Conflict of Interest Clause in JV Agreement
Prasenjit Sarkar
1. Whether the FIPB/SIA approval is required if they wants to make a JV in future in the same field?
With Regards
Prasenjit Sarkar
Company Secretary
09650375850
CS A Rengarajan
FOREIGN DIRECT INVESTMENT (FDI) POLICY
(In terms of Press Note No 4 (2006) Series dated 10.2.2006 of Department of Industrial
Policy and Promotion, Ministry of Commerce and Industry)
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It is advised that the joint venture agreement may embody a 'conflict of interest' clause to safeguard the interests of joint venture partners in the event of one of the partners desiring to set up another joint venture or a wholly owned subsidiary in the same field of economic activity.
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However, even in such cases where the foreign investor has a joint venture or technology transfer/trademark agreement in the 'same' field, the exceptions for
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requirement to obtain FIPB approval have been prescribed, which the investors may take note of:
The following article may be useful for conflict of interest
Joint Venture Agreement – Decoded
By lokeshrajpal
IMPORTANT POINTS TO REMEMBER WHILE NEGOTIATING AND ENTERING JOINT VENTURE AGREEMENTS
With the increased globalization, more and more Joint Venture Agreements are being signed by many multi national corporations across the geography. The need for such joint venture agreement arises from multifarious factors. Some of those factors are listed below:
1. At times joint venture agreement is necessitated due to statutory regulations prevailing in a particular geography which calls for local joint venture partner for certain activities to be commercially pursued in said geography;
2. Though there may be no such statutory restrictions but corporations prefer to have a local joint venture partner who has a better understanding of the market and consumers thereof;
3. At times joint venture agreement is pursued since the geography is more of a security concerns and it is advisable to have a local partner;
The above mentioned list of reasons are merely indicative and not exhaustive and needless to say there may be other reasons / consideration that weigh upon the mind of a corporation to pursue a commercial venture through a joint venture route rather than taking a solo aim at a geography. Whatever be the reasons or motives behind the decisions of having a joint venture agreement and whatever be the activities of a joint venture, broadly the bare shell form of all the joint venture agreements must have following clauses / features incorporated in the agreement:
1. Joint Venture Party: Before a joint venture is formed, it is important for every corporation to make a standard due diligence about the local partner. Such due diligence may cover aspects such as financial standing of the partner, key business strengths of partner especially in a area of operations, ethical practices of local partner, influence it garners in the local market, reputation of local partner among rival business houses and government circles etc. It is important to mention the right name and credentials of a local joint venture partner in the agreement;
2. Conditions Precedents: Joint venture agreement should clearly spell out the detailed conditions precedents for respective obligations spelled out in the agreement to be consummated between the parties to the agreement. For example, it must be clearly spelled the time frame in which respective parties are required to complete certain acts before the subject joint venture agreement becomes binding between the parties. Another example can be that respective parties shall take all government approvals before joint venture agreement comes into operation and become biding upon the parties.
3. Share Capital: Joint venture agreement should clearly state the amount and nature of capital that shall be provided by each of the party to the agreement. Further the ratio of shareholding should be made specific in order to avoid any controversies at a later stage.
4. Business Plan: A detailed, clear cut business plan for foreseeable terms and capital required thereof should be clearly specified in the agreement itself, if possible or else the same should be duly signed by the parties to the agreement and must be made part and parcel of the agreement;
5. Business and Operation of Joint Venture Company: Joint ventures agreement needs to detail out the area of business which a joint venture company shall operate into. Further a detailed procedure should be specified if any deviation or any additional activities needs to be pursued in near or far future. Though the detailed area of activity is always contained in charter of the company, but it shall be apt if the same is also detailed in a joint venture agreement as well so as to ensure clarity on the object of joint venture agreement.
6. Management of operations of the Joint Venture entity: Joint venture agreement can partake many characters wherein a joint venture partner may come is as strategic investor or merely as a financial investor. Whatever may be the case, it is very important to mention as to how the management of the joint venture company shall be conducted. Specific issues pertaining to day to day management of activities of the company, no of seat each party shall hold in the board of directors, voting rights at the board and resolution mechanism thereof in case of any conflict needs to be categorically dealt at an outset.
7. Representation and Warranties from each partner: Representation and warranties of each party needs to be specified under this head and the same needs to be specified separately for the sake of clarity.
8. Call and Put Option: At times, as noted above, joint venture agreements are entered by the parties because of statutory restrictions applicable in a particular geography. However one must be mindful of the fact that such statutory restriction may be removed by political establishments in future. To take care of such future eventualities, one must include call and put options in the agreement. Such call and put option must define the manner and pre-defined rate at which in which such options shall be exercised by the party to the agreement.
9. Right of Pre-emption: Most of the times there is an initial euphoria while entering into joint venture agreements between the parties. Such euphoria fizzles out after a certain time period due to overestimation of the opportunity by the parties, discord between the parties, day to day management issues and the reasons can be endless. Or it may be the case that one partner wants to cash in the investment which it made in the joint venture and now wants to en-cash the fruits of investment made by it. In such an event, there should be a clause in the agreement wherein the other partner has the right of pre-emption and purchase the stake of other partner. It is imperative to define the pre-agreed formula for arriving at a pricing of such stake and purchase thereof. In the event no such formula is defined by the agreement, the purchase can be made at market price or the best offer which the selling party can fetch from the market. Whatever may be the case, right of pre-emption being an important right for both the joint venture partners such right should find an appropriate place in the agreement.
10. Covenant not to Compete: When the joint venture parties enter into an agreement, it should be made appropriately clear that none of the joint venture parties shall form another joint venture or pursue independent business interest (excluding those already established and running) outside the joint venture in order to avoid any conflict of interest.
11. Confidentiality: Joint venture agreement should have an appropriate confidentiality clause in the agreement so as ensure that the terms and conditions of the agreement are not made public unless requested by the statutory authorities concerned.
It must be emphasized that the above list is merely indicative and not exhaustive and the details of each joint venture agreement shall differ based on the facts and circumstances of each transaction, nature of activities and such like factors. However above said points generally shall be applicable to most of the joint venture agreement. Further joint venture agreements are generally accompanied by other agreements such a Shareholders Agreement, Franchise Agreement, Supply Agreements, Know-how Agreements etc. and the joint venture agreement may vary in totality of circumstances.
Contact Information
Lokesh Rajpal
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