A joint venture allows one or more parties to pool their resources in the form of capital, knowledge, technology, physical assets etc to achieve the specific task or project. Joint ventures are generally short term though they can be for an indefinite period also. It is a kind of partnership, but for some specific purpose.
Many domestic companies enter into joint ventures with foreign companies in order to pool their technology, know-how for some specific project. Also, the same way small companies enter into joint venture with large companies to share their knowledge and expertise to achieve some common business objective.
Joint venture agreement outlines the purpose of the joint venture and other terms & conditions governing the joint venture. It serves as a legal document in the event of a dispute between the joint venture parties.
Major elements of Joint Venture Agreement:
- Purpose of the Joint Venture: The Joint venture is generally formed for some specific project. The purpose for which joint venture parties have agreed to pool their resources must be clearly specified.
- Contribution: Each joint venture party has to contribute to the functioning of the joint venture. Such contribution may be in the form of money, physical assets, technology etc. The proportion and the type of contribution must be decided among the partners and the same should be specified in the agreement.
- Sharing of Profit/Losses: The agreement should specify the share of profits/losses that each joint venture party is entitled to. Generally, this ratio depends upon the contribution made by them but it may also be based on some other criteria such as the number of services rendered by the partners etc.
- Management: The success of joint venture depends on how effectively it is being managed. Management implies how to handle the day to day operations of the joint venture, a delegation of authority for decision making, rights and duties of each partner, fixing the accountability of the tasks etc.
- Termination: The joint venture may be formed with specific time duration or on continuing basis. Whatever may be the scenario, the term of the joint venture must be provided in the agreement.