Joint ventures are set up for many reasons: to carry out a specific project or simply to assist with the growth and continuation of a business.
The parties to a joint venture can be individuals, partnerships, companies, or other organisations or associations. In certain cases, the joint venture can be created through the incorporation of a company that becomes a party to the joint-venture agreement. In other cases, the parties can sign a collaboration agreement.
The parties must think carefully about what they are trying to achieve through the joint venture. Do the parties want to have a period of exclusive negotiation, will they require a confidentiality undertaking, and will they sign a letter of intent to solidify their intention as a preamble for negotiations?
Things to consider include whether the joint venture will have any limitations in terms of territory in which it will operate. Also, what consents, approvals, licences, and permits are necessary for the joint venture to operate? If the joint venture will operate at a cross-border level, in which jurisdictions will it be established? Consider also whether there are any laws governing foreign ownership or investment. Are they any exchange controls in force? What relevant taxes and duties are imposed?
The parties to a joint venture can provide their own funding for the joint venture or use external sources for funding. The parties’ investment can be cash or payment in kind, such as expertise and resources. The parties must agree the percentage in which they will benefit from the joint venture. They must also agree working-capital requirements, any losses, and think about any expansion costs.
If the joint venture is through a company, the parties must agree the extent to which participation in the joint venture is transferable. Should the joint-venture company be wound-up if one of the parties wants to come out of it?
The joint venture will have to be thoroughly organised. The parties will agree the composition of the board and how the board will operate and vote.
Another very important consideration is whether the parties will be prohibited from competing with the joint venture at all or just in that particular territory.
Deadlock provisions are essential in a joint-venture agreement. This is when the parties cannot agree on certain voting issues and a decision cannot be taken. The joint-venture agreement must deal with this and set up a procedure to be followed in the event of a deadlock. For example, a voting deadlock at board level can be solved by giving a casting vote to the chairman or by involving an independent expert or arbitrator. The agreement must also establish the duration of the joint venture and how it can be terminated. In the event of termination, the agreement must deal with the distribution of assets, the discharge of any outstanding contracts, and the liabilities of the joint venture.
A joint venture allows two competitors to join forces, increase their market exposure, and compete at a higher level against other, more powerful companies in the same industry.
It also allows two connected businesses to cooperate on a joint project in a certain market.
Negotiating a joint venture can be complex and time consuming. It involves thorough research of the market and territory in which the products will be sold or the project will be organised.
Joint ventures can be expensive to set up initially.
Study any joint venture you might set up carefully. Obtain as much information from as many sources as you can before committing to an expensive joint-venture agreement. Plan it carefully and set up a realistic business plan with your business partner.
Know your market and make sure that you have analysed the consequences for your own business of entering into a joint-venture agreement.
Economize by negotiating a reasonable rate with your legal advisers, but remember that it is better to incur costs by obtaining legal advice than to enter into a joint venture under terms that you do not understand.
Dos and Don’ts
Choose your partner in the joint venture carefully, as you will be legally bound for a set period of time, under obligations that will prove costly if they are not successfully performed.
Involve your solicitors in the evaluation of both the risks and potential benefits of entering into a joint venture.
Negotiate your rates and make a contingency plan for any cost overrun.
Plan carefully how the joint-venture will operate, how the profits will be distributed and who will take responsibility for what.
Don’t make the mistake of being attracted by the idea of a joint venture that has not been thoroughly planned and thought through.