Get to Know: Joint Venture

ADCO Law

What is Joint Venture?

Joint Venture or JV is business cooperation carried out by two or more companies, both existing companies or companies that will be established, which aims to achieve certain business goals. This kind of cooperation is carried out through agreements or contracts resulting in the forming of a new company named Joint Venture Company or JVC. Forming a Joint Venture is a common business strategy used by companies to achieve a common goal and/or expand and reach a specific consumer market. Business entities forming a JV then combine their expertise and resources to achieve a particular goal. Furthermore, the forming of a JV may also minimize the business risks of one business entity because all the shareholders in the JV do risk-sharing.

However, to carry out a JV, Article 5 Law Number 25 of 2007 concerning Investment Law as amended by Law No. 11 of 2020 concerning hkjgjhklgjlgkluy stipulates that Joint Venture can only be carried out by business entities in the form of legal entities, and strictly sets out that foreign companies must be in the form of a limited liability company established and domiciled in the Republic of Indonesia.

The Difference Between Joint Venture and General Partnership

Although JVs and general partnerships are typically formed by two or more companies or individuals, the difference lies in the objective or purpose of the formation. General Partnership is referred to as a relationship or cooperation between parties doing a business with the common purpose of making a profit. Meanwhile, JVs involve two or more business entities entering into cooperation for developing a particular project. JVs often combines various aspects of each contracting company, such as human resources, finance, and management expertise. Meanwhile, the taxes borne by the Joint Venture are the responsibility of the Joint Venture Company, and the taxes of the “venturers” is the responsibility of each company (not the responsibility of the project owner), which reports it to the Joint Venture company.

Applicable Laws and Regulations of Joint Venture

1. Article 1 point 3 of the Investment Law states that foreign investment is an investment activity to carry out business in the territory of the Republic of Indonesia carried out by foreign investors, using either full foreign capital or joint capital with domestic investors.
2. Article 2 of Government Regulation Number 20 of 1994 as amended by Government Regulation Number 83 of 2001 regarding Share Ownership in Companies Established In the Framework of Foreign Investment explains that foreign investment can be made in two forms, namely (i) a joint venture between foreign capital and capital owned by Indonesian citizens and/or Indonesian legal entities; and (ii) direct, in the sense that all capital is owned by foreign citizens and/or foreign legal entities.

Joint Venture Example

The Freeport Gold Mine, one of the largest gold-producing mines in Indonesia, is owned by PT Freeport Indonesia, which is a Joint Venture formed between Freeport-McMoran and PT Industri Asahan Aluminum Persero (Inalum). It is currently the biggest gold concentrate-producing mine in Indonesia. PT Freeport Indonesia does not produce pure gold, but rather concentrates containing copper, gold and silver, which are all exported to international markets.

Read more: Get to Know: Standard Clauses in Standard Agreement

The Principles in JVA

The Joint Venture Agreement, as a cooperation agreement, must include the principles contained in Article 1338 of the Indonesian Civil Code, which are as follows:

1. The Principle of Freedom of Contract
   The principle of freedom of contract is a principle that gives each party the option of entering into an agreement with the freedom to arrange and negotiate what rights and obligations are to be regulated in the contract. “Freedom” is referred to acting in accordance with applicable laws, public order and good morals. As contained in Article 1339 of the Civil Code, an agreement is binding not only on matters expressly stated in it, but also, according to the nature of the agreement, on other matters as required by propriety, custom and law. This is also consistent with the requirements for making an agreement stipulated in Article 1320 of the Indonesian Civil Code, which states that drawn up contracts agreed upon by the parties must be based on “halal clause” because, if otherwise, the agreement becomes “null and void” or “void ab initio” and is considered to have never been valid. The terms of the “halal clause” has also been emphasized in Article 1337 of the Indonesian Civil Code, which reads:”A cause is prohibited if it is prohibited by law, or if it is contrary to good morals or public order.”
2. The Principle of Consensualism
   This principle is closely related to the previous principle. The convergence of wills or the consensus of the contracting parties is the source of contractual obligations. The agreement entered into by the parties has occurred with the existence of an agreement without the need to fulfill certain formalities.
3. Principle of Personality
   This principle states that third parties who are not related to the parties to the agreement are not bound by the agreement but are only given the rights and obligations contained therein to the parties involved/make it. This principle can be concluded based on Article 1340 paragraph (1) of the Civil Code which states that agreements only apply to those who make them.
4. Principle of Good Faith
   Based on Article 1338 paragraph (3) of the Civil Code, an agreement must be based on good faith, meaning that the contents of the agreement which are in the form of rights and obligations must be proper and rational. This includes all important aspects, for example in the case of this Joint Venture Agreement. Domestic investors must provide an honest and clear explanation regarding the laws and regulations governing the project to Foreign Investors, and so do Foreign Investors who tend to be more literate in technology and management skills; they must provide a rigid explanation.
5. The Principle of Pacta Sunt Servanda (Kepastian Hukum)
   Pacta Sunt Servanda means “an agreement is binding”, so if an agreement has been legally made by the parties, the agreement is automatically binding on the parties. This binding power is as strong and binding as laws made by the government

 

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The Structure of Joint Venture Agreement

When the parties have agreed to form a Joint Venture Company as a special vehicle to carry out the project they finance, they have to sign a JVA which has its own structure. The Joint Venture Agreement must regulate the shareholding percentage to determine the control over a joint venture company (JVC/JV Company), including control over assets and management.

In addition to the above, a JVA must include a provision that sets out the obligation of the JV company to comply with the applicable laws and regulations concerning, among other things, licensing and restrictions on foreign shareholding in investment law because a JV is quite dependent on how the JV company operates.

Other clauses/articles in a JVA are the same as those in cooperation agreements in general, that is, they contain matters such as the definition of the agreement, the purpose of the agreement, force majeure, insolvency, withdrawal, termination, confidentiality, applicable laws, and dispute resolution.

Important Things To Do

Before entering into a joint venture agreement, the parties must pay attention to the following matters:

1. Mechanisms and rules related to shareholder decisions, including the delegation of responsibility to the executive.
2. The leader who will chair the General Meeting of Shareholders (GMS), which will usually be appointed by one of the directors.
3.  Consultation, which is an important part that must be carried out before carrying out a Joint Venture because each company in the contract has the right to understand the goals to be achieved through the JVC
4. Both companies need to understand every detail of the provisions in the contract clauses before signing each sheet.

Then, is stamp duty an obligation in terms of signing? And is it a legal requirement for the validity of the agreement? Based on Article 1320 of the Civil Code, the agreement will remain valid and can be implemented if it fulfills the 4 conditions for a valid agreement. Thus, stamp duty is only needed as a complement if in the future there is a dispute or default that needs to be resolved through the Court.

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