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Startegic Investment and Joint Ventures

Broadly, there can be two eventual paths that a successful company can take – it may either reach the stage of an initial public offer, or it may be acquired earlier by a ‘strategic investor’. For example, consider acquisition of Skype by Microsoft, Facebook’s acquisition of Whatsapp, acquisition of Redbus by the iBibo group, which are examples of strategic acquisitions. On the other hand, Facebook, Microsoft, Google, Apple or Reliance Industries Limited are all companies that were not themselves acquired by other companies but eventually went on to raise investment from the public in an initial public offer.

A strategic acquisition typically involves a larger company acquiring a smaller company for various strategic reasons (not merely the intention to exit, as is the case for a financial investor) – typically, the larger company (acquirer) will infuse capital into the smaller company (target), and also acquire a significant component (or the entire portion) of the shares of the target’s founders. The founders are typically given employment agreements after the acquisition, although they may also retain a small component of their stake. A strategic acquisition is typically a very rewarding event for founders – shares are valued very highly by strategic investors. Most founders are known to eventually exit the company some soon after the acquisition (within the span of about two years), although in exceptional cases they could stay on. For example, when Blogger was acquired by Google, its founder Evan Williams (who later co-founded Twitter) left the company within 18 months of the acquisition.

What are the commercial objectives behind a strategic investment vis-à-vis a financial investment? Let’s hear from Sayak Maity, Associate at AZB & Partners, who has worked on several investment transactions in the past across different industry-sectors ranging from airlines to pharmaceuticals.

Joint ventures

Businesses typically enter into different kinds of collaborative or joint ventures to achieve their commercial objectives. A joint venture enables different business entities to pool in their respective expertise and specialization to work towards realization of a common objective. While joint ventures can be contractual, many high-value joint ventures are incorporated as separate legal entities (in which the joint venture partners are the shareholders). For example, Tata Starbucks or Maruti Suzuki are examples of joint ventures.

How are joint ventures different from a financial investment or strategic investment?

In a financial investment it is still the promoters who are likely to control the shots. In a strategic investment the acquirer, being the largest shareholder will be in a position to control the affairs of the company. What happens in a joint venture? How is it different from a financial investment?

The legal documentation for creating a joint venture, a strategic investment or financial investment transaction is the same – a shareholders agreement and share subscription agreement is the foundational document for all kinds of transactions. However, the manner of governing business activities, decision-making processes and exit related provisions in the documentation may differ significantly depending on the type of the transaction. These provisions are explained in detail below:
  • Both parties are interested in management of the business and will therefore have clearly specified rights which allow them to participate in the business. Unlike a financial investor whose main purpose behind investing is to protect his investment, a JV partner is interested in running the business as well.
  • There will be clear provisions explaining the situations which constitute a stalemate or ‘deadlock’ in decision-making, and what measures should resolve the deadlock.
  • In case there are disputes or governance deadlocks cannot be resolved, detailed exit mechanisms will be prescribed.
Also refer to the chapter titled ‘Introduction to raising investments’.

At the time of commencement, the joint venture entity is started from scratch, both parties will have to make different kinds of contribution towards the venture – apart from contributing capital, they will also have to make arrangements for transfer of intellectual property, physical assets and property and employees. These issues are captured in ancillary documentation, which is executed in addition to the shareholder’s or joint venture agreement. Some of these documents are described below:
  • license agreements or software supply agreements to govern software and technology related issues
  • asset purchase agreements for transfer of assets.
  • funding agreements with shareholders and third parties for raising debt financing
  • secondment agreements for employees.
The ancillary documentation also governs how revenues are taken out from the joint venture entity.

How to resolve deadlocks in a joint venture

Governance rights in joint ventures: reserved matters, board constitution and information rights



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