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Getting to grips with joint venture agreements

A joint venture is all about sharing talent, ideas or resources with those of another businesses or businesses in order to achieve their commercial objectives. These benefits and objectives can range from developing new products or the facilitation of access to new markets. A joint venture also allows the parties to share expertise as well as risk and costs between them.

Whilst there is no legal requirement for the participants to a joint venture to enter into a formal agreement, it is good practice to have one from the outset to provide a clear set of rules governing the parties’ obligations and relationship, whilst reducing the risk of disagreements later on down the line. It also provides the parties to consider all the different issues that could occur when collaborating with another business or individual.

This article identifies key areas to be aware of when considering entering into a joint venture agreement. To ensure your business collaboration is documented appropriately our commercial law solicitors can help, providing a joined up approach across commercial, corporate, partnership, IP and employment law aspects.

What is a joint venture agreement?

A joint venture agreement is a contract between two or more parties to pursue a shared business project. A joint venture agreement allows the parties to set the ground rules and define each other’s obligations to ensure that the business partners are protected in case of a joint venture dispute.

Whilst joint venture agreements can take the form of verbal agreements, it is strongly advised that you take specialist legal advice and get a detailed agreement drawn up identifying each parties’ obligations and rights and how those rights can be amended. For example, if Party B does not allocate the same time to the project as agreed or if Party C does not put in the agreed funds as specified in the joint venture agreement, then do Parties A, B, and C still jointly own the IP created through the joint venture? A specialist joint venture agreement will try to resolve potential trigger points for future disputes through careful and detailed drafting.

In some circumstances a joint venture may not be necessary to achieve the desired outcome. For example, if you are enlisting help from a third party as part of a tender bid submission, a teaming agreement may be more suitable.

Who can enter a joint venture agreement?

Any individual entrepreneurs or businesses can enter into joint venture agreements. The individuals or businesses do not need to be in the same business discipline or of the same size. There is no maximum number of participants to the joint venture but the more parties there are, the more complex the arrangement would be and the increased risk of disputes.

Does a joint venture agreement need to be in writing?

There is no law that states that a joint venture agreement needs to be in writing. However, where the terms between the parties have not been set out in writing, this leads to uncertainty and ambiguity as to what has been agreed and can increase the risk of disputes and litigation. Issues relating to the roles of the parties, cost and profit share, management and funding of the joint venture can be particularly contentious and so it is always advisable that these are set out in a formal written agreement signed by all the parties.

How do you structure a joint venture?

There isn’t a set legal structure for a joint venture. That means that your business collaboration can take the form that best suits your current business and the nature of the planned project. A joint venture can either be:

  1. A contractual joint venture with no separate legal entity and with the terms of the joint venture being detailed in a joint venture contractual agreement.
  2. A joint venture entity with a separate legal entity.

The types of joint venture entity include:

  • A company – with a joint venture company each party holds shares in the company with the company being formed to carry out the purpose of the joint venture
  • Limited liability partnership (LLP)
  • Partnership

As the joint venture can take a number of different legal forms you should speak to a solicitor about the most efficient structure for your venture. For more information read our article: How to structure a joint venture.

What should be included in a joint venture agreement?

A joint venture agreement should include:

  • Cost and profit sharing- how the profits and costs will be shared between the parties.
  • Responsibilities of the parties – sets out what each party is contributing to the arrangement. Contributions can be either financial or they could be intellectual property, management or products. The different contributions will influence the bargaining power of each partner and will also dictate what rights each party to the agreement will want.
  • Liability- how liability and risk is shared between the parties.
  • Dispute resolution mechanism – if there is a dispute between the parties, a mechanism can be included that each party must follow to try to resolve the dispute.
  • Confidentiality undertakings - non-disclosure or confidentiality clauses are frequently included in a joint venture agreement because the parties to a joint venture are pooling resources and, in some cases, granting the other party access to commercially sensitive business information.
  • Non-competition clause - non-competition clauses are common in joint venture agreements to prevent parties from engaging in business activities that compete with the joint venture project.
  • Intellectual property clause – joint ventures often produce new intellectual property and so it is important that the agreement specifies the ownership of the new intellectual property as well as how the rights and interests (such as licenses) in the new intellectual property will be distributed amongst the other partners both during and after the joint venture.
  • Term and exit clause – how long will the joint venture last for and what happens if one party wants to withdraw from the joint venture early.
  • Termination- a joint venture agreement will usually allow termination by agreement, expiry date, completion of the project, material breach or insolvency.

Steps to a successful joint venture

They say that preparation is the key to success and that is true with joint ventures. The preparatory steps to a successful joint venture are:

  • Assessing the business opportunity – are you better going it alone or as a joint venture? Is the joint venture a potential first step to a merger or a formal partnership with the third party? These long-term considerations may impact on your joint venture structure.
  • Confidentiality or non-disclosure agreement – so that you can provide information to the other party knowing that the confidentially of any commercially sensitive information is guaranteed. For information on non-disclosure agreements take a look at: Non-disclosure agreements: your questions answered.
  • Exclusivity agreement – you may want or be asked to sign an exclusivity agreement so neither you nor your proposed joint venture business partner will look elsewhere for alternate business partners during the period of exclusive negotiations.
  • Due diligence - on your potential joint venture partners and a feasibility study on whether your joint venture objectives are realistic and the cost benefit ratio of the venture.
  • The mechanics – to make the joint venture work will you or the other party need to transfer assets, IP or employees into the joint venture structure?  Where will the centre of operations for the joint venture be located? Do you need financing to fund your contribution to the joint venture? If you need financing will security for lending be required? If you are providing the IP, do you have an IP strategy and are your IP rights already protected? Will the IP ownership be retained by you and licenced to the joint venture or transferred to the joint venture? If you transfer assets from your existing business to the joint venture what are the tax implications? Can you lease your business assets to the joint venture as an alternative to transferring property or equipment into the joint venture vehicle?
  • The joint venture structure – the structure or ‘vehicle’ for your joint venture will be determined byyour objectives and other considerations such as whether there is a cross border element or regulatory issues or the proposed length and duration of the joint venture.
  • Heads of terms – these can be used to outline the key points of the proposed joint venture. A heads of terms document can save you time and money in the long term by focussing on the essentials of your joint venture. For more information on why heads of terms are a good idea and what should go in your heads of terms take a look at our guide to heads of terms.
  • The joint venture agreement – after taking tax and legal advice a detailed agreement and the associated paperwork needs to be drawn up. The additional documents could include a separate non-disclosure agreement, partnership agreement, shareholder agreement and articles of association and employee TUPE documents.

A joint venture can involve a lot of work in the set up and initial stages, but asking the right questions to get the best joint venture structure and agreement will ultimately give your joint venture the best chance of success.

Can you enter a joint venture with an overseas based company?

You can enter a joint venture agreement with an overseas company or individual. However, it is important that legal and tax cross border complexities are considered so your business interests are protected.

Do you need a solicitor to prepare a joint venture agreement?

You don’t have to use a solicitor to draw up your joint venture agreement, but it is wise to do so. When you are investing time and money into a project with a business partner it is normally cost effective to ensure your business collaboration is documented appropriately. If the agreement is not drawn up or checked by your solicitor, with joined up legal advice on the commercial, corporate, partnership, IP and employment law aspects, you could end up either in commercial dispute litigation or feeling your efforts in the joint venture have not been properly rewarded.

What next?

If you are contemplating a joint venture, or if you have any other commercial law questions, our solicitors can help. Get in touch using the form below or by calling 0800 689 1700.

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