Companies typically pursue joint ventures for one of four reasons: to access a new market, particularly emerging market; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities.
Some major joint ventures include United Launch Alliance, Vevo, Hulu (until 2023), Virgin Media O2, Penske Truck Leasing, and Owens-Corning.
According to Gerard Baynham of Water Street Partners, there has been much negative press about joint ventures, but objective data indicate that they may actually outperform wholly owned and controlled affiliates.
He writes, "A different narrative emerged from our recent analysis of U.S. Department of Commerce (DOC) data, collected from more than 20,000 entities.
According to the DOC data, foreign joint ventures of U.S. companies realized a 5.5 percent average return on assets (ROA), while those companies' wholly owned and controlled affiliates (the vast majority of which are wholly owned) realized a slightly lower 5.2 percent ROA.
[3] A JV can be brought about in the following major ways: In the UK, India, and in many common law countries, a joint-venture (or else a company formed by a group of individuals) must file its memorandum of association with the appropriate authority.
The articles of association regulate the interaction between shareholders and the directors of a company and can be a lengthy document of up to 700,000 or so pages.
By its formation, the JV becomes a new entity with the implications that:[citation needed] On the receipt of the Certificate of Incorporation, a company can commence its business.
This is a legal area and is fraught with difficulty as the laws of countries differ, particularly on the enforceability of "heads of" or shareholder agreements.
Often, the most successful JVs are those with 50:50 partnership with each party having the same number of directors but rotating control over the firm, or rights to appoint the Chairperson and Vice-chair of the company.
[8] Recently, in a major case the Indian Supreme Court has held that Memorandums of Understanding (whose details are not in the articles of association) are "unconstitutional" giving more transparency to undertakings.
Literature in business and management has paid attention to different factors of conflict and opportunism in joint ventures, in particular the influence of parent control structure,[9] ownership change, and volatile environment.
[10] Government procurement regulations, such as the Federal Acquisition Regulation (FAR) in the United States, may specify how joint ventures are to be approached as suppliers or confirm that a joint venture or other form of contractor partnering is seen as a "desirable" arrangement for supplying to government.
In the EJV mode, the partners share profits, losses, and risk in equal proportion to their respective contributions to the venture's registered capital.
The JV contract accompanied by the articles of association for the EJV are the two most fundamental legal documents of the project.
The other format of the CJV is similar to a partnership where the parties jointly incur unlimited liability for the debts of the enterprise with no separate legal person being created.
There is another advantage: the percentage of the CJV owned by each partner can change throughout the JV's life, giving the option to the foreign investor, by holding higher equity, obtains a faster rate of return with the concurrent wish of the Chinese partner of a later larger role of maintaining long-term control.
The feasibility study must cover the fundamental technical and commercial aspects of the project, before the parties can proceed to formalize the necessary legal documentation.
China's entry into the World Trade Organization (WTO) around 2001 has had profound effects on foreign investment.
As such, it is allowed to enter into contracts with appropriate government authorities to acquire land use rights, rent buildings, and receive utility services.
WFOEs are expected by PRC to use the most modern technologies and to export at least 50% of their production, with all of the investment is to be wholly provided by the foreign investor and the enterprise is within his total control.
An advantage the WFOE enjoys over its alternates is enhanced protection of its know-how but a principal disadvantage is absence of an interested and influential Chinese party.
As of the 3rd Quarter of 2004, WFOEs had replaced EJVs and CJVs as follows:[17] (*)=Financial Vventures by EJVs/CJVs (**)=Approved JVs These enterprises are formed under the Sino-Foreign Investment Act.
Further, State enterprises which have been approved for corporatization can trade in Hong Kong in "H" share and in NYSE exchanges.
On March 15, 2019, China's National People's Congress adopted a unified Foreign Investment Law,[19] which comes into effect on January 1, 2020.
JV companies are the preferred form of corporate investment but there are no separate laws for joint ventures.
Through capital market operations, foreign companies can transact on the two exchanges without prior permission of RBI but they cannot own more than 10 percent equity in paid-up capital of Indian enterprises, while aggregate foreign institutional investment (FII) in an enterprise is capped at 24 percent.