Joint Ventures 2024 Comparisons

Global economic conditions such as inflation, interest rate fluctuations, and geopolitical tensions (including war in Ukraine and the Middle East) have hugely impacted the world’s major economies and contributed to a more cautious investment climate. In 2023 and 2024, the joint ventures in Malaysia mainly revolved around hot sectors such as data centres and renewable energy.

Joint ventures in Malaysia have increasingly focused on leveraging the strengths of both parties to tackle large-scale projects, with notable activity in data centres and renewable energy during the past year. This surge is largely driven by the ongoing push for digital transformation and spurred by global sustainability goals and Malaysia’s commitment to reducing carbon emission.

The choice of joint venture vehicle (“JV vehicle”) typically depends on the parties’ risk tolerance, specific needs, management preferences, etc. In Malaysia, traditional joint venture companies (JVCs) and collaboration/co-operation agreements are widely and generally preferred. The main advantages of traditional JVCs are the limited liability of the joint venture partners and the ability of the joint venture entities to own their own assets, rights and liabilities. Taxes are imposed on the joint venture entities in the case of traditional JVCs, whereas in collaboration joint ventures the taxes are imposed on the joint venture partners.

The LLP, general partnership or LP are less common choices of JV vehicle, owing to certain disadvantages. By way of example, in a general partnership, all partners have unlimited liability. This means that if the business incurs debts or faces legal action, the personal assets of the partners can be used to satisfy the obligations of the business. This presents a significant risk, as partners are fully exposed to the business’ financial and legal risks. Further, general partnerships and LLPs generally have limited means of raising capital compared to companies. They usually rely on the personal resources of the partners or bank loans, which can restrict the ability to expand or invest in the business.

The primary drivers for choosing the appropriate JV vehicle in Malaysia indeed include the need for effective profit and loss sharing, entitlement to assets and revenue, risk-sharing, management structure, and control over decision-making processes. As mentioned in 2.1 JV Vehicles, the traditional JVC and collaboration/co-operation agreement are widely and generally preferred. The main difference between them is the absence of a separate legal entity. Generally, an unincorporated joint venture can be a short-term arrangement between the parties, whereas an incorporated joint venture is usually structured to provide a longer term between the parties to execute the objectives of the incorporated joint venture.

In Malaysia, traditional JVCs typically have a more formal management structure, often with a board of directors representing the interests of all joint venture partners. This structure provides clear governance but may dilute individual control. On the other hand, a contractual joint venture offers more flexibility, allowing partners to retain control over their respective contributions while collaborating on specific aspects of the venture. The decision here often hinges on how much control and decision-making power each partner wants to retain.

In Malaysia, the regulatory landscape for joint ventures is primarily governed by the following key authorities and statutory provisions:

• the Companies Commission of Malaysia (SSM) – regulates corporate entities under the Companies Act 2016 (“CA 2016”), which outlines the legal framework for the incorporation, management and dissolution of companies, including joint ventures or an LLP incorporated under the Limited Liability Partnership Act 2012;
• the Securities Commission Malaysia – oversees matters related to capital markets and ensures compliance with the Capital Markets and Services Act 2007 (CMSA), which may apply to joint ventures involving listed companies or those engaged in securities transactions; and
• the Central Bank of Malaysia (BNM) – regulates financial institutions and ensures compliance with the Financial Services Act 2013 and the Islamic Financial Services Act 2013, particularly where financial services are involved.

Depending on the sector, additional regulations may apply, such as those related to foreign investment and specific industry guidelines.

The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) serves as the cornerstone of the country’s AML regime. Under AMLA, reporting institutions (eg, banks, insurers, legal firms, and other designated non-financial businesses) are required to implement stringent measures to detect and report suspicious activities. These obligations include conducting customer due diligence (CDD) and submitting suspicious transaction reports (STRs) to the Financial Intelligence and Enforcement Department (FIED) of the Central Bank of Malaysia. Non-compliance with AML regulations can result in significant penalties (including fines and imprisonment), reflecting the Malaysian government’s strong stance on combating financial crimes.

In Malaysia, there are specific restrictions on co-operating with joint venture partners, particularly those linked to criminal activities such as money laundering and terrorist financing. Companies are expected to conduct thorough due diligence to ensure that their partners are not on any international sanctions lists, such as those maintained by the United Nations. Asset-freezing measures are among the Malaysian government’s efforts in fighting terrorism. Asset freezing is meant to stop the financing of terrorism and will be imposed on those listed in the United Nations Sanctions List and the Ministry of Home Affairs of Malaysia (MOHA)’s list.

In Malaysia, antitrust regulations are primarily governed by the Competition Act 2010, which aims to promote fair competition and prevent anti-competitive practices. The Malaysia Competition Commission (MyCC) is the regulatory body responsible for enforcing the Competition Act 2010, which prohibits – among other things – anti-competitive agreements and abuse of dominant market positions. Joint ventures, especially those involving competitors, must be carefully structured to ensure they do not breach the Competition Act 2010 – for instance, if a joint venture results in price fixing, market allocation, or bid rigging, it would likely be deemed anti-competitive. MyCC has the authority to investigate and penalise companies that violate competition laws. As of now, save for certain industries such as aviation services and the communications and multimedia sectors, Malaysia does not have a mandatory pre-merger notification or merger control regime under the Competition Act 2010. However, if a joint venture results in a substantial lessening of competition in a market, it could still be investigated by the MyCC.

In Malaysia, listed companies are subject to stringent disclosure and governance requirements under the listing requirements. When a listed company participates in a joint venture, it must adhere to specific rules regarding disclosure and may be subject to shareholders’ approval, depending on the transaction’s size relative to the company’s assets, profit, etc. The listing requirements outline thresholds for such transactions and stipulate the necessary steps for disclosure, including a detailed announcement release. Additionally, any material agreements or changes to the terms of the joint venture must be disclosed promptly to ensure transparency and protect the interests of shareholders. Failure to comply with these requirements can result in penalties.

Malaysia has implemented significant control and ultimate beneficial ownership (UBO) disclosure requirements to enhance transparency and prevent illicit activities. Under Section 60B of the CA 2016, every company must keep a register of beneficial owners of the company and record in the register – among other things – the full name, addresses, nationality, identification and usual place of residence of a person who is a beneficial owner of the company and the date the person becomes/ceases to be a beneficial owner of the company.

In a landmark ruling in the case of Concrete Parade Sdn Bhd v Apex Equity Holdings Bhd and Others on 26 March 2024, the highest court in Malaysia (the Federal Court of Malaysia) overturned the decision of the Court of Appeal of Malaysia and held that Section 223(1) of the CA 2016 should be interpreted disjunctively – ie, before the underlying primary agreement becomes binding and enforceable and prior to actual transfer of ownership either to or from the company, shareholders’ approval is required to be obtained only once. The need to obtain shareholders’ approval twice is unreasonable. This decision emphasises balancing shareholder rights with business efficiency, reducing procedural complexity, and promoting a more conducive environment for corporate transactions and growth in Malaysia.

Typical documents involved during the negotiation stage are the term sheet and heads of agreement or memorandum of understanding. Typical provisions would be the role and responsibility of each joint partner, the duration of negotiation, a confidentiality clause, etc.

In Malaysia, the timing and requirements for disclosing a joint venture depend on the nature of the joint venture and the entities involved, particularly if one or more parties are publicly listed. For listed companies, the listing requirements require that material transactions (including the formation of a joint venture) be promptly disclosed. Typically, immediate disclosure is required when the memorandum of understanding is signed as provided under the listing requirements. Further disclosures may be needed as the joint venture progresses, including at the signing of the definitive joint venture agreement and at closing, especially if the terms change or additional material information arises. Additionally, shareholders’ approval may be required before finalising the joint venture if it constitutes a major transaction.

Setting up a joint venture in Malaysia typically involves the following steps:

• term sheet/memorandum of understanding execution – parties agree on the joint venture’s feasibility, structure, and key terms, signaling intent to proceed;
• negotiations – the parties negotiate key terms, with legal and financial advisors ensuring alignment with strategic objectives;
• legal documentation – the joint venture agreement is drafted and executed, outlining roles and responsibilities, ownership structure, decision-making, profit sharing, and exit strategies; and
• implementation – the parties form the joint venture’s legal entity (ie, special purpose vehicle), appoint directors, set up governance structures, establish bank accounts, obtain the necessary regulatory approvals and set up operational processes

Regardless of the form of the JV vehicle, the terms of the joint venture agreement should generally cover certain basic terms including capital structure, roles and responsibilities of joint venture partners, deadlock situation, non-competition, exit strategies, etc.

Decision-making in a joint venture in Malaysia is typically governed by the terms set out in the joint venture agreement, which should detail the processes and authority for making key decisions including the board of directors and shareholders’ meetings. Significant decisions, such as those involving strategic changes or substantial financial commitments, usually require unanimous approval from all the shareholders and/or directors.

Joint venture entities in Malaysia are commonly funded through a combination of debt and equity, depending on the nature of the venture and the preferences of the joint venture partners. Unless there is a well-defined plan for future funding (equity or debt) requirements, parties typically leave this matter for future mutual decisions to be made as a reserved matter. Equity funding involves contributions from the joint venture partners in exchange for ownership stakes, a common practice in traditional JVCs. It is pertinent to take note on the provisions such as pre-emption rights and anti-dilution clauses in the joint venture agreement for future equity funding while also observing Section 85 of the CA 2016 on the pre-emptive rights to new shares, where it states: “Subject to the constitution, where a company issues shares that rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares in a manner which would, if the offer were accepted, maintain the relative voting and distribution rights of those shareholders.”

Deadlocks in joint ventures in Malaysia are typically resolved through pre-agreed mechanisms outlined in the joint venture agreement. Common solutions include escalation procedures, where the dispute is referred to senior management or external mediators, or arbitration. The joint venture agreement would typically also set out buyout/exit clauses, allowing one party to buy out the other at a predetermined price. Alternatively, the joint venture may be wound up if no resolution is reached.

Depending on the deal structure and context, a joint venture formation may involve additional ancillary agreements, such as asset transfer agreements, IP licensing agreements, leasing agreements, collaboration agreements, and service agreements.

In a joint venture corporate entity, the board structure is determined by the joint venture agreement. Generally, the board may have equal representation, where each partner nominates an equal number of directors. Alternatively, board seats might be allocated based on each partner’s equity stake in the joint venture – for example, if one partner holds 60% and the other 40%, the board seats are distributed proportionally.

In Malaysia, the principle of “one share, one vote” is generally upheld, as outlined in Section 71(1)(c) and Section 293(1)(a) of the CA 2016. Nevertheless, the CA 2016 also permits the allocation of special voting rights/weighted voting rights to certain classes of shares as specified in Section 69(d) and Section 90(1). By utilising these provisions, private limited companies in Malaysia can implement a dual-class share structure, assigning different voting rights to each class of shares.

In Malaysia, the principal duties of directors in Malaysia are as follows:

• duty to act in good faith under Section 213(1) of the CA 2016;
• duty to act with reasonable care, skill and diligence under Section 213(2) of the CA 2016;
• duty to avoid conflicts of interest under Section 217 of the CA 2016; and
• duty not to make secret profits under Section 218 of the CA 2016.

When a director has duties to both the joint venture and the joint venture participant that appointed them, conflicts may arise. In Malaysia, the directors of the joint venture entities must prioritise the interest of the joint venture entity rather than the interest of the joint venture partners. This is because the director has a fiduciary duty to the company, not to the appointing participant. Besides, according to Section 213(1) of the CA 2016, directors must act in the best interests of the company, thereby ensuring that their decisions align with the company’s welfare rather than the interests of any individual participant. Other than that, and pursuant to Section 217 of the CA 2016, the directors are required to avoid conflicts of interest. If a conflict arises between the interests of the joint venture entity and those of the appointing participant, the director must act in a manner that favours the interests of the joint venture entity.

According to Section 216 of the CA 2016, the board of a joint venture can delegate certain functions to subcommittees, provided this is allowed by the company’s constitution. However, the board retains ultimate responsibility for the company’s actions and must oversee and review the work of these subcommittees to ensure proper governance and compliance with their duties.

In Malaysia, conflicts of interest for directors are managed through strict adherence to the CA 2016. According to Section 221(1) of the CA 2016, every director of a company who is in any way (whether directly or indirectly) interested in a contract or proposed contract with the company must –  as soon as practicable after the relevant facts have come to the director’s knowledge – declare the nature of their interest at a meeting of the board of directors. Further, a director of a company who is in any way (whether directly or indirectly) interested in a contract entered into or proposed to be entered into by the company – unless the interest is one that need not be disclosed under Section 221 – shall be included only to make the quorum at the meeting of the board but must not participate in any discussion while the contract or proposed contract is being considered during the meeting and cannot vote on the contract or proposed contract as stated in Section 222(1) of the CA 2016.

Key IP Issues to Consider When Setting Up a Joint Venture Corporate Entity

When setting up a joint venture corporate entity, it is crucial to define the ownership and control of IP created or contributed by each party, ensuring clarity on how IP rights will be shared and managed within the joint venture. Besides, joint venture participants must decide whether IP will be licensed or assigned, considering the implications for control and revenue. Licensing allows the joint venture to use IP while retaining ownership with the original owner, as compared to transferring ownership entirely from the original owner to the joint venture. Proper use and protection strategies should be outlined, including confidentiality measures and enforcement of IP rights in the joint venture agreement.

Key IP Issues to Consider in Contractual Collaborations

In contractual collaborations, it is essential to clearly define the ownership and control of IP that is created or shared during the collaboration. The parties should outline how IP rights will be allocated, managed, and protected. Licensing arrangements should be established, specifying whether IP will be licensed or assigned, and detailing the scope and terms of use. Confidentiality clauses should be included to safeguard trade secrets and proprietary information. Additionally, the agreement should address how IP will be protected and enforced, including procedures for handling potential infringements. Dispute resolution mechanisms should be outlined to address any conflicts related to IP rights. It is also important to establish terms for IP use and ownership if the collaboration ends or if a party withdraws, ensuring that there are clear guidelines on the transfer or continuation of IP rights. Compliance with relevant IP laws and regulations, such as those set out in the Trademarks Act 2019, the Copyright Act 1987 and the Patents Act 1983, is crucial for maintaining legal protection. By addressing these issues in the collaboration agreement, parties can effectively manage and protect their IP assets and reduce the risk of disputes.

IP Issues in Joint Venture Agreements

IP issues are typically addressed in a joint venture agreement to ensure clarity and effective management. First, the agreement outlines the ownership and control of any IP contributed to or developed by the joint venture. This includes specifying whether IP is licensed to the joint venture or assigned and detailing the scope and terms of such licences or assignments. The agreement also establishes how IP will be used, protected and enforced, including procedures for maintaining confidentiality and handling potential infringements. Additionally, the joint venture agreement typically includes clauses on the management of IP, defining the roles and responsibilities of each party in maintaining and enforcing IP rights. Provisions are also made for the handling of IP in the event of termination or dissolution of the joint venture, including the transfer or division of IP rights and the settlement of any outstanding obligations. Compliance with relevant IP laws and regulations, such as the Patents Act 1983, the Copyright Act 1987 and the Trademarks Act 2019 in Malaysia, is also addressed to ensure legal protection. By incorporating these elements, the joint venture agreement helps prevent disputes and ensures that IP assets are effectively managed and protected throughout the duration of the joint venture.

Deciding whether to license or assign IP rights in a joint venture involves evaluating various factors, including strategic goals, control, financial implications, and the collaboration’s duration. Licensing allows the IP owner to retain ownership and control, providing ongoing revenue through royalties while setting terms for IP use. Conversely, assigning IP rights transfers full ownership and control to the assignee, simplifying IP management and potentially increasing the joint venture’s value. However, this means the assignor loses ownership and future revenue.

ESG standards are increasingly crucial for several reasons. They assist in managing risks related to ESG issues, thereby fostering more resilient and sustainable businesses. Investors are focusing on ESG metrics to make investment decisions, favouring companies that demonstrate sustainability and social responsibility. Adhering to ESG standards also helps businesses comply with tightening global regulations. Moreover, strong ESG practices enhance a company’s reputation and brand value, improve operational efficiency through energy savings and waste reduction, and support long-term sustainability by encouraging sustainable business practices.

Recently, Bursa Securities Malaysia Berhad has announced enhanced sustainability reporting requirements in the Main Market and ACE Market Listing Requirements and launched the Bursa Malaysia ESG Reporting Platform. The key enhanced areas include disclosure of common sustainability matters and alignment with climate change-related disclosures, as recommended by the Task Force on Climate-Related Financial Disclosures. With stricter regulatory requirements comes heightened litigation risks should companies fail to comply.

Both joint venture participants and the joint venture entity should take actions and implement measures related to ESG factors. For joint venture participants, integrating ESG considerations into their strategies can align with their broader corporate sustainability goals, attract investors who prioritise ESG criteria, and enhance their overall reputation. For the joint venture entity itself, adopting ESG measures can lead to improved operational efficiency, compliance with regulatory requirements, and better risk management. Actions might include establishing ESG policies, conducting regular assessments and reporting on ESG performance, and setting sustainability targets. By doing so, the joint venture can create long-term value, mitigate potential risks, and appeal to stakeholders who are increasingly concerned with responsible and ethical business practices.

In Malaysia, key ESG regulations include but are not limited to:

• the Malaysian Code on Corporate Governance, which promotes transparency, accountability and sustainability in corporate practices;
• the Securities Commission Malaysia’s sustainable and responsible investment framework, which encourages the development of sustainable and responsible investment products, thereby promoting ESG considerations in investment decisions; and
• Bursa Malaysia’s Sustainability Reporting Requirements, which mandates that listed companies include ESG information in their corporate governance report.

A joint venture arrangement can end in several ways, such as:

• completing the project for which the joint venture was established;
• reaching the end of the joint venture’s agreed-upon duration as specified in the agreement;
• mutual agreement to terminate the joint venture arrangement;
• breach of the joint venture agreement;
• insolvency;
• regulatory issues; or
• a deadlock between partners.

Upon termination of the joint venture, key matters need to be addressed by, inter alia:

• providing proper notice to the relevant parties as stated in the joint venture agreement;
• settling the outstanding financial obligations, including payment of debts, distribution of remaining funds, and addressing any tax liabilities;
• distributing the joint venture’s assets among the joint venture partners;
• handling remaining liabilities that arose owing to the joint venture agreement;
• addressing the ownership and transfer of IP and confidential information; and
• managing third-party contracts entered into owing to the joint venture agreement.

Transferring assets between joint venture participants involves several key considerations, depending on whether the assets were originally contributed by a participant or originate from the joint venture itself. Essential considerations include accurate asset valuation to ensure fair compensation, tax implications such as capital gains tax or VAT, and compliance with legal and regulatory requirements. Additionally, contractual obligations, IP rights, and employee considerations must be assessed too.

From a legal perspective, there is no difference between assets contributed by a participant and those originating from the joint venture itself, as both are treated as the JVC’s assets.