‘Estate planning’ needed as joint ventures may go awry

When a joint venture (JV) is set up between an Indian and an overseas company, both parties usually have a bullish view of things to come and an eagerness to get started with the business.

Despite the best intentions however a JV’s business plans often come unstuck for reasons such as: a basic mismatch in ideologies or temperaments of the partners; a modification in market conditions or dynamics that make the business unviable; a change in law that could make the business difficult; business losses or poor viability of the project.

When faced with the decision to wind up a JV, the partners may be ill prepared both psychologically and legally. Many a time they turn resentful and hostile, with one or both parties unwilling to cooperate with the other in the winding-up process. Financial defaults may also occur due to one or both partners’ unwillingness to settle the accounts in an attempt to take advantage of the situation.

Certain steps, described below, can be considered and used in a manner akin to buying insurance or doing estate planning at the inception and initial investment stage of the JV.

The shareholders’ agreement (SHA) is crucial. It should be drafted carefully and all parties should ensure that each shareholder signs it. If new shareholders come in at a later date, they should sign a deed of adherence and become bound by the SHA.

A good SHA should contain clear guidelines on divestment of shares by a single party or group of shareholders. The powers of the shareholders and of the board of directors should be clearly defined. Clear guidelines on how the JV can be brought to a close and limitations on obligations to invest further in the JV should be defined. Intellectual property rights (IPR) and use of a partner’s name along with a process by which the use of IPR and name can be terminated should be agreed.

Gautam Khurana is the managing partner and Anand Verma is a senior associate at India Law Offices in New Delhi.