Joint ventures are becoming increasingly popular in Malaysia. They are a common way to combine resources and expertise to enable growth, innovation, access new markets, or expand distribution networks. Joint ventures are flexible, meaning they can have a specified lifespan and you can limit your business’s exposure to risk and costs whilst gaining access to more significant resources.
It is becoming common in Malaysia for businesses that want to expand into a new market but lack the resources or knowledge, to tackle the problem by entering joint ventures with companies that have funds or expertise. The parties agree on who will contribute what and how to share profit and losses.
Joint ventures are, however, not without significant risks. There is always the potential for conflict and dispute when partners have different expectations, or the work and resources are not equally distributed. Different management styles and corporate cultures can also make joint ventures highly complex.
To minimise risk and ensure successful collaboration, the joint venture agreement must be unambiguous on all aspects of the arrangement.
A joint venture is a strategic business association or arrangement between two or more parties to share their business expertise, resources, and experience to work on a joint project or achieve a common business goal.
It is essential to perform thorough due diligence before entering a joint venture agreement.
Considerations should include the following:
There are two types of joint ventures in Malaysia – incorporated joint ventures and unincorporated joint ventures.
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 either 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 legal status of the “parent” parties to the joint venture.
Project or financial risks and liabilities vest with the joint venture, separate from the “parent” parties. The liabilities of the parties to the joint venture 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. The shareholders’ agreement must include the following:
The shareholder’s agreement and other constitutional documents of the SPV regulate the operations of the joint venture.
Unincorporated joint ventures are also referred to as contractual joint ventures. It is not required to incorporate as a separate legal entity. The joint venture 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 in accordance with 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.
Scope and objectives of the joint venture
The parties should agree and clearly set out the joint venture’s objectives and scope to avoid future disputes. These are the most fundamental terms of a joint venture 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 most probably not succeed.
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.
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 in accordance with the terms of the joint venture and minimises the risk of disputes about who is supposed to do what. Ultimately, it ensures the successful accomplishment of the project.
Conditions precedents
The agreement must clearly state any conditions, precedents, or significant dates determining when the joint venture will commence.
Dissolution and exit process
Parties must anticipate that everything might not go according to plan. A party might realise that the initial scope of the joint venture has shifted and no longer aligns with their business objectives, or a party might run into financial difficulties, or one party might breach their obligations under the joint venture 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 easily and amicably. Standard exit plans include a right of first refusal if it is an incorporated joint venture, liquidation, or put and call options.
Intellectual property rights
Joint ventures often involve the development of new products or processes. Whatever the purpose, it is usually of value to all parties to the joint venture. It is critical to precisely set out the ownership of any intellectual property created by the joint venture. 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.
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 set out the dispute resolution process.
It is further imperative to set out the rules and the laws of the jurisdiction which 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.
Shareholding and directors
If a foreign investor wants to set up a joint venture with a partner in Malaysia, the Malaysian partner will hold at least 50% of the shares.
The joint venture must appoint a director who must be a Malaysian 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.
Capital
Joint ventures with a Malaysian partner require at least 350,000 ringgit in paid-up capital and at least 500,000 ringgit 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. You will also need business premises where all formal documents can be served.
Compliance requirements
Once the joint venture is registered, the company must:
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 is legally required to submit annual tax returns and financial statements and be audited by an accredited auditor.
Parties should seek specialist legal advice before entering into a joint venture agreement. The terms and conditions of the joint venture must be drafted clearly and comprehensively to protect the rights of all parties involved.
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.
