DEFINATION UNDER COMPANIES ACT, 2013:
Companies Act, 2013 does not specifically define a Joint Venture but it is included in the definition of an associate. Section 2(6) of the Act defines Associate Company as follows:
“Associate Company in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary of the Company having such influence and includes a joint venture company.”
- here, significant influence means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;
- the expression "joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement
Here the parties to the JV would create a joint venture company (“JV Co”), under the Companies Act, 2013 (“Act”) and would hold the shares of such company in an agreed proportion.
The three most common ways of creating of joint venture companies may be described as follows:
- Parties subscribe to shares on agreed terms-
Parties to the JV incorporate a new company and subscribe to the shares of the company in mutually agreed proportion and terms, and commence a new business. The benefit of this route is that it allows structural flexibility in terms of creating an entity which is tailor-made to suit the specificationsof both the parties.
- Transfer of Business or Technology or intangibles
One of the parties transfers its business or technology to the newly incorporated company in lieu ofshares issued by the company. The other party subscribes to the shares of the company for cash consideration.
- Collaboration with the Promoters of an Existing Company
A proposed JV partner can acquire shares of the existing company either by subscribing to new shares or acquiring shares of the existing shareholder(s). The MoA and the AoA of the existing company would have to be amended accordingly to incorporate the Joint Venture Agreement into it.
POINTS TO BE CONSIDERDED UNDER COMPANIES ACT 2013
The most important document is the Joint Venture Agreement or Shareholders Agreement. Essentially this provides for the method of formation of the JV company and sets out the mutual rights and obligations of parties for the purposes of conducting the JV and the manner in which the parties will conduct themselves in operating and managing the JV. The JV agreement is between partners and does not bind the JV company unless its terms are included in the AoA of the JV company. Therefore it is necessary to specifically incorporate the JVA or the SHA into the AoA of the JV Company.
MEMORANDUM AND ARTICLE OF ASSOCIATION (MOA & AOA) [SEC 13 & 14 OF COMPANIES ACT 2013]–
The Companies Act requires every company to have a Memorandum of Association (“MoA”) and Articles of Association (“AoA”). The MoA and AoA are the charter documents of the company. In India, the AoA and MoA prevail over the JV agreement and the Act prevails over the MoA and AoA. In order to avoid conflicts arising between the agreement and the AoA, it is prudent to include a provision in the JV agreement to the effect that if the AoA is inconsistent with the provisions of the JV agreement, then the parties will amend the MoA and AoA accordingly.
The JV Agreement normally contains clauses relating to Shareholding, Rights of Shareholders, Composition of Board of Directors, Meetings, decisions to be taken with mutual consent, anti-compete clause, dispute resolution etc. These clauses should be incorporated in the MoA and AoA of the Company during to avoid conflicts in future.
BOARD AND MANAGEMENT OF THE JV -
- There are no specific rules relating to board or management structure of joint venture. Under Sec. 149 of Companies Act 2013, a “private” company must have at least 2 directors and “public” company should have three.
- The section also provides that every company must have at least one director who has stayed in India for a period of more than 182 days.
- 152 (6) also provides that at least two-thirds of the directors of a public company must be appointed by the shareholders in general meeting and their office must be liable to retirement by rotation. One-third of the “retiring” directors must retire at every AGM.
Thus, the JV Company has to ensure that it is in compliance with the provisions of Companies Act in relation to the Board and Management.
RIGHTS OF SHAREHOLDERS-
Shareholder rights in relation to any Indian JV Company can be classified into two categories – statutory rights and contractual rights, which are independent of each other. Statutory rights are derived purely on the basis of shareholding (and the extent of shareholding) as per the provisions of the Act, while contractual rights are derived from the terms and conditions of a shareholders’ agreement, irrespective of the extent of each shareholder’s shareholding in the JV Company. Contractual rights cannot supersede statutory rights.
INTER-CORPORATE INVESTMENT U/S 186 OF COMPANIES ACT
Where company [partner] acquires shares of the joint venture company which is exceeding 60% of its [company's] paid-up capital, free reserves and securities premium or 100% of its free reserves and securities premium, whichever is more, Section 186 will apply requiring prior Board decision of the company as well as special resolution of its shareholders passed at a General Meeting.
- here Company means a company incorporated under Companies Act, 2013 or any other previous company law (Sec. 2(20))
If a foreign company acquires the shares, this section will not be invoked as it applies only to a "company" defined under section 2(20) of the Act which does not take into account a foreign company.