People often ask us to help them draft joint venture agreements. Joint ventures (JVs) are not specifically regulated in South Africa and can be concluded through simple joint venture agreements, a partnership agreement or through incorporation of the joint venture entity.
The most commonly used types are the joint venture agreements and incorporation of the joint venture. These different types of JVs create different relationships and the practical implications are significant. So, it is important to decide which option you want to go with and we can help you with this decision.
Type 1: Joint Venture Agreements
Essentially, a JV is where two or more businesses agree to work together for a single business transaction. A JV agreement regulates and sets out obligations and duties of the parties. It is usually concluded through a collaboration, or a teaming agreement.
With this kind of agreement the businesses remain separate legal entities but act together to share strengths, minimise risks, and increase competitive advantages in the marketplace. Whilst competitive advantage can be gained through a JV agreement that competition is regulated by the Competition Commission.
Type 2: A Joint Venture Entity
A JV entity is created through the process of incorporation essentially creating a company. Once the company is incorporated the persons involved in the JV become shareholders of the new entity. The entity then conducts the business of the joint venture, concludes contracts and is liable if things go wrong. It is therefore a separate legal entity.
The creation of a Type 2 JV involves:
- registering a new company (or using an old one, but not a shelf company)
- drafting a new MOI, and
- drafting a shareholders agreement.
The MOI and the shareholders agreement regulates the relationship between the joint venture shareholders. There is some flexibility as to the content of these documents but the whole process is regulated predominately by the Companies Act 2008. This type of JV is a considerable financial commitment and is therefore more appropriate for JVs that intend to do business together for a considerable period of time.
Which Joint Venture Agreement is for you?
Well, JV agreements (Type 1) allows you greater flexibility in designing the obligations and duties of the parties. JV entities (Type 2) release the parties from personal liability by creating a separate legal entity. However, it is a greater financial commitment that this only really practical for parties that which to do business for an ongoing period of time. We do not recommend joint venture partnerships as they provide very little protection for the parties entering the partnership.