Author: Lic. Rafael Giménez Camacho
Joint Venture agreements, Strategic Alliances, and Co-investments are becoming increasingly popular due to the significant advantages they provide in optimizing resources within companies. The combination of efforts, financial resources, and unique characteristics such as knowledge, skills, and resources contributed by each company to the objectives of the agreements benefits the achievement of each party’s goals, enhancing their resources, participating in other market areas, shortening learning curves, and achieving greater market presence, among others, resulting in increased profitability without compromising the organization and capital of their companies.
1. INTRODUCTION
Joint Ventures, Strategic Alliances, and Co-investments are types of contracts that have transcended to become common expressions in business discussions, referring to the agreement between two or more companies to contribute an investment for the joint production of a product or the provision of a service, which is the case with Co-investment. In the case of Strategic Alliances, the contracting companies contribute existing characteristics to unite them and achieve a result.
In the context of Mexican legislation, the main advantage of a Joint Venture is that companies can practically enter into any agreement or contract, as it is an unnamed contract not specifically regulated and based on the principle of the free will of the parties, as established in the Commercial Code.
2. GENERALITIES
Joint Ventures can be entered into by entities that are not specifically established for profit, such as Civil Associations and Non-Governmental Organizations, in which case the free will of the parties, as established in the Civil Code, will apply.
Despite the versatility of the Joint Venture Contract, its complexity lies in the fact that they are contracts containing various provisions, and each must comply with its applicable legislation. For instance: regarding obligations, suspensive and resolutory conditions, the Federal Civil Code will apply; in the case of licenses for patents, trademarks, and copyrights, that agreement must adhere to the relevant Intellectual Property laws; and for mandates, deposits, or leases, it must comply with the specific regulations of the Commercial Code to avoid invalid clauses and, consequently, ineffective obligations for enforcing compliance.
Despite their popularity, it is not as common to notice that a product or service being consumed is the result of a Joint Venture, as is the case with Franchises, since one of their essential clauses is confidentiality, to which the companies entering into the agreement and even their employees and officials are subject.
3. MANAGEMENT OF INCOME, EXPENSES, AND PROFITS
The clear management of expenses, income, and profits will be essential for fulfilling the parties’ obligations under the project and for ensuring that each company receives the rights and benefits resulting from the association between the two.
In the case of Strategic Alliances, the expenses incurred for fulfilling the project will be the responsibility of each company, as it involves using their own infrastructure or rights to meet their obligations. In the case of Co-investment, the parties may open a joint bank account to ensure clarity in the accounts and oversight of the expenses incurred in compliance with the agreements.
4. INTELLECTUAL PROPERTY IN THE JOINT VENTURE AGREEMENT
Intellectual Property plays a significant role in Joint Venture agreements, Strategic Alliances, and Co-investments. The agreements will depend on the object and purposes of the arrangements while respecting trademarks, patents, industrial models, utility designs, copyrights, and of course, trade secrets belonging to each company as well as those arising from the outcome of the Joint Venture.
In this same regard for respecting the intellectual property of the parties, each party will be obligated not to register trademarks already registered under the ownership of their partner. Furthermore, they will commit not to register trademarks that imply to the consuming public that there is an association between them, unless, as in the case of authorized distributors, such registrations are relevant and, of course, consented to in writing by the other party.
In the event that new rights are generated as a result of the partnership, the ownership interests of each party must be established, reflected in an attached Usage Rules agreement that outlines ownership percentages, commercial exploitation, licenses, transfer of rights, defense, limitations on products or services as applicable, and voluntary termination.
5. TERM OF THE JOINT VENTURE AGREEMENT
Generally, the initial term of the Joint Venture Agreement is short because it is considered a trial period. In other words, since the companies are distinct and sometimes operate in different markets, they set a term to evaluate the performance of the agreements. This helps to ‘maintain the independence between both companies, which is essential for achieving results and limiting the agreements to the project’s conclusion’ in order to avoid risks, with fixed goals established under resolutory conditions. If these goals are met, the term of the agreement can be extended so that, subsequently, in the event of success, the agreements remain in effect. Another option is that if the goals described in the Contract are not met, it can be terminated without the need for the parties to express their consent or require a judicial ruling.
6. LABOR TREATMENT IN THE JOINT VENTURE
By definition, in a Strategic Alliance, each company will be responsible for its relationship with its employees, and under no circumstances may they hire new employees on behalf of the other party, as the Joint Venture does not imply a mandate or representation between them. The independence of both parties must be respected.
However, in most cases, when it comes to Co-investments, the parties will generally need to make new hires. They must agree on who will be responsible for the subordination according to the obligations of each area and, consequently, the responsibility for paying social security contributions, whether shared or borne by one of the parties.
7. DISPUTE RESOLUTION IN THE JOINT VENTURE
It is important to have a comprehensive Contract that reflects the intentions of the parties and describes the rights and obligations of the companies involved. As previously mentioned, this is a Contract that does not have specific regulation, which is why it is essential for the Contract to include a glossary of terms with their respective definitions that correspond to the customs and practices of the commercial environment. This will facilitate its interpretation for both the parties and, in the event of a dispute, enable the arbitrator or judge to interpret it properly.
In the event of a breach by either party, a timeframe is established for them to remedy the breach. If the issue persists, it is generally referred to the Arbitration Center of Mexico (CAM).
8. FIGURES RELATED TO JOINT VENTURES
Joint Venture Contracts are primarily distinguished from Commercial Companies (such as Corporations, Public Corporations, and Limited Liability Companies) in that the purposes of the parties involved do not always have a common goal, and their establishment does not result in the creation of a legal personality. In some cases, the agreements may consist of forming a joint company, in which case the rules of the General Law of Commercial Companies will apply, with the Joint Venture serving as the framework within which such a company will be established, particularly in the case of present or future contributions.
In the case of Participation Associations, both types lack their own legal personality, reason, or business name, but they are distinguished by the fact that the parties do not necessarily have a common goal; instead, the expected outcomes may vary. Additionally, in a Participation Association, the parties assume a shared responsibility for the profits and losses of the venture, whereas in a Joint Venture, profits and losses are not necessarily calculated or distributed jointly.
9. TAX TREATMENT IN THE JOINT VENTURE
When it comes to tax treatment, it should be addressed according to the purpose of the contract and the parties involved, as it seems that the Federal Tax Code does not fully harmonize with the specific laws in the area by redefining the Participation Association Contract in a more case-by-case manner than by the type of contract. Article 17-B establishes that ‘a Participation Association is understood to be the group of individuals engaging in business activities due to the execution of an agreement, provided that they, by legal provision or by the agreement itself, participate in the profits or losses derived from such activity.’ This means that it receives the same tax treatment as a legal entity; however, as mentioned earlier, it is essential to consider the purpose of the contract and the parties involved.
10. EXAMPLES OF JOINT VENTURE
Joint Venture Contracts can be as diverse as the intentions of the companies involved, and while there are clauses that are common in their content, there are also some that will depend on the specific purpose of the agreement. To understand what they can consist of, we can provide some examples:
a) Marketing products or services abroad.
Foreign companies looking to enter different countries for internationalization commonly establish Joint Ventures with companies that have experience in the markets they wish to penetrate, which provides an initial advantage to shorten the learning curve.
b) Permits and Licenses.
It is possible to share the benefits of permits and licenses, even though their holders and licensees generally cannot transfer these rights. In this case, the Joint Venture will involve being able to request a specific service from the entity that holds the permit or license, allowing the other party to take advantage of that benefit without the need to sublicense or transfer a permit.
Such is the case with a company that has a certification and another company that has the client’s accreditation. In this scenario, the Joint Venture will involve the provision of a service or product by the company that holds the permit or license, while the other company provides the customer base or the buyer who requires the certification. Both companies will gain a future client if they maintain the appropriate quality and price.
c) Construction Works.
Construction projects often require significant investments for the development of their works, involving various companies specialized in different aspects. The Joint Venture can consist of one company contributing the land and the other contributing the construction, thereby creating a co-investment between both for the sale of the completed project.
d) Marketing of Patents.
Research companies require the collaboration of another company with distribution channels and experience to market their products with retailers, ensuring timely and proper distribution to avoid penalties. The research company will be more interested in discovering new patents than in marketing its products if it ultimately profits from sales. To learn more about patents, click here: Intellectual Property.
Conclusion
In conclusion, Joint Venture agreements, Strategic Alliances, and Co-investments are associative contracts that represent a highly versatile resource for leveraging the advantages of other companies. Furthermore, these agreements help prevent potential conflicts that may arise between the parties; where there are agreements, there are no conflicts, and these can be prevented through a clear and well-adapted Agreement.
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