JOINT VENTURE

Joint venture (JV) is a business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task. This task can be new project or
any other business activity. In a joint venture (JV), each of the participants is responsible for
profits, losses and costs associated with it. However, the venture is its own entity, separate
from the participants’ other business interest.

When two or more parties whether individuals or entities enter into an agreement to
combine resources for a specific business undertaking, it is referred to as a “joint venture”. The
organization of a joint venture serves as a short term partnership for the duration of the
project, in which each participant shares responsibility for the project’s associated costs, profits
and losses. Although the parties share responsibility, the joint venture is its own legal entity
that remains separate from the parties’ other business interests. To explore this concept,
consider the following joint venture definition.

Joint ventures can be informal (a hand shake) or formal, and they can be short term or
long term. Often the joint venture creates a separate business entity, to which the owners
contribute assets, have equity, and agree on how this entity may be a corporation, limited
liability company or partnership.

In other cases, the individual entities retain their individuality and they operate under a
joint venture agreement. In any case, the parties in the JV share in the management, profits,
and losses, according to a joint venture agreement (contract).

Joint ventures are often entered into for a single purpose – a production or research
activity. But they may also be formed a continuing purpose. It is a business preparation in
which more than two preparation in which organizations or parties share the ownership,
expense, return of investments, profit, governance, etc. To gain a positive synergy from their
competitors, various organizations expand either by infusing more capital or by the medium of
JV with organizations. Joint Ventures can be with a company of same industry, but with a
combination of both, they will generate a competitive advantage over other players in the
market.

In short, when two or more organizations join hands together for creating synergy and
gain a mutual competitive advantage, the new entity is called joint venture. It can be a private
company, public company or even foreign company.

ELEMENTS OF A JOINT VENTURE

 Intellectual Property Ownership

This is one of the issues that seem to get murky when planning a joint venture. More
partner moften than not, these types of partnerships tend to end. This is usually due to market
changes and inability for a joint venture to adapt to changing environment. However, you may
still have been partners for several years. During this period of time, both you and your
business partner may have contributed ideas and concept to develop. These ideas are
considered to be intellectual property. At the time you are working together, these concepts
belong to the business. Once you are no longer a team, you or your partner might begin
questioning ownership of this intellectual property. This is why you need to determine these
terms ahead of time and place them in the agreement.
  Division of Control

When forming a joint venture, your partner usually has a certain amount of control over
the company. The actual percentage needs to be decided beforehand. This is not just about
ownership, however. It is also regarding the division of labor, responsibilities, and duty. Each
individual’s role within the company needs to be clearly defined and mentioned in the
agreement.

 Financial Contributions and Individual Profits

The other thing that needs to be put in this contract is how much each party will
contribute and how much they will return in term. If you are heavily dependent on your party
for capital, they would be contributing more money than you. This, in turn, could result in them
receiving greater profit as well. In certain instances, however, there is equal input or your
business partner may only be offering ideas and plans. Thus, you will need to decide just how
much each person gets, depending on what they do.

 Resolving Problems

This may seem like unusual condition, but it is an important one, nevertheless. This
clause is in case the partners are unable to reach a collective decision regarding the
company or the business processes. To avoid further conflict and to minimize fallout,
there should be strategies already in place. These will help you and your partner resolve
the issue quickly and with as little animosity as possible. Once you have come up with a
probable and viable technique, this too will be added to the legally binding agreement.

These are just few of the terms that need to be included in a joint venture agreement with an
outside party. This will prevent any legal misstep from occurring, both while the parties are
engaged in the venture, as well as when the venture is dissolved.

CHARACTERISTICS OF A JOINT VENTURE

1. Creates Synergy
- A joint venture in entered between two or more parties to extract the qualities of
each other. One company may possess a special characteristic which another
company might lack with. Similarly, the other company has some advantage which
another company cannot achieve. These two companies can enter into a joint
venture to generate synergies between them for a greater good. These companies
can work on economies of large scale to give cost advantage.

2. Risk and Rewards can be Shared

- In a typical joint venture agreement between two or more organization, may be of
the same country or different countries, there are many diversifications in culture,
technology, geographical advantage and disadvantage, target audience and many
more factors to overcome. So the risks and rewards pertaining to the activity for
which the joint venture is agreed upon can be shared between the parties as
decided and entered into the legal agreement.

3. No Separate Laws
- As for joint venture, there is no separate governing body which regulates the
activities of the joint venture. Once they are into a corporate structure, then the
 Ministry of Corporate Affairs in association with the Registrar of Companies keep a
check on companies. Apart from that, there is no separate law for governing joint
ventures.

FORMATION AND REGISTRATION OF A JOINT VENTURE

- What are the typical Joint Venture founding documents for a corporate JV?
The corporate JV is created like an ordinary domestic corporation. The charter
documents of a corporate JV are its articles of incorporation and bye-laws which
must both be approved by the Securities and Exchange Commission (SEC). The
articles of incorporation must specify the following:
 Name of the Corporation
 Specific purpose/s for which the corporation is being incorporated.
 Place in the Philippines where the principal office will be located.
 Term of the Corporation, which must not exceed in 50 years.
 Names of at least 5 incorporators, the majority of whom must be residents of
the Philippines.
 Names of the directors, not less than 5 but not more than 15, a majority of
whom must also be residents of the Philippines and who must each own at
least one share of stock of the corporation, who must act until the first set of
directors has been duly elected and qualified.
 Name of the treasurer in trust.
 Amount of the corporation’s authorized capital stock , in local currency, the
number of shares into which it is divided, and if the shares are par value
shares, the par value of each, the names, nationalities, and residences of
original subscribers, and the amount subscribed and paid by each on
subscription.

Use of foreign language in a JV’s founding documents (both corporate and contractual
restricted)
- English and Filipino are the official languages for communication. Official documents,
commercial contracts, and court pleadings are written in English. There no
restrictions for the language of the founding documents, although English is
preferred. However, if the language of the document is an unofficial language, the
SEC will require notarized English translation, duly authenticated in the Philippine
embassy or consulate with the jurisdiction over the place of execution. Further, in
litigation, such a document will not be admitted as evidence unless accompanied by
a translation into English or Filipino.

Public officers (for example, public notaries) involved in JV’s formation procedure?

- The articles of incorporation must be subscribed and sworn before a public notary.
The JV agreement in a contractual JV must also be subscribed and sworn before a
public notary if the capital is more than PHP3,000 or if immovable property or real
rights are contributed.

JV’s registered with any local registries. Public sector bodies’ authorizations required for
a JS’s establishment
- Local registries – the corporate JV must first be licensed by the Securities and
Exchange Commission (SEC) subsequently registered with the: BIR as a corporate
taxpayer with its own taxpayer identification number.
- Local government unit (city) where it has its principal office. Social Security System,
Philippine Health Insurance Corporation and the Home Development Mutual fund (as
an employer). Further, the foreign equity of the investment must be registered with
the Bangko Sentral ng Pilipinas to allow the corporate JV to access a foreign
exchange from the Philippine banking system for the payment of dividends and
repatriation of investment.
- Contractual JV agreements do not have to be registered with the SEC. Qualified JVs
(both corporate and contractual) can register with the Board if investments or the
Philippine Economic Zone Authority to take advantage of the fiscal and non-fiscal
incentives. , whether corporate or contractual, is considered a merger and as much
regulated by the Philippine Competition Commission (PCC) in accordance with the
Competition Act.
- A merger requires notification to the PCC before the execution of definitive
agreements if either the value of the assets to be combined or contributed to the JV
or the gross revenues generated by the combined or contributed assets will exceed
PHP1 billion (rule 4, section 3 (d), Implementing rules and Regulations of the
Competition Act). The parties must not conclude the transaction before the expiry of
the relevant waiting periods and/ or the approval of the PCC (section 2 (b)). A
transaction that meets the thresholds and does not comply with the notification
requirements and waiting periods will be considered void and will subject the parties
to an administrative fine 1% to 5% of the value of the transaction (section 3 (f)g).

Other formal requirements must be complied with to validly constitute with a JV

- In a contractual JV, if immovable property or real rights are contributed, the JV

agreement must also be sworn and subscribed to by the parties before a public
notary. If land is being contributed as equity capital by a party to the JV, the capital
contribution can be annotated on the certificate of title of the land. This will serve as
a notice against the whole world in case the land is alienated in the course of the JV.

FORMAL REQUIREMENTS OF A JOINT VENTURE

The JV structure is used in every industry sector. There are any restrictions to be
considered and carefully assessed before investing in a JV.
- There are investments areas or industry sectors which the Constitution, existing laws
or public policy reserve only to the Philippine Nationals.
- The Foreign Investments Act of 1991 defines a Philippine national as any of the
following:
 A citizen of the Philippines.
 A domestic partnership or association wholly owned by citizens of the
Philippines.
 A corporation organized under the laws of the Philippines of which at least
60% of the capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines.
 A corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code, of which the 100% of the capital
stock outstanding and entitled to vote is wholly owned by the Filipinos.
 A trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least 60% of the
fund will accrue to the benefit of the Philippine nationals.
 The Securities and Exchange Commission ruled that for corporations that are
engaged in activities which are wholly or partially reserved to Filipinos, the
minimum percentage of Filipino equity must be applied to both the
(Memorandum Circular No. 8, 2013 series): Total number of outstanding
shares of stock, entitled to vote in the election of directors.
 The investment areas below are wholly or partially reserved to the Philippine
Nationals under the 1987 Constitution and applicable laws and regulations
(Tenth Foreign Investment Negative List issued by the President of the
Philippines in May 2015).
No foreign equity- Mass media except recording
Practice of the following professions – pharmacy, radiologic and an x-ray
technology, criminology, forestry, law (only individuals can practice).
Retail trade enterprise with paid-up capital of less than $2.5 million.
Private security agencies.
Small-scale mining.
Utilization of marine resources in archipelagic waters, territorial sea, and
exclusive economic zone as well as small-scale utilization of natural resources
in rivers, lakes, bays, and lagoons.
Ownership, operation and management of cockpits.
Manufacture, repair, stockpiling and/ or distribution of nuclear weapons, or
biological, chemical and radiological weapons and anti-personnel times.
Manufacture of firecrackers and other pyrotechnic devices.
Up to 20% foreign equity:
Private radio communications network.
Up to 25% foreign equity:
Private recruitment, whether for local or overseas employment.
Contracts for the construction and repair of locally-funded public works,
except for infrastructure/development projects;
Projects which are foreign funded or assisted and required to undergo
international competitive bidding (where 100% foreign equity is allowed).
Under current rules of the Construction Industry Association of the
Philippines, a Regular License with Annotation can be issued by the
Construction Accreditation Board to domestic contractor corporations with
100% foreign equity, provided that the corporation has a minimum
capitalization of PHP1 billion. Holders of this license can undertake the
following projects: vertical projects with a minimum value of PHP 5 billion
including office or residential condominiums, hotels, malls, hospitals, schools,
warehouses, airport terminals, marine terminals, international transport
terminals, power generation plants, manufacturing and assembly facilities,
tourism resorts, country clubs, and golf courses; horizontal projects with a
minimum value of PHP3 billion including roads, expressways, toll road
systems, light rail systems, heavy rail systems, water distribution systems,
bulk water systems, sewage and sewerage systems, power transmission and
power distribution systems, telecommunications distribution systems,
bridges, flyovers, viaducts, overhead carriageways, storm cisterns, dams,
dikes, seawall and breakwater system, reclamation projects; contracts for the
construction of defense-related structures.
Up to 30% foreign equity
Advertising.
Up to 40% foreign equity
Exploration, development and utilization of natural resources.
Ownership of private lands.
 Operation of public utilities.
Educational institutions other than those established by religious groups and
mission boards.
Culture, production, milling, processing, trading except retailing, or rice and
corn and acquiring, by barter, purchase or otherwise, rice and corn and their
by-products.
Contracts for the supply of materials, goods and commodities to a
government-owned or controlled corporation, company, agency or municipal
corporation.
Facility operator of an infrastructure or a development facility requiring a
public utility franchise.
Operation of deep sea commercial fishing vessels.
Ownership of condominium units.
Manufacture, repair, storage, and/or distribution of products and/or
ingredients requiring Philippine National Police clearance.
Manufacture, repair, storage, and/or distribution of products and/or
ingredients requiring Department of National Defense clearance.
Manufacture and distribution of dangerous drugs
Sauna and steam bathhouses, massage clinics and other similar activities
regulated by law because of risks posed to public health and morals.
All forms of gambling
Domestic market enterprises with paid-in equity capital of less than the
equivalent of US$ 200,000.
Domestic market enterprise with paid-in equity capital of less than the
equivalent of US$ 100,000 which involve advanced technology; or employ at
least 50 direct employees.
Non-Philippine nationals can engage in an export enterprise in which a
manufacturer, processor or service, including tourism, exports 60% or more
of its output, or a trader purchases products that are domestically
manufactured and exports 60% or more of them.
Non-Philippine nationals cannot own or hold land anywhere in the Philippines.