The contents of this document are confidential 1

Joint Ventures Agreements:

Definition, disputes and resolution.

Trilegal

CONFIDENTIAL

2016

Yogesh Singh

Partner

25 September 2016

Introduction to Joint Ventures in India

Funding a Joint Venture

Key Commercial Terms in JV Agreements

CCI Implications

OVERVIEW

Introduction to Joint Ventures in India

3

JOINT VENTURE

Separate

legal entity

Common

objective

Asset contribution

Sharing of risks and profits

Elements of a JV

4

Company A Company B

New JV

Equity Equity

Assets/

Cash

Assets/

Cash

Typical JV Structure

Types of JVs

6

JVs

Incorporated

Company

Subscription of Shares

Transfer of Business/Technology

Collaboration with Existing Company

LLP

Contribution

Transfer of Business/Technology

Unincorporated

Partnership

Cooperation Agreement/Strategic

Alliance

• Object and scope of JV

• Participation of JV Partners

• Future issuance of capital

• Financial arrangements

• Composition of board

• Management of JV company

• Distribution of profits

• Transferability of shares

Documentation for JV Company

7

• Deadlock resolution

• Restrictive covenants on JV Partners and the JV company

• Reserve matters

• Appointment of higher management

• Non compete clause

• Confidentiality clause

• Indemnity clause

Documentation

8

Funding a Joint Venture

9

Funding a JV

10

Equity• Foreign Exchange

Management Act, 1999

Debt

• Domestic borrowing and external commercial borrowing

Funding

Options

Key Commercial Terms in JV

Agreements

11

Rights of JV Partners

12

Voting Rights

Nominate Director

General Meetings

Receive Dividend

Transfer of Shares

13

ROFR

ROFO

Drag Along Right

Tag Along Right

Pre-Emptive

Right

Transfer Restrictions

Types of Votes

• Affirmative: requiring the affirmative vote of the right-holder

• Negative: granting a veto to the right-holder

Matters that may be listed

• If outside the scope of the normal day to day working of the company.

• If impact shareholders’ current or future shareholding in the company.

Common Examples

• Appointment/removal of senior management or statutory auditors of the company.

• Changes in capital structure, mergers and acquisitions, creation of subsidiaries.

• Large capital expenses, acquisitions of outside entities, entering into indebtedness.

Reserved Matters

14

Non-Compete and Non-Solicit Clauses

Non-Compete Clause

Restriction on entering into a similar trade or business.

Non-Solicit Clause

Restriction on soliciting company’s employees or customers may be enforced on a case to case basis.

Deadlock

16

Deadlock Events

Refusal by shareholder to give its consent at shareholders'

meeting

Failure of the Board of

Directors to agree on any

matter Failure to gather

the requisite quorum at the

Board meetings

Resolution of

Deadlock

Russian Roulette

Sale of Shares on Fair Price

Sale of Shares to

Third Party

Sale of Business to

Third Party + Winding-Up Winding Up

Casting Vote of Chairman

Appointment of Third

Party Expert

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Deadlock Resolution

When the JV Partners form a JV, they may conduct business

under a new brand name or the JV Partners may decide to assign

or license the right to use the intellectual property of the JV

Partners.

Intellectual Property

18

Transfer of IPRPost-term use

of TMs

acquire the shares of the defaulting party at

a discount to fair value

sell its shares to the defaulting party at a

premium to fair value

Event of Default

19

Rights of the

non defaulting

party in case

of an event of

default

Put an

d C

all Mech

anism

• Any commercial matter, if it arises out of or relates to a contract, can be

referred to arbitration.

• Standard clause:

“In the event of any dispute, controversy or difference between the Parties

arising out of or relating to this Agreement (including a dispute relating to

the validity or existence of this Agreement and any non-contractual

obligations arising out of or in connection with this Agreement) (a

Dispute), any party to the Dispute shall be entitled to refer the Dispute to

arbitration (Notice of Arbitration) to be resolved in the manner set out in

this Clause. This Agreement and the rights and obligations of the Parties

shall remain in full force and effect pending the award in such arbitration

proceeding.”

Arbitration

20

• Disputes between JV Partners often relate to transfer of shares, non-

compete, intellectual property etc.

• Whether or not oppression and mismanagement is arbitrable

• Unsettled law

• Arguments against reference to arbitration

• Sukanya: If there is bifurcation of reliefs, there can be a situation where 2 fora could decide on

similar issues

• Bennett Coleman: Companies Act requires the CLB to decide the dispute

• Mere arbitration clause cannot oust jurisdiction of the CLB

• Arguments for reference to arbitration

• High courts have also held that S.397-398 do not cast an exclusive jurisdiction on

the CLB

• If civil courts can hear petition under S. 397-402, an arbitral tribunal should also

be able to hear the same dispute.

Arbitrability of Disputes

21

• Foreign governing law.

• Jurisdictional nexus between the JV Parties and the

governing law.

Governing Law and Jurisdiction

22

CCI Implications

23

Assets Turnover

India Acquirer and target

(collectively)

INR 20 billion INR 60 billion

Acquirer's group together

with the target

INR 80 billion INR 240 billion

Worldwide Acquirer and target

(collectively)

USD 1 billion worldwide

including assets of at least

INR 10 billion in India

USD 3 billion worldwide

including turnover of at

least INR 30 billion

from/within India

Acquirer's group together

with the target

USD 4 billion worldwide

including assets of at least

INR 10 billion in India

USD 12 billion

worldwide including

turnover of at least INR

30 billion from/within

India

Note: Please note that ‘group’ will include all entities controlled by the ultimate parent entity (UPE) where the

UPE directly or indirectly (i) exercises 50% or more of the voting rights; or (ii) appoints more than 50% of the

members of the board of directors; or (iii) controls the management or affairs.

CCI Implications

24

Case Study

25

• JV between Party A (non resident) and Party B.

• Exit clause: If certain targets are not met in a specified

period:

• Party A will sell its shares to a third party buyer, or

• Party A will exercise Put Option at a pre-determined price

(higher than FMV).

• Put Option Enforceable at FMV.

Case Study

26

THANK YOU

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