South Africa's agribusiness sector continues to attract joint ventures between commercial farmers, agribusiness investors and emerging or land reform partners. These ventures pool land, capital, expertise and market access to pursue shared commercial objectives without the parties surrendering their independent businesses. Yet the same features that make these ventures attractive also expose the parties to significant risk if not mitigated adequately. This article identifies eight risks that arise when the legal framework is not properly addressed at the outset.
Risk one: choosing a structure without weighing the consequences
The parties sometimes default to whichever structure is quickest to set up.
South African law recognises two common but fundamentally different joint venture structures. One is an incorporated joint venture, which involves the joint venture parties registering a new private company under the Companies Act 71 of 2008 and administering the venture’s assets and operations through it. The company is a separate legal person and would typically have the joint venture parties holding shares in the company. Accordingly, shareholders’ exposure is ordinarily capped at each shareholder's contributed capital and the company’s existence is usually unaffected if a shareholder exits. The company would be governed by a board of directors and there would generally be a shareholders' agreement regulating the relationship between the shareholders as part of the constitutional documents of the company.
The second is an unincorporated joint venture. In this instance, no company is created but instead the parties contract with each other through a joint venture agreement. The joint venture agreement is the governing instrument setting out each party's respective interests, contributions and shares in profits and losses. An unincorporated joint venture is typically used for a once-off project or one of limited duration rather than for a continuing relationship. A defining characteristic of this structure is that it is not recognised as a separate legal entity with limited liability. There is no perpetual succession and if the unincorporated joint venture is classified as a partnership, a third party's claim can be enforced against any one partner, meaning that it creates joint and several liability between the partners in the unincorporated joint venture.
A venture involving long-term land use, permanent infrastructure or specific consent usually needs the stability that an incorporated joint venture offers. Banks and development finance institutions show a stronger preference to engage in financing arrangements with an incorporated company rather than an unincorporated joint venture governed through a contractual arrangement. Where one party is an emerging farmer entering the venture partly to satisfy broad-based black economic empowerment (B-BBEE) ownership requirements, incorporation also makes it easier to verify and score that ownership. This is a practical necessity where the venture's B-BBEE status is a condition for securing supply contracts, government tenders or sector-specific licences. A short-term, single-season collaboration, by contrast, may not justify the cost and administrative burden of incorporating and maintaining a company.
Risk two: Insecure land tenure and water rights
An agribusiness venture that lacks secure land tenure is fundamentally exposed from the outset. If the underlying land right is a permission to occupy or an informal allocation rather than registered title or a long-term lease, the venture may be unable to mortgage the land, offer it as security to lenders or enforce its occupation against third parties. Where a party exits the joint venture, the land right may not be transferable at all. Water use authorisations under the National Water Act 36 of 1998 present a similar risk in that they are granted to a specific user, do not automatically transfer with the land and can be curtailed or reallocated by the responsible authority. A venture that depends on irrigated production but holds no water use authorisation in its own name is operationally exposed from day one. The governing documents should identify the nature of every land right and water authorisation on which the venture depends, record which entity holds each one and address what happens if a right lapses, is curtailed or cannot be transferred to the venture.
Risk three: No consideration to competition law
A venture that proceeds without first considering competition law assessment risks may unlawfully implement a notifiable merger, exposing the parties to administrative penalties and an order to unwind the transaction. Whether incorporated or contractual, the venture’s formation must be assessed against the Competition Act 89 of 1998 (the Act). If the arrangement gives one party acquiring control over another business and the prescribed thresholds are met, the transaction constitutes a notifiable merger under section 12 and must be approved before implementation. The competition authorities will also assess the merger on public interest grounds under section 12A(3), including the promotion of ownership by historically disadvantaged persons.
Even when no merger arises, the venture’s ongoing conduct remains subject to the Act. Information sharing, market division or co-ordinated pricing between competitors channelled through the venture may contravene the prohibition on restrictive horizontal practices, unless the arrangement produces demonstrable pro-competitive efficiencies. Restraints of trade are generally permissible where commercially rational and proportionate. In agribusiness, where the parties frequently compete in the same commodity market, exclusivity and information-exchange provisions require careful scrutiny from the outset.
Risk four: B-BBEE compliance treated as an afterthought
A venture that fails to structure its B-BBEE ownership properly risks losing the transformation credentials that justified the partnership or, at worst, facing a fronting complaint.
Incorporated joint ventures are frequently used where B-BBEE recognition is important or where regulatory policy or sector-specific transformation requirements make Black ownership a practical condition for obtaining rights, licences or market access. Where B-BBEE recognition is a structuring objective, the parties must ensure the venture achieves and sustains lawful recognition under the Broad-Based Black Economic Empowerment Act 53 of 2003. The shareholders’ agreement should address how B-BBEE ownership is protected against dilution on future capital raises, what happens to B-BBEE status if the B-BBEE partner exits and how the venture will respond to changes in the applicable sector codes. A further compliance requirement that is often overlooked is that major B-BBEE transactions – those with a value equal to or exceeding ZAR 25 million that result in a change of B-BBEE ownership – must be registered with the B-BBEE Commission within 15 days of conclusion.
Risk five: No answer for deadlock
Many agribusiness joint ventures are structured on an equal footing, meaning any significant decision can end in a tied vote. Left unaddressed, deadlock can freeze planting decisions, block funding calls and leave perishable stock unmanaged. In a sector governed by seasonal windows, a paralysed boardroom in August can cost an entire harvest.
The shareholders’ agreement should provide a clearly defined escalation framework. This would typically commence with senior management escalation, then mediation, before a buy-sell mechanism is triggered. The choice of mechanism matters: each carries trade-offs between speed and fairness, and the right choice depends on the parties’ relative financial positions and the assets at stake. Below are some of the mechanisms that may be employed to break or resolve a decision deadlock:
- A status quo clause is the most conservative option. Neither party may alter the current state of affairs and neither may petition a court to wind up the company on the basis of the deadlock alone. It preserves the business while the parties negotiate but does not resolve the underlying dispute.
- A Russian roulette clause requires one party to name a price; the recipient may accept and sell or reverse the transaction and buy at that price. The self-correcting dynamic discourages undervaluation but where there is a material disparity in financial resources – common in commercial-and-emerging-farmer partnerships – additional protections may be necessary.
- A Texas shoot-out requires both parties to submit sealed bids simultaneously; the higher bidder acquires the other’s interest at the lower of the two bids. This process encourages genuine valuation and removes the information asymmetry of the Russian roulette structure.
In
Thunder Cats Investments 92 (Pty) Ltd v Nkonjane Economic Prospecting and Investment (Pty) Ltd[1], the Supreme Court of Appeal confirmed that persistent deadlock can constitute just and equitable grounds for winding up a solvent company.
Risk six: Reserved matters left undefined
Where reserved matters are left undefined, one party may take decisions that materially affect the other – for example, by changing the crop mix, pledging shared assets or diluting B-BBEE ownership – all without requiring consent. Day-to-day governance depends on well-drafted governing documents that draw a clear line between ordinary decisions taken by simple majority and reserved matters requiring unanimous or special majority consent.
In agribusiness, decisions that directly affect each party’s commercial position should be expressly listed as reserved matters rather than left to be argued over when they arise. These reserved matters typically include decisions on land use, water use and environmental authorisations, share transfers, funding changes that dilute Black ownership, transformation commitments, budgets, capital expenditure, borrowings, major acquisitions or disposals, dividend policy, key appointments and related-party dealings.
Risk seven: Funding obligations left to goodwill
When funding obligations rest on an informal understanding, cash shortfalls during a difficult season can trigger disputes that destroy the joint venture. This can look like a situation where one party stops contributing, the other advances funds without agreed terms and ownership then become contested. The governing documents should set out how contributions are made (cash, in kind or a combination), the valuation of non-cash contributions and, where the emerging partner’s equity is loan-funded, the loan terms, repayment schedule and priority against other obligations. They should also address what happens if the funded party exits before repayment: whether the balance is deducted from exit proceeds, whether it accelerates and whether shares can be transferred subject to the debt.
Attracting external finance depends on the quality of the venture’s legal documentation. Lenders routinely require evidence of secure land tenure, a valid water use authorisation, enforceable offtake or supply agreements and registered security interests. Governing documents should address which party’s assets are pledged, how suretyships are shared and the consequences of a funding call default, including whether the non-defaulting party may advance the shortfall and convert it to a loan or additional equity, with corresponding dilution.
Risk eight: Exit terms negotiated too late
Every party to a joint venture will eventually exit, whether through sale, retirement, death, insolvency or unresolvable dispute. Three mechanisms are typically included in the governing documents to regulate and facilitate a party's exit. The first are pre-emption rights, which give the remaining party the first opportunity to acquire an exiting party’s interest before it is offered to an outsider. The second may be drag-along and tag-along rights, which address a sale of the whole venture: the former compels the minority to sell on the same terms while the latter protects the minority from being left behind. The third are leaver provisions, which distinguish good leavers (fair market value) from bad leavers (bought out at a discount). In agribusiness, valuation requires particular attention because the venture’s worth may depend heavily on biological assets and unharvested crops that vary by season.
It is always best to settle on the exit mechanics at inception of the joint venture relationship. Waiting until a relationship has soured to negotiate an exit mechanism results in genuine compromise being far more difficult to reach.
An agribusiness joint venture is only as resilient as the legal framework underpinning it. Each risk addressed in this article – from structuring and tenure to governance, funding and exit – is manageable if confronted at the outset through clear contractual provisions rather than assumptions. The parties who invest the time to negotiate a complete agreement at inception protect the very commercial value that brought them to the table.
[1] (847/12) [2013] ZASCA 164 (26 November 2013).
