A joint venture is an agreement between two or more companies that agree to pursue together a specific purpose for a limited time.
The objectives of a joint venture may be:
- Joint research laboratory on a technology (eg, superconducting magnets);
- Operation of a common production site, or a critical process of pooled production (eg operation of a private railway);
- Promotion of separate but complementary products in an expanded distribution network (eg, car, insurance and financing);
- Pooling of complete activities that alone would not have a sufficient market share (close to the merger).
The joint venture is a flexible form of association which can take many different forms and does not necessarily entail the creation of an entity with legal personality. However, it is managed by a specific contract which specifies its objectives, means and rules of operation. In French law, for example, it may be treated as a joint-stock company (SEP), whereas under Quebec law it may be described as a company contract, a contract of affiliation or an unnamed contract (sui generis). Under Anglo-Saxon law, any creation by an enterprise of a new entity does not automatically have legal personality but may nevertheless be considered as a joint venture.
A company wishing to invest in a project that is financially heavy or risky, may choose to associate with one or more other companies also interested in the project in order to benefit from the following advantages:
- Sharing of investments;
- Sharing of project risks;
- Gradual withdrawal from an industrial sector (or vice versa);
- Pooling of an infrastructure to ensure its neutrality (eg pipeline under an airport).
The joint venture requires good agreement between the partners on its operation and a common strategic vision on its development to ensure that the project is viable.
Joint ventures often have a limited life. Their existence depends on the precise role assigned to them, often for an alliance between the companies that created them. They are widely used in the petroleum and film industries. By pooling, they pool their knowledge, technologies or resources to achieve goals they could not have, or hardly if they were alone. This can also be a way for a company to gradually stop one of its activities.
If the alliance does not meet its objectives, or if it is too difficult to manage, shareholders may wish to leave the joint venture. This can cause tension and jeopardize the success of the alliance. It is therefore important to provide in the articles of the joint venture exit procedures (known as “divorce clauses”) for each of the parties.
A joint venture may allow the investor to enter a relatively closed national market. The country where the investment takes place also benefits from the system, including access to new technologies or knowledge transfer. This is the case, for example, in China, where the joint venture often involves a foreign company and a company that can be close to local authorities, especially if it is a state enterprise.
International joint venture
The creation of international joint ventures depends on the legislation in force in the host countries. It may be a desirable passage to accelerate its local establishment or a compulsory crossing point if local legislation does not offer other solutions to foreign companies. The creation of a joint venture is often conceived by the host country as a privileged means of accelerating the transfer of competence and technology, while avoiding that entire sectors of its industry will fall under the control of foreign operators. There is generally a relaxation of these constraints as the local economy accelerates its development. There are, however, cases where even if the local partner retains a single share (minority share), the ownership of the share gives it rights comparable to those resulting from a joint venture (for example, approving the appointment of officers, or certain investments).