Introduction: Understanding Joint Venture Agreements in Malaysia
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
What is a joint venture?
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.
Things to consider before you decide to form a JV
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:
- Identities of the parties
- Financial statements and performance of each party. See here how you can conduct this search.
- Corporate structures – It is essential to consider the cultural and business differences between the partners, as these can impact the success of the JV.
- Objectives and goals of the partnership. This includes identifying the specific purpose of the JV, such as expanding into a new market or developing a new product.
- Legal status of the parties – Understanding the legal status can help each party identify potential risks and liabilities that may arise during the business. This can include issues such as bankruptcy, legal disputes and regulatory compliance.
Types of joint ventures in Malaysia
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.
Incorporated Joint Venture
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.
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:
- the respective shareholding percentage of each party;
- transferability of shares;
- the structure of the Board of Directors and management committee;
- voting rights; and
- key personnel appointments.
See here for reasons why you should sign a shareholder agreement.
Unincorporated Joint Ventures
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.
Essential clauses in a JV Agreement
(1) Scope and objectives of 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.
(2) The parties’ contributions and shareholding
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.
(3) Rights and duties of the parties
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.
(4) Conditions precedents
The agreement must clearly state any conditions, precedents, or significant dates determining when the joint venture will commence.
(5) Dissolution and exit process
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.
(6) Intellectual property rights
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.
(7) Dispute resolution and applicable law
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.
Specific requirements for joint ventures in Malaysia
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.
Shareholding and directors
- If a foreign investor wants to set up a JV with a partner in Malaysia, the Malaysian partner will hold at least 50% of the shares.
- The JV must appoint a Malaysian director who must be either a citizen or a permanent resident, or the person must ordinarily reside in Malaysia or have a Resident Talent Pass.
- The directors must issue a statutory declaration that they are not undischarged bankrupts and have not been convicted of an offence.
- Joint ventures with a Malaysian partner require at least RM350,000 in paid-up capital and at least RM500,000 in authorised capital.
Company name and premises
- To set up a joint venture, the parties must reserve a company name with the Companies Commission of Malaysia and register their premise address so that all formal documents can be served.
- Once the joint venture is registered, the company must:
- Obtain a business licence
- Open corporate bank accounts
- Register with the Kumpulan Wang Simpanan Pekerja (KWSP)
- Register as a taxpayer
- Appoint auditors
Tax and accounting requirements
- A joint venture is liable for taxation, including corporate income tax. It is, however, exempted from withholding tax on payments to foreign shareholders.
- The joint venture must legally submit annual tax returns and financial statements and be audited by an accredited auditor.
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.