Confusing Concepts: Joint Ventures, Consortia, and Business Partnerships

Due to technological developments, undertaking projects such as airports, bridges, highways, metro, ports, which entail great economic power, technical knowledge, and expertise, requires the collaboration of companies specialized in different fields and with diverse financial capabilities.

Establishing and managing one of the business corporations stipulated in the Turkish Commercial Code for such collaboration will not provide the speed and flexibility that the parties will need to carry out the project since it will bring along many bureaucratic procedures. Therefore, parties prefer partnerships based on an agreement for such collaborations. Joint ventures and consortia are the most preferred forms of such alliances, and business partnerships are a particular type of joint venture.

Definition and Types of Joint Ventures

We may define a joint venture as “a contract in which two or more persons jointly undertake a specified task or a continuous activity to generate income and are jointly liable for the performance of the task.”

The legal jurisprudence mainly classifies joint ventures as contractual joint ventures and equity joint ventures.

This classification may be confusing in practice. Such variety is not related to partners’ obligation to bring capital to a partnership. Both contractual joint venture partners and equity joint venture partners should bring assets. The participation share (Turkish Code of Obligations (“TCO”) Article 621) given by the partners in a contractual joint venture is also capital. Adopting a distinction like the fully functional joint venture and partially functional joint venture used in competition law to companies’ law may better present the difference.

The critical difference between these two types is whether joint venture partners also establish or join a business corporation to achieve the partnership’s purposes. In an equity joint venture, partners form or join such a business corporation. However, it is not the case in a contractual joint venture; joint venture partners do not establish or join a business corporation in this type.

In an equity joint venture, the joint venture agreement’s subject matter is the relationship between the partners and the business corporation’s structuring and management issues. In this type of joint venture, the joint venture agreement serves as a shareholders’ agreement. However, in a contractual joint venture, parties set out all matters for achieving the partnership’s purposes in the joint venture agreement.

Definition and Types of Consortia

We may define a consortium as “a contract in which each of two or more persons combine their contributions through the undertaking, independently of the others, the liability of performing part of the work they have undertaken together to perform a specified task.”

Significant types of consortia are loan, voting, and construction consortia. A different kind of consortium is the brokerage consortium regulated in the capital markets law.

Common Aspects of Joint Ventures and Consortia

Both joint ventures and consortia are contractual partnership forms. Joint venture and consortium agreements are deemed ordinary partnership agreements as per the TCO (TCO Articles 620 et al.), the primary law governing contracts. Thus, the provisions regarding the ordinary partnership agreements govern joint venture and consortium agreements.

Under the freedom of contract principle (TCO Articles 26 and 27), the parties may formulate these agreements as they desire.  These agreements may be concluded verbally, in writing, or formally in line with the freedom of form principle (TCO Article 12). However, considering the size of the works undertaken by a joint venture or a consortium, in practice, it is preferable to conclude these agreements in writing. The written form helps to avoid potential problems in managing the partnership or issues related to evidence rules (Civil Procedural Law Article 200) that may arise in a prospective dispute.

Parties can form a joint venture or a consortium to perform one or more specified tasks, such as constructing a power plant.

Differences between Joint Ventures and Consortia

The most essential and distinctive difference between a joint venture and a consortium is that the partners in a joint venture are jointly and severally liable for all the work undertaken. In contrast, in a consortium, each partner is personally responsible for only a specific part of the work undertaken.

Parties form a joint venture to generate revenue, while there is no such requirement for a consortium. A voting consortium is an example of a non-revenue consortium.

Unlike a consortium, parties can perform a continuous activity, such as operating a port constructed by the partnership, by a joint venture. They usually form an equity joint venture in such cases. On the other hand, a consortium is temporary in nature and usually terminates with accomplishing the partnership purposes consisting of one or more specified tasks.

“Business Partnerships”

A business partnership is a type of taxpayer stipulated in the Corporate Tax Law (“CTL”) and the General Communiqué on Corporate Tax (“Communiqué”).

Partnerships may request a corporate taxpayer status under CTL Article 2(7). CTL grants the right to such a request to collaborations which are “formed by capital companies, cooperatives, state-owned enterprises, business enterprises owned by associations or foundations, through among themselves or with partnerships or natural persons, to jointly undertake collaboration for a specified task and share the revenue.”

Under Communiqué Section 2.5.2, the following conditions are the minimum required elements of a business partnership:

  • At least one of the partners is a corporate taxpayer,
  • Parties formed the partnership by a written contract to accomplish a specified task,
  • Parties anticipate that they will perform the collaborative work within a certain period,
  • There is a contracting agreement between the business partnership and the project owner,
  • The parties are liable towards the project owner for the entire task, not for one or more specified parts of the project undertaken jointly,
  • Parties will share the revenue upon the accomplishment of the task, and
  • The corporate taxpayer status will terminate upon completing the project undertaken jointly and fulfilling all tax-related duties.

The requirement that the partners in a business partnership be jointly liable for the entire task indicates that a business partnership is not a consortium. This conclusion is confirmed in Communiqué Section 2.5.2, stating that the definition of business partnerships does not cover consortia. A business partnership is a particular type of contractual joint venture, and therefore, the provisions of the ordinary partnership agreements will apply to business partnerships.

Parties may name a partnership that does not have the required elements as a business partnership as per the freedom of contract principle, though one should note that such a formation may be confused with a business partnership defined in the CTL and the Communiqué. Similarly, some joint venture and consortium agreements in practice involve provisions that are not compatible with the relevant partnerships’ characteristics.

The features and differences of these partnership types should be cautiously analyzed while designing a joint venture or a consortium agreement to avoid potential disputes or to ensure a proper resolution when it arises.

Av. Müge Önal Başer, LL.M.

 

References

  1. This blog post is the revised version of my blog post published on https://turkishlawblog.com/read/article/162/confusing-concepts-joint-venture-consortium-and-business-partnership-in-turkey.
  2. Corporate Tax Law No. 5520, published in the Official Journal dated 21 June 2006 and numbered 26205.
  3. Law of Obligations No. 6098, published in the Official Journal dated 04 February 2011 and numbered 27836.
  4. Turkish Commercial Code No. 6102, published in the Official Journal dated 14 February 2011 and numbered 27846.
  5. Civil Procedural Law No. 6100, published in the Official Journal dated 04 February 2011 and numbered 27836.
  6. Communiqué Serial No. 1, published in the Official Journal dated 03 April 2007 and numbered 26482.
  7. Communiqué No. III-37.1 on Principles regarding Investment Services and Activities and Ancillary Services published in the Official Journal dated 11 July 2013 and numbered 28704.
  8. Guidelines on Cases Considered as a Merger or an Acquisition and the Control Concept, 05 April 2018, https://www.rekabet.gov.tr/ (last visited 21 September 2019).
  9. Relevant Supreme Court Judgments: 3rd Civil Law Chamber, 28 June 2012, E. 2012/11789 K. 2012/16355; 12th Civil Law Chamber, 03 October 2013, E. 2013/21231 K. 2013/31151; 12th Civil Law Chamber, 27 May 2014, E. 2014/12436 K. 2014/15031; 12th Civil Law Chamber, 26 March 2015, E. 2014/32410 K. 2015/7441; 15th Civil Law Chamber, 22 May 2015, E. 2015/2104 K. 2015/2761; 12th Civil Law Chamber, 24 December 2015, E. 2015/21533 K. 2015/32830; 12th Civil Law Chamber, 04 April 2016, E. 2015/32298 K. 2016/9747; 12th Civil Law Chamber, 14 June 2016, E. 2016/3124 K. 2016/16804; 12th Civil Law Chamber, 05 June 2018, E. 2017/2568 K. 2018/5815; 12th Civil Law Chamber, 12 September 2018, E. 2018/11022 K. 2018/7910, https://www.lexpera.com.tr/ (last visited 21 September 2019).
  10. Black’s Law Dictionary, St. Paul, MN 2004.
  11. Altay, Sıtkı Anlam: Anonim Ortaklıklar Hukukunda Sermayeye Katılmalı Ortak Girişimler [Equity Joint Ventures], İstanbul 2009 (for further information on equity joint ventures).
  12. Kaplan, İbrahim: İnşaat Sektöründe Müşterek İş Ortaklığı - Joint Venture -, Ankara 2013.
  13. Barlas, Nami: Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri, İstanbul 2016.
  14. Pulaşlı, Hasan: Şirketler Hukuku Genel Esaslar, Ankara 2017.
  15. Eren, Fikret: Borçlar Hukuku Özel Hükümler, Ankara 2018.
  16. Bozkurt, Tamer: Şirketler Hukuku, Ankara 2019.
  17. Şahin, Turan: “Konsorsiyum Sözleşmesi”, Türkiye Barolar Birliği Dergisi 2011, I. 92, p. 451-483.
  18. Kara, Mustafa Sencer: “Aracılık Konsorsiyumu,” Selçuk Üniversitesi Hukuk Fakültesi Dergisi 2015, V. 23, I. 1, p. 313-349 (for further information on the brokerage consortium).
  19. Çakır Çelebi, Fatma Betül: “Joint Venture’ın Hukuki Niteliği,” Yıldırım Beyazıt Hukuk Dergisi 2017, I. 2, p. 97-126.