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Joint Ventures: Read This Before You Say "I Do"

Aug 17, 2019 | 17m

Gain Actionable Insights Into:

  • The difference between Partnerships and both incorporated & unincorporated Joint Ventures
  • Why it isn’t cynical to plan an exit strategy before forming a Joint Venture
  • What you should have in place before you enter into a Joint Venture


Understanding Joint Ventures

In today's world, collaboration is everywhere. Tech companies like Uber, for example, are collaborating with taxi drivers. More than ever, Joint Ventures (JVs) are a great model. Particularly in growing markets in Asia, having a local business partner is a huge value-add that perhaps many are missing out on. There is only so much you can achieve by yourself. With a JV, you speed up growth, market penetration and scale at a pace you perhaps couldn’t by yourself. What’s more, JVs may be the only choice for you (certainly in some countries) due to legal reasons!

Like in a marriage, pushing your individual agenda will get you nowhere. You should focus on the purpose of the JV and effectively deliver on it in order to unlock its full potential.

JVs can be between equals, but also between bigger/older and smaller/younger companies. If you’re a large company, you’d need to give your partner freedom and space. Conversely, as a smaller company, don’t be afraid to step up and take ownership. There are pitfalls and potential areas of contention that can arise in JVs, but once you’re able to foresee these pitfalls, you’ll be in a better position to set up a JV that will withstand bad weather and achieve great results. Ultimately, clarity and trust are the foundations of a good JV.

As the old adage goes, together is better.

JVs versus Partnerships

First, let’s set the stage by understanding what a JV is and how it’s different from a Partnership. While there are many similarities between the two, the main difference between a JV and a Partnership is the structure. A Partnership structure is relatively straightforward. It’s when two individuals come together over a common interest and make an agreement. This could be a Partnership Agreement which, in summary, would outline your duties, rights and obligations. Then you have Joint Ventures, which fall under two categories: Unincorporated or Incorporated.

Let’s start with an Unincorporated Joint Venture. This is where people come together over a project with shared outcomes and objectives; constructing a shopping mall for instance, where you’re bringing in either capital or some other economic resource. There’s usually a well-defined relationship between the partners (these could be individuals or companies) which is defined through various specific contracts. Between themselves, the parties might have a Partnership (or a similar) Agreement, but it may not have a fence around it. Of course, there are more complicated structures like limited liability partnerships, especially in the professional services industry. But such structures are quite specialised.

On the other hand, an Incorporated Joint Venture (IJV) is a much longer term entity which has a life and legal status of its own. There’s usually a corporate structure and Share Capital. The relationship between parties in an IJV is that of shareholder partners and would typically be governed by a Shareholders’ Agreement.

Usually, such Joint Ventures are incorporated onshore and are subject to the country’s local corporate laws. If you form an Incorporated JV in Singapore, then it would be subject to the Singapore Companies Act. The laws in Singapore governing corporate entities (like IJVs), for example, may be completely different from those in Vietnam or Indonesia as these countries have completely different political backgrounds and Government model legacies.

You need to really figure out how much experience you have in a particular country, among other factors you may not have thought about, before setting up an Incorporated JV. You need to have an acute awareness of local regulations, business culture, and cultural practices. Many times, people enter countries to form Incorporated JVs only to be surprised to find that things in that particular country are run very differently.

Let’s say there are three real estate companies from three different countries who form an IJV to build a shopping mall. The ultimate beneficial owners are actually the shareholders of these companies. You’d need to write out the Shareholders’ Agreement carefully, with proper frameworks and procedures in place, such that each company is able to justify capital investment, personnel appointments, day to day business, and managing risks to their parent companies. It’s a complex process that can get quite expensive to put in place. Enlist the help of an experienced commercial lead to make this process efficient and to ensure an ideal outcome.

Now, let’s say you have a very simple purpose, for example, importing hockey sticks to Singapore. Instead of forming a Joint Venture, you should just enter into an Agency Agreement or a Distributorship, or if there is an intention of risk/reward sharing, then a partnership with a supplier in India or Australia might work better. So when you're selecting the business model, you should think about the scale and amount of resources required to achieve your objectives.

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