Joint Venture Agreements (“JVA”) are becoming an increasingly common way for companies to form strategic alliances, and this is why more than 1/3 of the fast growing companies are continuingly involved in JVA. Specifically, in a joint venture, two or more “parent” companies agree to share capital, risks and rewards, human resources and technology in order to form a new legal entity under shared or common control.
Considering the great importance of JVA, it is vital to examine whether your potential partner is capable of meeting the criteria towards the successful completion of the task or project in question. Moreover, you should always remember that a bad JVA is likely to affect the structure and image of your company, something which is likely to have an adverse impact on your company’s economics and future development.
How we can help…
Our specialized team at Parparinos Milonas Corporate and Legal can assist you to avoid such danger by performing an exhaustive research and legal due diligence in relation to the factors that must be considered prior to the establishment of a JVA.
There is no definition of a joint venture in Cyprus law, however, there are four forms of joint ventures which can be identified in current practice:
- contractual joint ventures,
- partnership joint ventures (general or limited)
- corporate joint ventures
- (EEIG) European Economic Interest Groupings
Contractual Joint Venture
A contractual joint venture does not involve the conduct of business in common, as in a partnership and is an unincorporated form of cooperation based on a contract between the interested parties.
The parties to a contractual joint venture retain distinct roles, rights, and obligations whilst remaining autonomous. Nevertheless, a contractual joint venture may acquire rights and liabilities as a single entity, and is capable of suing and being sued in its own name.
Any permutation of individuals, partnerships, or companies may enter into a contractual joint venture. As contractual joint ventures normally involve bringing together a number of resources and knowledge without a separate legal personality, it is vital that comprehensive detailed contractual agreements are in place in order to regulate issues such as the responsibilities of the participants, their respective contributions and their actual share in the income generated by the contractual joint venture.
It is a known fact that in Cyprus, contractual joint ventures have proved popular for large construction projects, chiefly in the context of public tenders where both apparent costs and risks are high.
Partnership Joint Venture
An unincorporated cooperation which subsists between not more than twenty legal or natural individuals carrying on a business in common with an objective to profit is known as a partnership.
The Partnership Law recognized both limited and general partnerships. The actual creation, operation and termination of these partnerships are regulated by the Partnership and Business Names Law.
A limited partnership must include at least one general partner and the liability of some partners is limited to the amount of capital that they initially agreed upon. As the limited partner is not considered as an agent of the partnership, he therefore does not possess the power to either take part in the actual running of the business or bind the firm in any way. There is a penalty for disregarding these rules which result in the loss of the benefit of limited liability.
In a general partnership, each partner has unlimited liability with the other partners for all obligations and debts of the partnership incurred during its time as a partner. Each partner is considered to be the agent of the others, and has the authority to enter into contracts in the ordinary course of business on behalf of the partnership as a whole.
In the case of both limited and general partnerships, the structures are best suited for cases where two or more parties wish to conduct a business on a lasting basis and in close cooperation. It is apparent and has been proven in practice that the use of partnership joint ventures is common for professionals rather than for large-scale commercial operations.
Corporate Joint Venture
A contractual arrangement between two or more parties cooperating to create a corporation under a national legal system is known as a corporate joint venture.
A corporate joint venture, unlike a contractual joint venture, has a legal personality separate from that of its participants.
A corporate joint venture will usually take the form of a private limited company which is restricted to not more than fifty members, rather than a public company. Though, certain ways of forming a (Societas Europaea, SE), European Public Company such as through the formation of a joint subsidiary or a holding SE, may be particularly useful to companies registered in different European Economic Area jurisdictions who wish to incorporate a joint venture vehicle with a pan-European brand.
The establishment, operation, and termination of a corporate joint venture in Cyprus are regulated by the Companies Law and is recognized as a legal entity providing that the Registrar of Companies is content that all statutory registration requirements are in place.
To be exact, the company should file a copy of its constitution otherwise known as the Memorandum of Association and Articles of Association with the Registrar of Companies. These are public documents which, once registered, bind the company along with its members to the same degree as if they had been signed and sealed by each member individually.
It should also be noted that the participants in a corporate joint venture will usually enter into a shareholders’ agreement which will frequently be supplemented with collateral agreements between the participants and the corporate joint venture. Characteristic examples of collateral agreements include those on the use of intellectual property rights owned by the participants and the secondment of personnel. If any of the provisions of the shareholders’ agreement alter or modify the articles of association, then the shareholders’ agreement also should be filed as a public document with the Registrar of Companies.
Corporate joint ventures are ideal for joint ventures who aim to establish and conduct a new separate business involving contractual interaction with third parties for the purpose of profit-making.
What is the Memorandum of Association (MOA)?
The Memorandum of Association states the kind of activities which the company is authorized to carry on, while the articles of association contain rules that govern the internal management procedures of the company. It is when the Articles of Association are silent on a particular issue, that the standard articles appended to the Companies Law are deemed to apply.
European Economic Interest Grouping
The European Economic Interest Grouping (EEIG) concept was introduced by Council Regulation Number 2137/1985.
Since 1 July 1989, it has provided a mechanism for natural persons, firms, companies and other legal entities to cooperate efficiently across intra-EEC borders.
A very specific type of joint venture arrangement is represented by the EEIG, as its objective should always be to promote the economic activities of its members. The EEIG activity should be associated to and be secondary to these economic activities.
The management of an EEIG is delegated to one or more legal or natural individuals who are appointed by the members or in the formation contract. Each of the managers is entitled to represent the grouping, and to bind it in respect of dealings with third parties when he acts on its behalf.
A duly registered EEIG has the capacity to acquire, in its own name, obligations and rights of all kinds, to close contracts, and to sue and be sued. It is important to note however that it may not have assets and liabilities separate from those of its members, unless it is vested with legal personality. This subject is left to the discretion of the Member State where the EEIG is registered.
Although cost effective, use of the EEIG has not yet become widespread, and is an option for smaller-scale specialized sector companies and professionals who wish to generate a larger international market profile than their individual size would merit.