Joint venture - concept and comparative analysis

I. Preliminaries

The joint venture contract is defined by Article 1949 of the Civil Code as: "a contract by which a person grants one or more persons a share in the profits and losses of one or more operations which he undertakes".

Practically speaking, a joint venture is a form of association between two or more persons - usual professionals within the meaning of the Civil Code - without acquiring a separate legal personality.

Practical scenarios in which it is considered appropriate to use this type of contract may be, for example, the following:

Hypothesis 1: A professional wants to start a project for which he does not have enough funds. In this case, he will team up with another professional who has the necessary funds, offering his labor and/or expertise in return. In the end, the result will be shared according to the percentages agreed by the parties.

Hypothesis 2: A professional wants to build a real estate project but does not have the necessary land. In this case, he will enter into a partnership with another person who owns the land, and in return, he commits to building the complex with his own funds. At the end, the real estate will be divided according to the percentages agreed by the parties.

In both cases, the Parties will establish at the very beginning what percentage of the benefits and losses will be earned/supported by each party.

In the following, we will look at the differences between the joint venture, the limited liability company, and the simple company (governed by the Civil Code).

II. Joint venture vs. limited liability company vs. simple company (governed by the Civil Code)

2.1. The method of formation

• A joint venture is formed by signing a contract (a joint venture contract) between two or more persons who intend to engage in one or more legal transactions together, with each partner maintaining its legal personality;
• A limited liability company is formed by drawing up/signing specific company documents (Memorandum of Association, Articles of Association, Partnership Agreement) by one or more individuals or legal entities for the purpose of carrying out profit-making activities by creating a new entity with a separate legal personality;
• A simple company is formed by the conclusion of a Partnership Agreement by at least two individuals or legal entities for the purpose of carrying out profit-making activities, and an entity without separate legal personality is created;

The essential difference is, therefore, that only the limited liability company implies the establishment of an entity with a legal personality distinct from that of its members.

2.2. The regime of the associates' contributions

• In the case of a joint venture, the partners remain the owners of the assets placed at the disposal of the joint venture and may agree: (i) that the assets brought into the joint venture and those obtained as a result of their use become joint property or (ii) that the assets placed at the disposal of the joint venture pass, in whole or in part, into the ownership of one of the partners for the purpose of achieving the object of the joint venture;
• In the case of a limited liability company, the shareholders must build up an initial share capital by making contributions in cash or in assets, which become the property of the newly formed company;
• In the case of a simple company, the partners must build up an initial share capital by making contributions (in cash, tangible or intangible assets, specific benefits or knowledge, etc.), which become the common property of the partners making the contributions;

The essential difference is therefore that: (i) in the case of joint ventures and simple companies, the contributions remain the property of the partners; (ii) in the case of limited liability companies, the contributions become the property of the newly formed company.

2.3.   Forming the entity's will

• In the case of a joint venture, the partners decide according to the rules laid down in the Joint Venture Contract; in principle, the power of decision is left to a partner, known as the managing partner;
• In the case of a limited liability company, the shareholders decide at the General Meeting of Shareholders, under the quorum and majority conditions regulated by Law no. 31/1990 or by the Memorandum of Association; in principle, decisions are taken by a vote representing an absolute majority of the members and of the shares - except for decisions to amend the Memorandum of Association, which are taken by unanimous vote of the shareholders.
• In the case of a simple company, the shareholders decide at the General Meeting of Partners, under the quorum and majority conditions laid down in the Civil Code or the Partnership Agreement; in principle, decisions are taken by a majority of the shareholders' votes, except for decisions to amend the Partnership Agreement or appoint a sole administrator, which is taken by a unanimous vote of the shareholders;

The essential difference is that, in the case of limited liability companies and partnerships, the decision-making power of the partners is exercised at each General Meeting of Shareholders, whereas in the case of joint ventures, the decision-making power belongs in principle to the managing partner designated by the initial contract.

2.4.    Relations between associates and third parties

• In the case of a joint venture, the partners contract and bind themselves in their own name vis-à-vis third parties, but at the same time they are jointly and severally liable for the acts concluded by any of them in the "representation" of the joint venture; the partners exercise all the rights arising from the contracts concluded by any of them, but the third party is liable exclusively to the partner with whom it has contracted unless the partner has declared its membership of the joint venture at the time the act is concluded;
• In the case of a limited liability company, the shareholders do not commit themselves in their own name vis-à-vis third parties, but all legal relations are between the company and third parties;
• In the case of a simple company, the shareholders can act both in their own name and in the name of the partnership;

The essential difference is, therefore, that the only form of company in which the partners commit themselves strictly on behalf of the newly created entity is the limited liability company. In the other two cases, we do not have such a clear-cut 'boundary' between the partners and the (unincorporated) legal entity formed. This will be discussed in more detail in the following section when we examine the liability of the associates.

2.5.   Liability of the associates

• In the case of joint ventures, we reiterate that the partners are jointly and severally liable for the acts concluded by any of them on behalf of the joint venture; where the joint venture does not involve the formation of a separate legal entity, the partners will be liable to creditors with their own assets; any clause in the joint venture contract limiting the partners' liability to third parties is unenforceable against them;
• In the case of a limited liability company, the shareholders are liable only up to the amount of the paid-up share capital; the company will be liable for all the assets held in the patrimony; in principle, creditors will not be able to claim against the shareholders' personal assets;
• In the case of a simple company, the shareholders are liable to the company's creditors with the joint assets they have brought into the company and, in addition, they are liable with their own assets in proportion to their contribution to the company's assets;

The essential difference is, therefore, that: (i) in the case of a joint venture, the partners are liable with their own assets; (ii) in the case of a limited liability company, the shareholders are liable only up to the amount of the share capital they have subscribed (which is often not more than 200 Ron); (iii) in the case of a simple company, the shareholders are liable with the assets they have brought into the company and only in subsidiary form with their own assets, if the creditors have not satisfied their debts.

III. Conclusions

In conclusion of all of the above, it appears that the differences in legal status between the entities analyzed have a common ground - acquiring legal personality.

Thus, in the case of entities that do not involve the acquisition of legal personality (such as simple partnerships and joint ventures), we have a 'preferential' regime for the contributions made, which remain in fact the property (individual or joint) of the partners, but also a much more drastic regime for the liability of the partners, which is not limited solely to the contributions or assets brought into the partnership - but also extends to their personal assets.

On the other hand, in the case of an entity that assumes legal personality (limited liability company), the contributions will pass from the ownership of the shareholders to the ownership of the company, but at the same time, the liability will be limited to the contributions made and/or the assets of the company. Basically, as a matter of principle, creditors of the company will not be able to claim against or seize the personal assets of the members.

Under these circumstances, the question to be answered if a person is undecided as to the type of entity through which he wishes to initiate a joint-venture economic activity is simple - is greater control over the assets contributed to the share capital desired or is a limitation of liability to creditors desired?

Obviously, in the first hypothesis, it is advisable to opt for the joint venture/simple partnership, whereas in the second hypothesis, it is advisable to opt for the limited liability company.

MAXIM / Associates

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