"We are starting the project together. Do we really need a JVA?"

Two companies identify an opportunity to develop and operate a new logistics facility.

Company A will provide the land and industry connections. Company B will contribute RM2 million, technical expertise and operational staff.

They agree that profits will be shared equally.

Both sides are optimistic.

“We trust each other. Let us start the project first and prepare the documents later.”

Six months later, Company B has transferred part of its funding. Company A has started dealing with contractors. A potential customer is ready to sign a five-year service contract.

However, the parties have not decided:

• who owns the project assets;

• who may sign contracts;

• whether additional funding is mandatory;

• how management decisions will be made;

• who owns the project’s intellectual property; or

• what happens if one party wants to leave.

A joint venture does not fail only when the business performs badly.

It can also fail because the parties never agreed on how the business should be owned, funded, controlled and eventually concluded.

1. Start by identifying the joint venture structure

A joint venture may be structured in different ways.

The parties may incorporate a new company and hold shares in that company. This is commonly described as an incorporated joint venture.

Alternatively, they may collaborate contractually without forming a new entity. Each party retains its own business and assumes the responsibilities allocated under the joint venture agreement.

The appropriate structure depends on matters such as:-

• the duration of the project;

• the nature of the business;

• ownership of assets;

• regulatory requirements;

• financing;

• tax treatment;

• liability exposure;

• staffing; and

• the intended exit.

A contractual joint venture should not accidentally operate as an unintended partnership or agency relationship.

The agreement should state the nature of the relationship and whether either party has authority to bind the other.

2. A joint venture company is a separate legal person

Where a new company is incorporated, the company is separate from its shareholders.

The land, money, equipment or intellectual property intended for the venture does not automatically become the joint venture company’s property.

Each contribution must be documented.

Company A may:-

• transfer the land;

• lease the land to the joint venture company;

• grant a licence to use it; or

• retain ownership while permitting limited project access.

These alternatives produce different legal, financing and tax consequences.

Similarly, Company B’s RM2 million may be introduced as share capital, a shareholder loan, staged project funding or a combination of these.

The Companies Act 2016 governs the company’s corporate structure, shares, directors and internal administration. The joint venture agreement must therefore be coordinated with the company’s constitution and corporate approvals.

3. “We will contribute equally” is not sufficiently precise

The agreement should identify what each party must provide and when.

Contributions may include:-

• cash;

• land or premises;

• machinery;

• employees;

• licences;

• technical knowledge;

• customer contracts;

• intellectual property;

• guarantees;

• management time; and

• access to suppliers or distribution networks.

The parties should agree on how non-cash contributions are valued.

If Company A’s land is valued at RM2 million, does the joint venture receive ownership, a lease or only permission to use it? If the project ends after two years, does the land remain with Company A?

The agreement should also state whether a failure to contribute constitutes a default and what remedies are available.

4. Who must provide additional funding?

Initial capital is rarely the project’s final funding requirement.

The venture may later require money for construction overruns, working capital, licence applications or expansion.

The parties need to decide:-

• who may approve additional funding;

• whether contributions must remain proportionate;

• whether funding will be equity or debt;

• the terms of shareholder loans;

• what happens if one party cannot contribute;

• whether the other party may fund the shortfall; and

• whether failure to contribute causes dilution, debt or default.

A clause stating that the parties will provide “such further funding as may be required” can create uncertainty if there is no limit, approval mechanism or consequence for non-participation.

5. Ownership percentage and management control are different questions

A party holding 50% of the shares does not necessarily control daily operations.

The agreement should determine:-

• the composition of the board;

• each party’s right to appoint and remove directors;

• quorum requirements;

• voting thresholds;

• the authority of the chief executive or project manager;

• financial approval limits;

• bank signatories; and

• reporting obligations.

Routine operational decisions may be delegated to management.

More significant matters may require unanimous or enhanced approval. These are commonly described as reserved matters.

They may include:-

• approving the annual budget;

• borrowing money;

• granting security;

• issuing new shares;

• entering major contracts;

• disposing of material assets;

• changing the nature of the business;

• appointing senior management;

• commencing significant litigation; and

• declaring dividends.

If every minor decision requires unanimous approval, the venture may become unworkable. If too few matters require consent, one party may lose protection over its investment.

6. A 50–50 venture needs a deadlock mechanism

A disagreement becomes a deadlock when the required decision cannot be made and the business cannot move forward.

The agreement should distinguish between an ordinary disagreement and a defined deadlock.

A deadlock procedure may involve:-

• escalation to senior representatives;

• a cooling-off period;

• mediation;

• referral to an independent expert for technical issues;

• a buy-out mechanism;

• sale of the business;

• transfer to a third party; or

• winding up as a final option.

A buy-out mechanism must be designed carefully.

A clause allowing one party to name a price and force the other either to buy or sell may favour the party with greater financial resources.

The agreement should consider valuation, funding ability, regulatory approvals and the treatment of shareholder loans.

7. Who owns the intellectual property?

One party may bring an existing system, formula, design, brand or operating method into the venture.

The agreement should distinguish:-

• intellectual property owned before the venture;

• intellectual property created specifically for the project;

• improvements to existing technology;

• customer data;

• project documents; and

• licences required after termination.

Contributing intellectual property does not necessarily mean transferring ownership.

A limited licence may be more appropriate.

The agreement should specify the permitted use, territory, duration, sublicensing rights and what happens when the venture ends.

Otherwise, the joint venture may depend on technology that it can no longer use after the relationship breaks down.

8. Which party owns the customers and commercial opportunities?

A joint venture may receive opportunities through one party’s existing network.

The parties should decide whether:-

• all opportunities within a defined field must be offered to the venture;

• each party may continue its existing business;

• customers introduced to the venture belong to the venture;

• a party may pursue rejected opportunities independently; and

• employees or customers may be approached after termination.

Restrictions must be drafted with regard to Malaysian law, including principles governing restraint of trade and competition.

An excessively broad non-compete clause should not be assumed to be enforceable merely because both parties signed it.

Protection of confidential information, trade secrets and project-specific opportunities may require a more carefully targeted approach.

9. Profit sharing cannot be determined before liabilities are defined

A statement that profits will be divided 50–50 leaves several unanswered questions.

The agreement should explain:-

• how profit is calculated;

• which expenses are deductible;

• whether management fees are payable to either party;

• whether shareholder loans are repaid first;

• whether reserves must be maintained;

• who approves the accounts;

• when distributions may be made; and

• whether the company must satisfy statutory solvency requirements.

One party should not be able to reduce distributable profit by charging unapproved related-party expenses.

Related-party transactions should be disclosed and subjected to an agreed approval process.

10. The parties must identify who bears liability to third parties

In a contractual joint venture, a customer or contractor may deal directly with one or both parties.

The agreement should identify:-

• who signs each external contract;

• who issues invoices;

• who employs the staff;

• who holds the required licences;

• who bears tax obligations;

• who maintains insurance;

• who is responsible for defective performance; and

• how third-party claims are allocated.

An internal agreement between the joint venture parties does not necessarily prevent a third party from pursuing a contracting party.

Indemnities may allocate the loss between the parties, but they do not automatically remove liability owed directly to the customer, employee or regulator.

11. Plan the exit while the parties are still cooperating

A party may wish to exit because:-

• the project has achieved its purpose;

• performance targets were not met;

• further funding is required;

• management relationships have deteriorated;

• a party undergoes a change of control;

• a party becomes insolvent; or

• a better commercial opportunity arises.

The agreement should regulate:-

• the minimum commitment period;

• permitted transfers;

• rights of first refusal;

• tag-along and drag-along rights;

• valuation;

• payment terms;

• treatment of guarantees;

• repayment of shareholder loans;

• ownership of assets;

• continuing customer contracts; and

• post-exit confidentiality.

Selling shares does not automatically release a party from guarantees or contractual obligations given to banks, landlords or suppliers.

Third-party consent or a formal release may still be required.

12. What happens when the venture terminates?

Termination should address more than the date on which cooperation stops.

The parties may need to decide:-

• whether existing contracts will be completed;

• how employees will be treated;

• who collects outstanding receivables;

• how liabilities are paid;

• whether stock is sold or divided;

• who retains project records;

• how licences are cancelled or transferred;

• whether intellectual property may continue to be used; and

• how remaining assets are distributed.

The venture may continue to have obligations long after the relationship between the shareholders has ended.

13. Due diligence should be conducted on the proposed partner

Before committing assets or reputation, each party should examine:-

• corporate ownership;

• financial capacity;

• litigation history;

• regulatory licences;

• existing charges;

• key contracts;

• technical capability;

• intellectual property ownership;

• sanctions or compliance risks; and

• authority to enter the venture.

A party should not contribute land, technology or customer access merely because the other party promises that funding is “already approved.”

The source, timing and conditions of funding need to be verified.

14. A term sheet is useful, but it is not the entire transaction

The parties may first record key commercial principles in a memorandum of understanding or term sheet.

That document should state which provisions are binding, such as confidentiality, exclusivity, costs and governing law.

The full joint venture documentation may also require:-

• a shareholders’ agreement;

• a company constitution;

• subscription or share-transfer documents;

• shareholder loan agreements;

• asset transfers;

• intellectual property licences;

• service agreements; and

• board or shareholder resolutions.

These documents must be consistent with one another.

A joint venture agreement is not merely evidence that two parties intend to work together.

It is the operating manual for what happens when they need more money, disagree on a decision, face a claim or no longer want the same future.