Joint Venture Agreement

Drafting a Joint Venture Agreement

A joint venture (JV) is a business venture in which two or more companies mutually contribute capital and technology to form a new company and conduct business through the new company. When establishing a joint venture, a joint venture agreement is drafted between the companies making the investment.

Title of the Agreement

The Joint Venture Agreement will set forth the basic framework for the establishment and operation of the JV. Of course, the preparation of a JV agreement is not mandatory, and there are no special provisions on the form of the agreement, so the agreement may be prepared as a Memorandum of Understanding (MOU), a Basic Agreement, or a Shareholders’ Agreement.

Joint Venture Agreement Provisions

The joint venture agreement should first set forth the following basic matters regarding the incorporation of the company.

1. (1) Name of the company
2. (2) Location
3. (3) Capital
4. (4) Articles of Incorporation
5. (5) Purpose of business

Joint Venture Capital

With regard to capital, not only the amount of capital, but also the mutual investment ratio, the number of authorized shares, the number of shares to be subscribed, the method of payment, and the type of shares must be determined. In particular, the capital contribution ratio is an extremely important factor in determining which party will have future management rights. If both parties are establishing a new company on equal footing, it would be reasonable to set the capital contribution ratio at 50:50. However, if the 50:50 ratio is used, the company will be in a deadlock situation where nothing can be decided if one party opposes the decision. Therefore, when a 50:50 investment ratio is set, it is normal to consider how to resolve the deadlock and stipulate this in the agreement.

In-kind Contributions in Joint Ventures

While the usual method of investment is in cash, it is also possible to make an investment in kind, such as in a technology or a factory. In such cases, it is important to determine the value of the technology and plant, and there are often legal requirements regarding the procedures (e.g., requiring an appraisal by a tax accountant or an appraiser).

Joint Venture Management

The joint venture agreement also needs to provide for the management of the new company (JV). The following items are usually stipulated

1. (1) Matters related to the general meeting of shareholders
2. (2) Matters related to the board of directors
3. (3) Matters concerning representative directors and officers
4. (4) Matters related to corporate auditors and accounting audits
5. (5) Matters related to the ratio of shareholdings and the issuance of new shares.

Representative Director of Joint Venture

For the management of a company, there is often one representative director, but in some cases, there may be more than one director with representative authority, and in many cases, the chairman of the board of directors is elected from Company X and the president of the board of directors is elected from Company Y. The number of directors may also be elected in proportion to the investment ratio, or if the investment ratio is the same, the same number of directors may be elected. However, in this case, as with the above, there is still a possibility of deadlock, so it is necessary to consider how to resolve the deadlock.

Issuance of New Shares in a Joint Venture

In the case of a joint venture, new shares are usually allocated to the existing shareholders in proportion to their investment ratio by way of shareholder allocation. In this case, shareholders who do not agree with the allocation of new shares will be forced to contribute to the company. The allocated shareholders will have to decide whether to accept the allocation of new shares and contribute additional funds, or refuse to accept the allocation of new shares and accept a reduction in their investment ratio. If shares are allocated to a third party, this also causes a loss of control and a serious problem for the previous shareholders, since it will result in a decrease in their capital contribution.

Joint Venture Operation

In the case of JV operations, it is important to determine whether indirect financing, such as bank loans, or direct financing, such as issuing bonds or new shares, should be used when funds are exhausted. If the business is proceeding smoothly, no problem arises, but once the business operation becomes doubtful, the parties to the JV often have no choice but to either contribute additional funds and purchase the JV, or effectively abandon their investment and exit from the JV.

Reasons for Termination of Joint Venture Agreement

The grounds for termination of a JV agreement are also extremely important for a JV agreement: since a JV is a contract to establish a company in cooperation with each other, it has elements similar to a marriage, but termination is the equivalent of a divorce, and the burden on the parties can be significant. Although the contract may be terminated due to expiration of the term or achievement of the purpose of the contract, it is usually terminated by agreement of the parties or in the form of purchase of one party’s interest by the other party. Therefore, it is important to specify in which case the contract will be terminated (including the cause of termination), how the other party’s shares will be treated, which party will take the initiative in dissolving the contract (e.g., in case of default, the non-defaulting party has the right to make an offer to purchase the other party’s shares), and so on. One method of dissolving a JV is for one party to offer a certain price and make an offer to purchase the shares, and the other party can choose whether to accept the sale or purchase the shares at that price (also known as Russian roulette).

Preamble to the Joint Venture Agreement

THIS JOINT VENTURE AGREEMENT (the “Agreement” or this “Joint Venture Agreement”), is made and entered into as of this January 10, 2020, by and between PARTY 1 and PARTY 2.
WHEREAS, the parties desire to establish between them a joint venture in order to collaborate in the sale and marketing of Cosmetic Chemistry Products (“Products”) in the market of USA,
NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants and commitments set forth herein, the parties hereto agree as follows

Establishment of the Joint Venture Agreement

The joint venture formed by this Agreement (“Newco”) will conduct its business under the name Cosmo Chemical Co. Newco shall be considered a joint venture between the Parties in all respects, and in no event shall this Agreement be construed to create a joint venture between the Parties. Newco shall be considered a joint venture between the Parties in all respects, and in no event shall this Agreement be construed to create a partnership or any other fiduciary relationship between the Parties.

Purpose of joint venture

The purpose of Newco shall be the production and sale of the Products within the USA, provided that the purpose of Newco may be extended if and when the Parties agree.

Investment in Joint Venture

Each Party shall subscribe to the shares of Newco and pay to Newco the following sum in full in cash as contributions to the initial paid in capital. The date of payment shall be decided by mutual agreement between the parties. The date of payment shall be decided by mutual agreement between the parties.
PARTY 1’s Contribution: USD200,000
PARTY 2’s Contribution: USD200,000

Joint Venture Profit Sharing

Any and all net income accruing to Newco shall be distributed equally to the Parties.

Joint Venture Shareholders’ Meeting

An ordinary general meeting of shareholders shall be held in New York once a year not later than the end of the month of May.

Joint Venture Board of Directors

Except as otherwise provided in the Articles of Incorporation of Newco, the direction and control of Newco shall be vested in the Board of Directors of Newco.　The Board of Directors of Newco shall consist of not less than three directors. All substantial matter relating to the operation and management of Newco shall be decided unanimously by all members of the Board of Directors then in office. All substantial matter relating to the operation and management of Newco shall be decided unanimously by all members of the Board of Directors then in office.

Joint Venture Operation

The following individuals in the following positions will comprise Newco’s management.
Name, Position;
Name, Position;
Name, Position;

Representative of the Joint Venture

The president of Newco shall be nominated from the resident directors nominated by Party 1. The Parties shall cause the directors nominated by each of them The president shall represent Newco and shall act in accordance with the resolution of the Board of Directors. The president shall undertake to manage the day-to-day business of Newco within the framework and limits approved by the Board of Directors. The president shall undertake to manage the day-to-day business of Newco within the framework and limits approved by the Board of Directors.

Joint Venture Accounting

The fiscal year of Newco shall begin on April 1 each year and end on March 31 the following year. Any of the Parties shall have the right to inspect the books of account and records of Newco and to make extracts. Any of the Parties shall have the right to inspect the books of account and records of Newco and to make extracts and copies thereof at all business hours. Newco’s financial records shall be audited annually at the expense of Newco by international accounting firm selected by agreement among the Parties.

Joint Venture Term

This Agreement shall commence on the date first written above and remain in full force and effect for an initial period of 5 years. Term, the Parties shall consult each other as to the extension of the term.

Termination of Joint Venture

Either Party shall have the right to terminate this Agreement, effective as of the end of the Initial Term or any Renewal Term, by providing the other with Either Party shall have the right to terminate this Agreement, effective as of the end of the Initial Term or any Renewal Term, by providing the other with a written notice of termination at least thirty (30) days prior to the end of such Initial Term or Renewal Term. Neither Party shall have the right to terminate this Agreement at any other time, unless such termination is mutually agreed to by the Parties hereto. Newco shall terminate upon termination of this Agreement.

Joint Venture Confidentiality Clause

Each of the Parties hereto shall hold the Confidential Information received from the other party in strict confidence and shall use such information only Each of the Parties hereto shall hold the Confidential Information received from the other party in strict confidence and shall use such information only for the purpose of this Agreement.

Obligation of the Parties to Cooperate

The Parties shall execute any documents and take all appropriate actions as may be necessary to give effect to Newco.

General Provisions of the Joint Venture Agreement

The joint venture agreement will have the same general provisions as other agreements, which will include provisions such as no assignment, duplicate, severability, notice, title, and perfection clauses.

Clauses Characteristic of Joint Venture Agreements

Since the joint venture agreement is a contractual relationship between the parties, it should specify how to handle the situation in which one of them wishes to terminate the agreement. In addition, if a 50-50 situation arises due to disagreements between the parties, neither party will be able to make decisions regarding the company’s affairs. This situation is called a deadlock. It is important to stipulate in the contract how the deadlock will be resolved.

Deadlock

In most joint ventures, both parties own 50% of the shares. In this case, if there is a difference of opinion between the two parties, no conclusion can be reached unless one of the parties folds, which can seriously affect the operation of the company. This situation where both parties have the same shareholding ratio and are unable to resolve their differences of opinion is called deadlock. How deadlock is resolved in a joint venture agreement is extremely critical. Various studies have been conducted on how to resolve deadlocks, and it is necessary to incorporate the preferred method of resolving deadlocks into the agreement. The following is a list of proposed clauses regarding some of the methods of resolving deadlocks.

Preemptive Rights to Resolve Deadlocks

A preemptive right of first refusal is a right that allows the other party, when considering selling its shares to a third party, to first ask the other party whether it will buy the shares on the same terms as it would sell them to the third party. If the other party is considering selling the shares, we have the right to purchase the shares first.

No party in this Agreement may sell, transfer, dispose or pledge shares in Newco without the prior written consent of the other party. If any party intends to sell any part of the shares in Newco, it shall notify in writing to the other party at 30 days prior written notice. The other party shall have the pre-emptive right to purchase such shares.

Dissolving Deadlocks through Arbitration Procedures

One way to resolve deadlocks is to submit the matter to international arbitration. A third party may be able to resolve differences of opinion, and the mediator may propose that one party purchase the other party’s shares.

(Draft text)
In the event the parties are unable to reach an agreement on the matter described in Article 10, the parties will attempt to settle it by mediation in accordance with the CEDR Model Mediation Procedure and the mediation will start, unless otherwise agreed by the parties, within 28 days of one party issuing a request to mediate to the other. Unless otherwise agreed between the parties, the mediator will be nominated by CEDR. The mediation will take place in London, England and the language of the mediation will be English. The Mediation Agreement referred to in the Model Procedure shall be governed by, and construed and take effect in accordance with the substantive law of England and Wales.
The Mediation Agreement referred to in the Model Procedure shall be governed by and construed and take effect in accordance with the substantive law of England and Wales.

Resolving Deadlocks through Negotiation

The most usual way to resolve deadlocks is through consultation. In the course of discussions, one party makes a proposal to the other party to purchase the shares, and if that cannot be resolved, the joint venture may be dissolved and the remaining assets distributed.

(Draft text)
If the Parties reach a deadlock on a matter of material importance and are unable to break the deadlock despite good faith efforts to do so, either party shall have the right to terminate this Agreement upon 30 days advance notice to the other party. Upon the termination of this Agreement, the parties shall negotiate in good faith to have one party sell its shares in Newco to the other party, so that such other party becomes the sole shareholder of Newco. Despite good faith negotiations, the parties are unable to agree upon the terms and conditions of such sale, then the Parties shall cooperate in good faith to cause Newco to be liquidated as quickly as possible.

Resolving Deadlocks through Russian Roulette

The most famous method of resolving deadlocks is what we call Russian roulette. One party proposes to the other party to purchase its shares at a certain price, and the other party can decide whether to accept the sale at that price or, if not, to purchase the shares held by the offeror itself at that price.

(Draft text)
In the event the parties are unable to agree to the important issues for the operation of Newco, then a deadlock shall be deemed to have occurred. Upon the occurrence of deadlock, one party (“Offeror”) may elect to purchase the shares in Newco owned by the other party Upon the occurrence of a deadlock, one party (“Offeror”) may elect to purchase the shares in Newco owned by the other party (“Offeree”) at a price calculated by the percentage of Offeree’s shares multiple total amounts of Newco. The Offeror shall notify the Offeree in writing of the offer to purchase all Offeree’s shares in Newco at the amount. The Offeree shall have the right to buy the shares of the Offeror in Newco at the designated price and terms, or to sell the Offeree’s shares to the Offeror at the designated price and the terms, whichever the Offeree may elect.