A Contribution and Formation Agreement or a joint venture agreement as it is more commonly known as an arrangement wherein two or more parties come together to combine their resources and expertise to create a separate entity. Sometimes, investing in an existing entity with another company is also termed as a joint venture. A contribution agreement typically outlines minute details of the arrangement such as the parties, the effective date, the form of entity to be created, the shareholding percentage and the rights and obligations of the parties. Creating a contribution agreement requires referencing routinely to other agreements such as shareholders agreements and company formation documents such as memorandum and articles of association. It is a complex but essential contract wherein joint venture formation is concerned.
What is a Contribution and Formation Agreement?
A contribution and formation agreement, also known as a Joint Venture Agreement or a JV is an arrangement wherein two or more parties come together to run a business which is typically known as a joint venture company. A joint venture may take any form or span over any amount of time. It can be an arrangement wherein two or more parties share the equity in a business or share some other contractual benefits. It could be in the form of a permanent company or any specific project. Hence, a JV assumes the form in which it is structured and there is no single mode of creating a JV. The rationale behind a contribution agreement lies in two commercial players coming together and sharing their resources and insights for mutual benefits. Typically, a shareholders agreement, memorandum, and articles of association are required before drafting a contribution agreement.
Purpose of Contribution and Formation Agreement?
A joint venture formation or a contribution agreement is formed in order to protect the interests of the joint venture partners. It provides the opportunity for partners to share liabilities and risks and helps them in the expansion and diversification of their businesses. For example, if a company having expertise in IT, wishes to expand and go into the food business, it may tie-up with restaurants and provide them with an online platform. This way both the businesses stand to gain and share their resources and expertise.
Inclusions in Contribution and Formation Agreement
A contribution agreement to form a joint venture company should include the names of the parties who wish to become joint venture partners. Caution should be taken, to include the names of subsidiaries and holding companies as well, depending upon the intent of the parties. Apart from the same, the effective date when the JV gets created, the form of the joint venture entity and other standard boilerplate clauses such as dispute resolution, notices, remedies, waiver, severability and interpretation clause should also be included. Any references made in the agreement should ideally be contained in the annexures or appendages. Clauses protecting confidential information and trademarks and other intellectual property should also be included. Exit options should be drafted effectively.
Key Terms in Contribution and Formation Agreement
The following key terms need to be included in a contribution agreement:
- Formation and nature: What is the form of the joint venture arrangement i.e whether it is in the nature of a joint venture company or whether a partnership needs to be included.
- Type of JV: It is also essential to put in the contract the type of joint venture formation being created. For example, it could either be an agreement where both parties have equal shareholding or one party has more shareholdings than the other.
- Purpose: The purpose behind the joint venture formation should also be provided for in the contract.
- Restrictive covenants: Covenants such as non-compete and non-solicitation may be included.
- Rights and obligations of the parties: The rights and obligations need to be outlined clearly.
- Profit sharing mechanism: This needs to be in-built in the contract basis negotiations.
Drafting of a Contribution and Formation Agreement
The following guidelines may be followed while drafting a contribution agreement:
- The names of the parties should include/exclude the names of their subsidiaries/holding companies basis the intent of the parties.
- The purpose should be stated clearly.
- The form of the company should be chosen carefully after taking into account tax and legal compliances required.
- Covenants such as non-compete may not be enforceable, hence, they should be worded as broadly as possible to make them appear reasonable.
- Clauses such as confidentiality and intellectual property may also be included.
- Process of profit sharing and loss distribution should be outlined clearly.
- Exit options should be mentioned clearly.
- Simple and crisp but effective language should be used.
Benefits of a Contribution and Formation Agreement
A contribution agreement has the following benefits:
- Helps the companies in building their public profile and increase their client/customer base.
- Helps the companies market their products and services in a better way.
- Leads to a synthesis of good talent from both the companies.
- Leads to more innovation and better generation of ideas.
- Mutual cooperation balances out the cons of JV partners. For instance, if company A is good at innovation and company B is good at marketing, a synthesis would lead to more innovative products as well as better marketing.
- A JV also provides an opportunity for partners to share liabilities and risks.
- Forming a JV with a different business vertical also leads to diversification of business and enables both the partners to explore and access different market segments.
A joint venture formation agreement is created between companies in order to amalgamate their resources and skills and form an entity which would enable them to strengthen their market position and grow their business. In the event of a dispute, typically, arbitration is chosen as a preferred method. The companies may belong to different geographical regions, hence choosing a neutral arbitration venue also becomes important.
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