LEGAL VIEWPOINT: Main features of joint venture companies

By Dr AbdelGadir Warsama

Asia 728x90

7 December 2022

According to the provisions of the Commercial Companies Law there are different types of companies that could be established for corporate business. The law provides for different types to enable the public to choose that type of company suitable for them and could satisfy their requirements. Herein, I will focus on one of the types of companies to be established, which is the joint venture. In Arabic, this type is called “Sharakhit Al-Mahasa”.

The phrase, joint venture, is commonly used on daily basis by business people or other groups, intellectuals and media circles, however, I have noticed that sometimes the phrase is not used in the right context. In law, when we refer to ” joint venture companies” we specifically mean that type of companies agreed upon between two persons or entities to share the profits and or loses in one or more business activities run by one partner in his private name. The joint venture company shall be strictly confined to the relationship between the partners only and shall have no affect whatsoever towards third parties. The existence of the joint venture company can be raised as an issue, however, this can easily be proved by available means of evidence.

The above explanation, more or less, gives the exact meaning of the phrase “joint venture” in law.

The main feature in this type of companies, compared to other types, is the running and managing of the company by one of the partners in his private name. This feature of joint ventures is not possible with reference to other types of companies wherein all the business and every thing is totally undertaken in the name of the company and not in the name of a partner.

This distinctive feature gives the impression that this type of companies lacks the capacity of being a juristic person. Another important legal feature is that the venture is closed and confined to the partners only and shall be ineffective in relation to third parties. This principle of ineffectiveness signifies another major distinction from other types of companies. The legal relationship between the concerned partners is governed and totally guided by the contract (in other words, the memorandum of understanding signed between the partners) establishing the joint venture.

This contract explicitly provides for the legal rights and obligations of each partner and, moreover, the methodology of sharing the profits or loses between the concerned partners. The contract establishing the joint venture company is not subject to registration in The Commercial Register nor disclosure to the public. Whereas, in other types of companies, registration in the Register and disclosure to the public are mandatory. 

The aggrieved party, just in case there is any dispute, shall have the right to pursue and sue the partner who dealt with him only. Other partners, in all cases, are not responsible unless they disclose the existence of the joint venture company and their association to the company. If the existence of the joint venture is proved before the court, then all partners shall collectively and jointly be liable to third parties on pro rata basis. As a rule each partner owns his shares agreed upon at the time of establishing the venture, unless agreed otherwise.

A partner in such type of companies shall not be regarded or dealt with as a trader or merchant, according to the definition provided in the law, unless he performs the commercial activities by himself or informs third parties. All decisions regarding the management of the joint venture shall be unanimous unless the partners agree otherwise i.e. to majority of votes as mentioned in the memorandum of association.

The characteristics of joint venture companies indicate that they possess a unique legal structure, this uniqueness cannot be easily identified unless we look very closely at the legal definition of the term “joint ventures”.