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2014-05-08

3 JV Tips for Entrepreneurs

Indian entrepreneur Vikram Bakshi\'s joint venture (JV) with global fast food giant McDonald\'s has garnered sufficient media attention.

Bakshi, who was ousted as the JV’s managing director after 18 years of partnership, is now fighting a legal battle against his former associate. The case brings to fore essential lessons for entrepreneurs planning to take the JV-routeIndia is a dynamic economy, and the Indian entrepreneur is an extremely motivated individual. It is during specific moments of dealing with the phases of scalability when the Indian entrepreneur also looks out for a partner. Foreign investment is considered an essential ingredient for any rapidly growing economy.

 

A foreign partner considers long-term partnership with an Indian promoter in various forms and one such mode is a ‘joint venture’. A JV, for a common man would generally mean collaboration between two or more entities or persons. This collaboration could be in the form and nature of a technological/technical or financial collaboration and could be through greenfield projects, alliances or acquisitions. From a legal perspective, laws in India have not particularly provided a legislative definition to the term ‘joint venture’. However, typically a JV is more than a mere financial investment. 

 

Indian JVs typically involve two or more persons who decide to collaborate. Such an arrangement can be in the form of either an incorporated entity or in the form of a business relationship; with the essence being a commonality of commercial purpose for a profitable venture. The proceeds that arise from such a venture are shared as per agreed proportions. Prior to embarking on a joint venture, there are certain aspects that need to be well considered; especially from the perspective of the lone entrepreneur.

 

Ensure management control: Control, the term, as emphatic as it sounds is also equally important for consideration. The Companies Act, 1956, and the Companies Act, 2013 (to the extent applicable) enable a company to perform its activities through the passing of ordinary resolutions or special resolutions. Shareholders of the company (in this context, the joint venture company) owning more than 50 per cent of the share capital can approve and pass ordinary resolutions; whereas for approval and passage of special resolutions, the shareholders of the joint venture company would need to own more than 75 per cent of the share capital. Hence, it is of utmost importance for an Indian entrepreneur to ensure that the control remains with him at all points of time. While the generic thought around this would be to state that the same would be completely circumstantial especially in context of which partner adds what value to the joint venture. The retention of control at either of the above-stated thresholds, in the company, will allow the Indian entrepreneur to have a relevant say within the day to day management of the company and mitigate possibilities of compromise in the future. A consequential element in this context that the Indian entrepreneur needs to bear in mind is the division of the representative ratio on the board. The thumb rule being that the total strength should always result in an odd number as against the even so as to ensure no possibility of a deadlock at any given point of time.

 

Have clearly defined rules: Default may be relative or may not, but the consequences of such defaults or events of defaults could very well result in the Indian entrepreneur losing complete control or at times total ownership of any portion of the joint venture company. Hence, it is pertinent that the events of defaults are well addressed both in thought and in words so as to ensure least ambiguity for interpretation. Similarly, the consequences of default right from the concept of establishment to the parameters of exit, whether to obtain or provide needs to be encapsulated in detail so that any unpleasant surprises are avoided at a later point in time.

 

Plan for dispute resolution: Conflict management is another area that is of great concern that the Indian entrepreneur needs to consider. One common failing is that when parties are coming together, not enough attention is paid to future disputes. It is advisable to follow the three pronged approach of mediation – conciliation – arbitration for any conflict management or dispute resolution. The thought process should be to try and minimise methodologies that could accelerate friction, and hence the half-way-house approach of mitigating the dispute through mediation or conciliation is preferable, failing which the process of arbitration could be initiated.

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