A Joint Venture is a commercial agreement between two or more parties with a view of sharing the rewards of the cooperation. Over the years. Joint Ventures have proven to be a popular way of mobilizing resources to carry out a particular project or business activity (ies). The resources can range from access to facilitate the penetration of new markets, funding, physical assets, and intangible assets such as licenses, intellectual property, or supply of goods and services. For instance, with the increase of investment in Kenya’s real estate sector, Joint Ventures have become the preferred way of mobilizing resources between investors, developers, and land owners since each individual party may have a unique resource not available to the other. The multi-faceted nature of real estate transactions requires a variety of products, services, and factors of production thus creating a need for parties to devise appropriate structures to facilitate the realization of the project.
Once a Joint Venture is chosen as the primary means of engagement between the contracting parties, some questions that need to be canvassed by the parties are;
a) What structure will the Joint Venture take?
b) How will the venture be financed?
c) How are the profits to be distributed/shared?
d) Who will manage the joint venture?
e) What are the legal, statutory, and compliance requirements needed?
f) What would be the ideal structure of management, responsibility, and degree of management independence?
Legal Structure of a Joint Venture
The contracting parties may agree on a suitable legal structure for the Joint Venture. The structures may include the incorporation/identification of; a) General Partnership; this form of JV does not have a legal personality and each partner has responsibility for the business. To curb the risk associated with the management of the General Partnerships, the contracting parties may consider the formation of a joint-management company that would be involved in the day-to-day running of the Venture. b) Limited Partnership; this structure is often found in Ventures where funds are by either party availed in order to facilitate a project or transaction. In this structure, the partners shall be liable for the debts or obligations of the partnership to the extent of the amount contributed to the partnership at the time of joining the partnership; c) Limited Liability Company; this structure gives the parties the advantage of limiting the liability of the partners to the amount of the share capital they invest in the Joint Venture. This route then opens up the possibility of the partners signing a Shareholder Agreement which would advise the interactions between the shareholders of Limited Liability Company; d) Limited Liability Partnership (LLP); this a body corporate with perpetual succession with a legal personality separate from that of its partners; e) Contractual co-operation Agreement; this guided by the provisions of the Law of Contract (CAP. 23) and arises is useful when parties intend to quickly set up the JV for a short term or single-goal venture.
Competition Authority’s Joint Venture Guidelines
In Kenya, Joint Ventures are not expressly regulated. However, some key legislations in/around JVs are; The Competition Act, No. 12 of 2010, The Companies Act, 2015, Law of Contract (CAP. 23), Limited Liability Partnership (No. 42 of 2011), Partnerships (No. 16 of 2012) and the Data Protection Act (No. 24 of 2019). In an effort to provide guidance on how the provisions of the Competition Act, No. 12 of 2010 can be applied with respect to Joint Ventures, the Competition Authority on 1st June 2021 published the Joint Venture Guidelines. The guidelines recognize the role Joint Ventures play in facilitating local investments and the place of foreign direct investment in triggering Kenya’s economic growth. We shall discuss the three (3) forms of Joint Ventures identified by the Guidelines;
a) Joint Ventures; these are defined, inter-alia, as undertakings between two or more separate undertakings in which the undertaking (venture transaction) is under the direct/or indirect or joint control of the parent undertaking (contracting parties), or each Contracting Party has made a resource contribution to the venture transaction, or the Joint Venture Agreement creates a shared; ownership, expenses, return of investment, profits and rules of governance.
b) Full-Function Ventures; the Guidelines define these as venture transactions that are designed to be performed on a last basis or for a period, or for 10 years, or for a period of less than 10 years with a renewal provision. Among other criteria, a full-function venture has management dedicated to its day-to-day operations and access to resources including but not limited to finance, staff, and intangible/intangible assets.
c) Greenfield Joint Ventures; these are defined as ventures aimed at engaging in a new business venture separate from and unrelated to the activities undertaken by the contracting parties. In this instance, the contracting parties agree to the creation of a new Joint Venture Vehicle for the purpose of the transaction. The Guidelines define a Joint Venture Vehicle as a Special Purpose Vehicle incorporated/identified for the sole purpose of undertaking the venture transaction.
This write-up is a summary of the various structures a Joint Venture may take and is for informational purposes only; it should not be construed as a legal opinion. If you have any questions or need clarifications, please do not hesitate to contact Gregory Makambo, Partner, (gmakambo@makambolaw.com), Kelvin Mwaniki, (kmwaniki@makambolaw.com) or your usual contact at our firm, for legal advice.