A joint venture agreement is a business arrangement in which two or more parties agree, domestic or foreign, to create a new corporation for purposes of accomplishing a specific activity in a determined market. This activity may be a new project or any other business activity in which the parties involved already participate in such specific market.
Joint venture agreements are frequently used to enter the Mexican market using the experience of a Mexican corporation to avoid starting from zero any business operations and reducing any potential risks for entering the specific market. Foreign corporation form joint ventures with domestic corporations already present in the relevant market and may bring new technologies or business practices into the joint venture using the business relationships and/or governmental contacts of the domestic corporation.
Regardless of the joint venture structure, the most important document will be the joint venture agreement that will set out all the rights and obligations of each party member of the venture.
Depending on the business structure established for the joint venture, the objectives, initial contributions, day-to-day operations, profits and responsibility for losses must be established in the relevant agreement. Likewise, specific dispute resolution clauses must be included to make sure an appropriate mechanism to dissolve the joint venture in any specific scenario.
To the extent that the joint venture provides for the creation of a special purpose vehicle to carry out the business operations, the specific bylaws of such vehicle must contain the provisions negotiated under the joint venture agreement, including but not limited to (i) capitalization, (ii) management (including Board members and appointment of key officers), (iii) shareholders/partners meetings (including specific voting requirements for specific scenarios), (iv) limitations on transfer of shares/equity interests, and (v) dispute resolution mechanisms, amongst others.
In Mexico, joint venture agreements have two different structures. The first structure used more from a tax perspective is known as a joint venture association (asociación en participación) and it is an agreement by which an individual or corporation grants to others who provide him with goods or services, a share in the profits and losses of a mercantile negotiation or of one or several specific transactions of commerce.
This agreement must be in writing and not subject to registration, must be signed by legal representatives (individual or corporation) with capacity to contract and the purpose of such association must be lawful.
There is no social organ, it is only managed by the association that works on its own behalf.
Under this type of contracts:
1. The losses that correspond to the associates cannot be greater than the value of their contribution.
2. Unless otherwise agreed, the distribution of profits or losses among the capitalist partners will be proportional to their contributions, in relation to the industrial partner.
3. The admission of new members and the assignment of the rights of members cannot be made without the consent of all others (unless the agreement establishes that the consent of the majority is given).
4. The partners may not, either on their own account or on behalf of third parties, engage in business of the same kind as that which is the object of the company, nor form part of companies that carry it out (except for the consent of the other partners).
Please note that this form of agreement is not frequently used and depends on the nature of the project for its consideration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.