confidential nature. Both ____ and ______ agree to keep confidential all proprietary and confidential information disclosed by each to the other and not to disclose any such information for their own purposes. At each other’s request, both ____ and ______ will promptly return any drawings, plans, specifications, equipment, lists or other documents that may have been supplied by one to the other.

There can be some sort of difficulty while forming the corporate governance structure related to confidentiality such as what information can be considered as crucial or not, as it depends on the point of view and the nature of information.
The executives of both the corporations needs to coordinate firstly then negotiate on the same.

Representations and Warranties

Each party represents and warrants that it is permitted by its respective corporate charter and incorporating documents to enter into this Agreement, and is not restrained, prevented or inhibited by any contract or arrangement to which it is a party from entering into this Agreement or undertaking the obligations herein contained.
Each signatory to this Agreement represents and warrants that he is duly authorised by the party for and on whose behalf he is signing this Agreement to execute the same in a manner binding upon the said party and that all corporate approvals and procedures necessary for vesting such authority in him have been duly obtained and complied with.

One of the difficult part for this clause is to form corporate governance is that the “Negotiations” on the Representations and Warranties. The corporations needs to come on table and decide what needs to be cover under the same or not, also they needs to understand the requirements of each other corporation.
While forming the governance structure the major difficulty is understanding between both the corporations.

Indemnity

All warranties and representations made in this Agreement and in the Assignment of Business between ____ and the _______ (name of type of agreement) (the ‘Assignment’) may be enforced against ____ either by the _______ (name of type of agreement) or by ______. All indemnities on the part of ____ expressed or implied in this Agreement, and in the Assignment shall apply to and be enforceable not only by the _______ (name of type of agreement), but (subject to applicable Government approvals) by ______.

Same as above understanding is the biggest stone to digest to form a good corporate governance structure.

Notice

All notices and other communications in respect of this Agreement shall be given in writing in English by registered Email, Gmail, airmail, postage prepaid, or by telex or facsimile to the party entitled thereto at its address set forth below, or such other address as it shall hereafter designate for this purpose :

______________________ (name of the company)

Place: ____________, Country: _____________

Title: _____________________________

SIGNED AND DELIVERED for and on

Behalf of the within named

__________________________ by (position)

Shri. _________________________, (name)

CONCLUSION

This paper covers the importance the good corporate governance structure in this corporate business or culture. The joint venture is a document which is crucial to maintain and sustain business as well business relationship. In joint venture there are plethora of aspects in which the corporations finds difficulties to form a good corporate governance structure. The author by this paper highlights the different important clauses under which kind of difficulties corporations can face.

The author would like to conclude this paper by highlighting some point on which the corporations needs to focus to avoid certain difficulties while forming a good corporate governance structure in joint venture.

Firstly, the understanding between the executive of both the corporations as well as the shareholder and executive of the newly formed corporation. They need to understand the importance of understanding in joint venture as everything can be achieved by understanding.

Secondly, the “Negotiation” the corporations need to adopt certain negotiations techniques as per their goals such as: collaboratively etc. The corporations can use these kind to techniques to avoid upcoming difficulties while forming good corporate governance structure.

Lastly, the experienced people should put and use their experience while forming the governance which will help the corporations to work effectively and co-ordinately without facing any difficulties in forming or establishing a good corporate governance structure.

To read more drafting related topics click here. To see drafting related videos click here.

Legal SYNK