A joint venture agreement is a contractual agreement based on which two or more persons or entities undertake joint economic activity in order to achieve joint profit, while jointly controlling the achievement of that goal. Contractual or co-ownership character is also indicated by two basic forms of joint venture. These are unincorporated or contractual, and incorporated jointly venture. This also outlines the difference between the Anglo-Saxon law in which a joint venture is considered only an incorporated joint venture, and a continental law in which the joint venture may be the result of either a contractual or proprietary connecting of economic operators.
Unincorporated and incorporated joint venture
Contractual joint venture or consortium is the earliest manifestation of the joint venture which has historically been assigned the term risk, so it is often called joint adventure. The term joint adventure was used for associations of economic entities from few countries, which were formed to intensify overseas trade after the great geographical discoveries. Today, this term is no longer used, although the one of the motives of entering into joint ventures is further reducing of risk.
From the name itself, it is clear that a contractual joint venture is emerging by connecting undertakings on the basis of a contract. Although theoretically the lasting of joint venture in such a way can be unlimited, in practice it is most often up to fulfillment of the goals defined by the contract or until the completion of a project. There are different contractual joint ventures for example for the execution of construction projects, research and development projects or ventures concluded to share financial risks in large bank loans.
Incorporated joint ventures or joint ventures with an ownership stake imply a capital connection of two or more companies, provided that the durability or continuity of business, as with any other company, is their dominant feature.
Types of joint ventures
Although it is not possible to specify all forms of joint ventures, they are usually divided according to the legal form, to incorporated and contractual, according to the identity of the partner, to ventures with the known or active members and ventures with the secret members, according to the origin or registered office, to domestic and international, according to the economic development of the country where the joint venture is based, on joint ventures in developed and non-developed countries, according to the types of deposits, on deposits in tangible and intangible assets, according to the type of control over the venture, to jointly controlled entities, jointly controlled activities and jointly controlled assets, according to the owner of the enterprise, on private-private, public-private and public-public owner of the enterprise, according to the connection of the activities of the partners in the value chain, to the horizontal ones and vertical ones, according to the
Methods of forming joint ventures
According to the two basic types of joint ventures, methods of forming joint ventures can be divided into methods of forming contractual and methods of forming incorporated joint ventures. The choice of method usually depends on the investment risks, the differences between the partners and other particularities, measured in the estimated cost of the association for each partner. However, regardless of the chosen method, it is important that the cooperation of the partners combines with property rights and management functions and that every partner participates in it, because only then it can be a joint venture.
Motivation to form joint ventures
The motives for forming joint ventures are numerous, as is the number of their classification. However, the most frequently highlighted motives for the emergence of joint ventures can be grouped into three broad categories expense reduction, risk reduction, acquisition of resources.
The mentioned categories of motives include the ways of overcoming internally and externally generated problems in which companies can be found, as well as market ways of positioning, especially compared to the competition. Cost reduction means the reduction of fixed and variable costs, exchange costs, not only absolutely, but also relative to competitors.
Risks can be divided into those that are specific to a particular company and to market risks as a set of risks determined by geopolitical, normative, historical and cultural and other differences. The company may be affected by specific risks, which therefore, they are called endogenous, while market risks are exogenous in nature the company must constantly adjust. The term resource is broadly defined by the term assets, which is thoroughly classified in company balance sheet. Resources are all that a company has access to and from what it can expect future economic benefits.
Taxation of investments and business results of joint ventures
Incorporated joint ventures are treated for tax purposes as any other enterprise, while for contractual joint ventures a tax liability is determined in proportion to their rights and obligations in the joint venture.
For investors interested in investing in joint ventures from the most important are income tax rates, tax treatment of paid dividends, capital gains and losses, interest paid and fees for assigned rights, right of use losses to reduce the tax base, tax rates on the alienation of real estate, methods and maximum taxable depreciation rates, tax-deductible expenses for research and development, tax relief in case of hiring new workers and investing in less developed areas, tax treatment of residents income and non-residents, etc.
Choosing a business partner – investor in joint ventures
The choice of a partner in a joint venture is influenced by the circumstances such as macroeconomic, political and cultural environment, general circumstances relevant to foreign investment (currency restrictions, foreign investment laws, approvals required to form a joint venture, repatriation of profits, restrictions on indebtedness in the country, control exports, tax treatment of foreign investment, relevant tax legislation, permitted formal-legal forms of enterprise, restrictions on hiring foreign workers and managers, basic information about the target company or partners (commercial history of the target company and potential partners, reputation at the local market, connection with a family or business group, access to the local financing, shares in other companies, financial strength, collection of information from credit agencies and local banks, product history that refers to business expertise, views of the stakeholders)
Parameters for evaluating the success of investments in joint ventures
The assessment of the success of the venturers investment in the joint venture depends on the risks venture, the control that the ventures exercises in the venture, and the parameters that are used for ex-post performance appraisal. In doing so, it is important to differentiate performance venture from the success of the venturers investment in the joint venture. In practice the success of the venture usually includes the success of the venturers investment in venture, but it doesn’t have to be the rule, especially not when evaluating performance of every venture in a joint venture.
Examples of joint venture
The first example of joint venture is when Google’s parent company and pharmaceutical company Glaxo and Smith decided to enter into a joint venture agreement for the production of bioelectric drugs, and the ownership ratio was 45% – 55%. The joint venture lasted and began 7 years with a capital of 540 million euros.
Another example of a joint venture is the joint venture of taxi giant UBER and heavy vehicle manufacturer Volvo. The goal of the joint venture was to produce driverless cars. The ownership ratio is 50% – 50%. The deal was worth $350 million under a joint venture agreement.
The example of Sony and Ericsson is also a good example of Joint Venture as they have teamed up in the production of smartphones and gadgets. After several operating years, Sony eventually bought Ericsson’s mobile device division.
Another well-known example of establishing joint ventures is the agreement between Kellogg and Wilmar International Limited. Kellogg International entered the market to expand its presence in the Chinese market to sell cereals and other snack foods to customers in China. The merger with Wilmar resulted in profitable synergies for both companies as Wilmar International provided a wide distribution and supply chain network to Kellogg International, and Kellogg also managed to enter a new geography through this agreement and relationship.
Opportunities to invest in joint ventures in Croatia
The assessment of future investments in joint ventures in Croatia is related to real needs of the economy as well as with the normative framework. Possibilities of private investments are far higher today than they were a decade ago. This is due to the construction of infrastructure, the continuous work of public administration on faster resolution of land registry problems and administrative barriers to doing business, liberalization of import-export and regulations on foreign exchange operations, harmonization of accounting regulations, increasingly the adoption of the legality of private sector operations in the public sector, but also the process approaching the EU.
Joint ventures can be and are one way of associating companies with the aim of building and gaining a competitive advantage through the acquisition of resources, cost reduction and business reorganization. Are joint ventures just the right strategy for development and networking economic entities, depends, inter alia, on other available business strategies, and the answer lies primarily in their comparison and evaluation.
If you need lawyer for drafting joint venture agreement for business or project execution in Croatia, please do not hesitate to contact my law firm.
