Joint ventures are becoming increasingly popular in Malaysia. They are a great business opportunity to combine resources and expertise to enable growth, innovation and access to new markets.
It is becoming common in Malaysia for businesses that want to expand into a new market but need more resources or knowledge to tackle the problem by joining ventures with companies with funds or expertise. When entering into a JV business, parties agree on their respective contribution and how to share profit and losses.
For a successful joint venture, the agreement must be clear and comprehensive.
Joint ventures are like marriages. A successful joint venture requires understanding, communication, and compromise.
– John A. Pearce II
A joint venture is a business arrangement where two or more parties pool their resources and expertise to achieve a common goal. It is a strategic partnership that allows each party to leverage their strengths and share the profit and losses of the venture according to their agreed-upon terms.
Performing thorough due diligence before entering a joint venture agreement is essential. Before you decide to sign a JV agreement, it is wise to consider the following:
There are two types of joint ventures in Malaysia: incorporated and unincorporated.
The main difference between the two is that an incorporated joint venture involves the formation of a new legal entity. In contrast, parties to an unincorporated joint venture are not required to form or incorporate a new legal entity.
The new legal entity formed with an incorporated joint venture is referred to as a Special Purpose Vehicle (SPV). The parties to the SPV contribute their resources and assets to the SPV. In return, they get shared ownership of the newly formed SPV.
This SPV can be incorporated as a company (Sdn Bhd) under the Companies Act 2016 or as a limited liabilities partnership (LLP) under the Limited Liability Partnership Act 2012.
Once incorporated, the SPV operates as a separate legal entity, meaning it exists separate from the “parent” parties to the joint venture. The liabilities of the parties to the JV are limited to their shareholding in the SPV. The “parent” companies are protected against financial risks or insolvency of the SPV.
If the SPV is incorporated under the Companies Act, the shareholders must prepare a joint venture and a shareholder’s agreement to regulate the operations of the JV. The shareholders’ agreement must include the following:
See here for reasons why you should sign a shareholder agreement.
Unincorporated joint ventures are also referred to as contractual joint ventures. A new legal entity formation is not required for this type of JV. The JV is created by an agreement referred to as a joint venture agreement. The parties agree on the terms and conditions of the agreement and perform their duties and responsibilities under the joint venture agreement.
Unincorporated joint ventures are often formed for shorter-term agreements between the parties.
How the parties share in the profits and liabilities of the joint venture is usually determined by their respective contributions to the joint venture.
The parties should agree and set out the joint venture’s objectives and scope to avoid future disputes. These are the most fundamental terms of a JV agreement.
The purpose of a joint venture is, after all, to achieve a common business goal. If the parties can’t agree on these fundamentals, the joint venture will probably not succeed.
The parties’ contributions usually determine their shareholding. Therefore, the parties must understand and agree on the respective contributions. It should be carefully documented in the agreement as it usually forms the basis of how they share profits and liabilities.
Each party’s rights, duties, and obligations must be set out. Clarity on each party’s role ensures they perform their duties and responsibilities under the terms of the joint venture and minimises the risk of disputes about who is supposed to do what.
The agreement must clearly state any conditions, precedents, or significant dates determining when the joint venture will commence.
Parties must anticipate that everything might go differently than planned. A party might realise that the initial scope of the joint venture has shifted and no longer aligns with their business objectives.
Other scenarios include one party facing financial difficulties and breaching their obligations under the JV agreement. It could also happen that the conditions precedent are not met in the specified time.
Including an exit strategy assists parties in dissolving or exiting the arrangement efficiently and amicably. Standard exit plans include a right of first refusal if it is an incorporated joint venture, liquidation, or put-and-call options.
Joint ventures often involve the development of new products or processes. It is critical to precisely set out the ownership of any intellectual property the joint venture creates. The terms must specify to which extent each party may use the intellectual property outside of the joint venture to avoid conflict and protect all parties’ rights.
Parties should anticipate and agree on a method for dispute resolution. Parties usually opt for negotiation or mediation as the first attempt to resolve disputes. If mediation fails, parties can choose arbitration or the courts for dispute resolution. Parties should carefully consider all the options and comprehensively execute the dispute resolution process.
It is further imperative to set out the rules and the laws of the jurisdiction that governs the joint venture. This is vital in cross-border joint ventures where the laws might be different.
A joint venture is an excellent and popular tool for foreign investors to access the Malaysian market. It is, however, essential to understand the types and requirements specific to joint ventures in Malaysia.
It is important to note that the legal requirements for creating a JVA may vary depending on the nature of the JV and the industry in which it operates. Parties should seek specialist legal advice before entering into a joint venture agreement to ensure the terms and conditions of the joint venture are drafted clearly and comprehensively.
An experienced lawyer can advise on the type and structure of the joint venture. A lawyer can also assist with negotiating a joint venture agreement that minimises risks and avoids disputes.
