The most common type of joint venture in South Africa is an incorporated entity, normally a private company, but sometimes a public company. These companies are incorporated under, and regulated by, the South African Companies Act.
Joint ventures (JVs) are not specifically regulated in South Africa and can take a variety of forms. Essentially, you can either work as a team or register a new joint venture entity of which the parties to the joint venture are shareholders. We do not recommend joint venture partnerships.
These different types of JVs create different relationships and the practical implications are significant. So, it is important to decide which option you want to go with and we can help you with this decision. Once decided, we can help you conclude good agreements with those with whom you will be venturing jointly.
Teaming joint venture
Essentially, a teaming JV is where two or more businesses agree to work together for a single (or multiple) business transactions. An agreement regulates and sets out obligations and duties of the parties. It is usually concluded through a teaming agreement. With this kind of agreement, each business remains a separate legal entity but they act together to share strengths, minimise risks, and increase competitive advantages in the marketplace. Whilst competitive advantage can be gained through a JV agreement that competition is regulated by the Competition Commission. Often in this scenario, one party becomes the subcontractor (or principal) of the other who becomes the prime contractor (or distributor) of the other.
A Joint Venture Entity
A JV entity is created through the process of incorporation essentially creating a company. Once the company is incorporated the persons involved in the JV become shareholders of the new entity. The entity then conducts the business of the joint venture, concludes contracts and is liable if things go wrong. It is therefore a separate legal entity.
The creation of a joint venture entity involves:
- registering a new company (or using an old one, but not a shelf company)
- drafting a new MOI, and
- drafting a shareholders agreement.
The MOI and the shareholders agreement regulate the relationship between the joint venture shareholders. There is some flexibility as to the content of these documents but the whole process is regulated predominately by company law. This type of JV is a considerable financial commitment and is therefore more appropriate for JVs that intend to do business together for a considerable period of time.
JV founding documents for a corporate JV?
The typical JV founding documents for a corporate JV include:
- Certificate of the company’s registration.
- Memorandum of incorporation.
- Shareholders agreement.
What other formal requirements must be complied with to validly constitute a JV?
Corporate JV
To form a corporate JV, the members of the JV must create a company (the JV company) and become shareholders in the JV. This can be achieved by incorporating a new company or becoming a shareholder in an existing company.All South African companies are governed by the Companies Act.
The JV company must comply with the provisions of the Companies Act and have a memorandum of incorporation. The Companies Act allows certain statutory provisions to be altered by a company’s memorandum of incorporation. However, only certain provisions can be amended and other provisions are fixed. Therefore, if a provision of a company’s memorandum of incorporation is inconsistent with a fixed provision of the Companies Act, the provision in the memorandum of incorporation is void.
The members set out the terms of the JV and their relationship in a JV agreement. The agreement can take a number of forms including an agreement expressly referred to as a “joint venture agreement” but most commonly will take the form of a shareholders’ agreement (JV agreement). The JV agreement records the intention of the members in forming the JV company and will provide information about the JV, including the:
- Name.
- Location.
- Role of the members.
- Shareholdings.
- Capitalisation of the company.
- Scope of the business to be conducted.
- Fundamental principles of how the JV will be managed.
If there is an inconsistency between a company’s memorandum of incorporation and its shareholder’s’ agreement, the provisions of the memorandum of incorporation will prevail, and inconsistent provisions in the shareholders’ agreement will be void. The effect of this is that rights and obligations granted under the shareholders’ agreement will be invalid if they do not align with the memorandum of incorporation and Companies Act provisions.
Therefore, when a shareholders’ agreement is prepared, a memorandum of incorporation must be prepared simultaneously to ensure that the two documents are aligned and there are no inconsistencies that render provisions in the shareholders’ agreement void. If the company has an existing memorandum of incorporation, it will need to be amended so that it is aligned with the shareholders’ agreement. The members can also enter into ancillary agreements including:
- Shareholders loan agreements (providing loans to the company for the purposes of funding its working capital).
- Service agreements (providing particular services, such as management to the JV).
- The members can also enter into a memorandum of understanding or letter of intent agreeing to the terms of the JV prior to creating the JV company.
How do I start a joint venture in South Africa?
To form a corporate JV, the members of the JV must create a company (the JV company) and become shareholders in the JV. This can be achieved by incorporating a new company or becoming a shareholder in an existing company. All South African companies are governed by the Companies Act.