In general terms, a joint venture is a commercial arrangement between two or more parties who agree to work together, combining resources and skills, to achieve a particular goal.
This arrangement could be with a friend, a member of family, colleague, or perhaps another business. The term joint venture is an umbrella term which covers a wide range of collaborative business arrangements, which all vary in terms of the level of integration of the participants and also vary in duration, with some having a fixed duration and others indefinite.
Victoria McMurray, Senior Associate, MacRoberts LLP covers the main points below.
Why set up a joint venture?
There are a number of reasons why you may want to enter into a joint venture, with such an arrangement having the potential to grow your business and allow you to develop new products and/or services in particular industries or markets, overall increasing the profitability of your business.
With shared investment (depending upon the terms of any joint venture agreement) and shared expenses, the joint venture would share a common pool of resources. This would reduce the burden of costs on the parties, and also potentially provide your business with greater capacity in its operations. In sharing the costs, you will also share the risks associated with running the joint venture.
The other party to the joint venture may bring specialised expertise and knowledge which you require to push your business and its services in a certain direction, with this expertise potentially being financial, technical, or market related.
Access to new markets
Joint ventures can be a way to allow you to enter into new markets in different regions, territories or even online whilst spreading the risk with another party. Teaming up with a joint venture party in a new location may allow you to grow and expand your business whilst taking advantage of the other partner’s local knowledge and relevant expertise.
While the benefits of entering into a joint venture are clear, to do so is a big decision that needs to be given careful consideration to ensure that the correct strategy, objectives and documentation are in place for the joint venture to succeed.
We will now discuss the key issues you have to consider in setting up and entering into a joint venture.
What to consider when setting up a joint venture
How will the joint venture be structured?
One of the first considerations is whether a separate legal entity will be established as a vehicle for the joint venture. Under UK law, there is no distinct legal form for a joint venture which means each joint venture can use a structure which is best suited to its particular purpose. The four most commonly used structures are as follows:
- Limited liability company
- Limited liability partnership
- General partnership or limited partnership
- Contractual co-operation agreement
The four legal structures provide varying degrees of integration, and each comes with their own advantages and disadvantages.
While we will not look at these in detail here are some of the key things to consider.
Regardless of the legal structure that you choose for your joint venture, key written documentation is required to cover certain legal aspects and the day to day operations of the joint venture. For example, when a limited liability company is the structure used, the main documents will be a joint venture agreement or shareholders’ agreement, and the company’s articles of association. These documents should cover the following important areas:
The extent of each party’s interest in the joint venture, ie in the case of corporate joint ventures, how many shares in the joint venture company each party will own. All JVs are not just 50:50.
- The scope and purpose of the joint venture.
- The management of the joint venture.
- The financing of the joint venture, including the contributions of the parties to the joint venture.
- The division of power between the parties, and how this power can influence the management of the joint venture.
- How disputes and deadlock between the parties are dealt with.
- How the proceeds of the joint venture are to be distributed or re-invested.
- The duration of the joint venture and the circumstances in which it will terminate.
- Financial contributions, ownership and decision making
Agree contribution and ownership
It is important for the participants in a joint venture to clearly set out their contribution to the business at an early stage and these contributions could be in the form of cash, non-cash assets or ideas and work. Essentially, the partners need to understand what each of them are bringing to the party. In some instances, one party will provide the capital and resources required to finance the joint venture, while the other brings specialised expertise and knowledge in exchange for “sweat equity” (shares for free in return for unpaid work). This provision of knowledge and expertise is seen as the party’s investment into the joint venture, albeit not monetary.
It is also beneficial for the parties to discuss how they intend to meet any future financing requirements of the venture. Are they willing to contribute further investment directly or will they look to third party finance providers?
When considering the financial and non-financial contributions made by the participating parties, it is vital to determine the level of ownership and control that each party will have and there may even be a need to involve a valuer to determine the worth of non-cash contributions. When the parties agree on the split, they will either have a 50:50 joint venture or a joint venture where there is a majority and minority interest. Where there is a minority interest, the minority may look to insert some protections into the joint venture agreement to ensure they have a voice in decision making in relation to the joint venture and are not overlooked by the majority.
In a scenario where there is an equal split in the control of the joint venture and decisions requiring the approval of both parties, problems can arise when the parties are unable to reach a decision on matters of significance for the joint venture.
Disputes and deadlock
Parties enter into joint ventures with aspirations to work together and achieve a common goal, but inevitably, disagreements on particular issues may occur. Such disagreements in a 50:50 joint venture pose a particular problem. This issue is commonly referred to as ‘deadlock’, and it is helpful to have specific provisions in the joint venture’s documentation to deal with these situations.
There are several ways which parties can look to resolve a deadlock ranging from obligations to cooperate and try to find an amicable solution to more drastic measures which could ultimately see one party exit the joint venture or have the joint venture wound up. Examples of such deadlock provisions are:
Where the board is unable to reach a decision on a particular matter, this could be escalated to the shareholders or in larger organisations, the CEOs of the joint venture parties to try to reach an agreement.
- Chair’s casting vote – A chair could be given a casting vote where the board is split on the issue.
- Outsider’s swing vote – A third party could be given a ‘swing vote’ on behalf of the joint venture.
- Mediation/Arbitration – A deadlock scenario could be referred to an independent third party, such as a mediator or arbitrator, to resolve the issue.
- Share Transfers – There are a number of different mechanisms which can be put in place to facilitate one party buying the other out of a joint venture where there is a disagreement.
- Voluntary Liquidation – The most drastic course of action would be for the joint venture to be wound up if there is a fundamental breakdown between the parties which makes the future management of the joint venture impossible. Clearly, this is a nuclear option and tends to only be used as a last resort.
A joint venture could have the potential to grow your business, access new markets, and gain valuable expertise. Think about the best arrangement for you and your business to make sure it works for you.