Self-belief is an essential requisite for start-up business success but, in some situations, a short-term business partnership will get you from A to B quicker, whether that’s getting a product to market or another type of business collaboration. A joint venture agreement ensures the ground rules of your collaborative business project are clearly defined and that you and your proposed short-term business partners are protected in case of a joint venture dispute.
In this article we answer your questions on joint venture agreements.
Click to jump to individual FAQs:
- What is a joint venture agreement?
- Why do I need a joint venture agreement?
- Who can enter a joint venture agreement?
- Steps to a successful joint venture
- Does a collaborative tender need a joint venture agreement?
- How do you structure a joint venture?
- The difference between a joint venture and a company shareholder agreement
- Do you need a joint venture agreement if a joint venture company has articles of association?
- The difference between a joint venture and a partnership
- The difference between a joint venture and a joint operating agreement
- The difference between a joint venture agreement and a consortium or collaboration
- What should be included in a joint venture agreement?
- Joint venture employment considerations
- Can you change a joint venture agreement?
- How do you terminate a joint venture agreement?
- What are the alternatives to a joint venture?
- Can you enter a joint venture with an overseas based company?
- Will competition law affect my joint venture?
- Do you need a joint venture solicitor to prepare a joint venture agreement?
What is a joint venture agreement?
A joint venture is a type of business structure entered into between two or more parties to pursue a shared business project. The joint venture document formalises the arrangement reached between the business partners.
In this article, for simplicity, our commercial contract solicitors refer to the other party to the joint venture as your ‘partner’. However, although joint ventures can be partnerships this isn’t necessarily the case as there are a variety of different legal mechanisms to enter a joint venture.
A joint venture is all about sharing talent, ideas or resources to achieve a business goal that you otherwise could not achieve on your own or, if you attempted it, your own business could be left over exposed. Joint venture solicitors say you can get some unusual pairings in joint ventures, such as tech and creative industry entrepreneurs or market leaders and start-ups. It just takes a bit of imagination and business acumen to see and realise the potential of a business idea and convert it into a joint venture.
Why do I need a joint venture agreement?
If you have the same business mind set as your joint venture partner you may question the need for a formal joint venture document. However, without a written agreement you are increasing your risk, what if the worst happens and you will fall out with your joint venture business partner?
Commercial contract dispute solicitors recommend written joint venture agreements to reduce the chances of commercial litigation. Verbal joint venture agreements are possible but risky. If you need to establish a verbal joint venture agreement you need to show an understanding with a third party as well as:
- A common undertaking - such as contributing an asset, capital, or skill for a specific business purpose
- A common interest
- Some control over the joint venture
It is unwise to enter a verbal business relationship because if you fall out with your business partner the court will impose terms based on its interpretation of your intentions. If there is no evidence of what you intended, the court will impose terms it considers fair. You may not agree with the court definition of fair terms, so it is best to negotiate your own in a written joint venture agreement.
Who can enter a joint venture agreement?
A joint venture is a collaboration between individual entrepreneurs or business owners. The individuals or businesses do not need to be in the same business discipline or of the same size. It is not uncommon for start-ups to enter into joint venture agreements with multi-nationals.
In that type of David and Goliath business arrangement, if you are the start-up, it is crucial that the joint venture agreement effectively protects you and your business. After all, it is probably your business idea or influencer reach that has led to the multi-national company being willing to provide the development resources. What both parties to the joint venture bring to the table needs to be properly valued and protected in a legal document.
A joint venture can be between more than two parties. If there are several parties to the joint venture, there is an increased risk of disputes. So, it is best to 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, 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.
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.
Does a collaborative tender need a joint venture agreement?
If you decide that the best way to win a tender is not to go it alone, but to pool resources or combine forces with a business partner who has complimentary or specialist skills (that are uneconomic for you to recruit to fill within your own company), then a joint venture agreement may be your best option to win the tender.
With a joint venture agreement specifying who will do what if you win the tender and how profits will be shared, you are demonstrating commitment to the tender process. You are also signalling that if you win the tender through collaboration your working relationship with your joint venture partner is properly defined and there is less risk that you will fall out with your business partner and be unable to meet your tender obligations.
An alternative to a joint venture agreement for a collaborative tender is to enter a teaming agreement. This is a contract regulating the rights and obligations when one party submits a tender to a third party and sub-contracts with another party (or parties) to jointly work on the tender. A teaming agreement enables the parties to combine their capabilities for the tender and share the tender costs. Entering a teaming agreement means the parties retain control over their respective work and therefore is suited to collaborative tenders.
For more information on teaming agreements read our article: When to use a teaming agreement.
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:
- 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.
- A joint venture entity with a separate legal entity. As the joint venture can take a number of different legal forms you should speak to a joint venture solicitor about the most efficient structure for your venture.
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)
You don’t need to register a joint venture but if you set up a separate legal entity, such as a company, you do need to comply with the relevant rules on company set ups and HMRC registration requirements.
For more information read our article: How to structure a joint venture.
The difference between a joint venture and a company shareholder agreement
If a joint venture is set up in the legal structure of a company there can be confusion about the difference between a joint venture and a shareholder agreement. A shareholder agreement is an agreement between company shareholders regulating the relationship between the shareholders, stating their rights and protections, and directing the operation of the company.
A shareholder agreement is supplemental to the joint venture agreement and addresses matters such as the right to transfer interests in shares, and manages the operation of the joint venture by detailing the procedure to appoint directors and checks and controls.
Do you need a joint venture agreement if a joint venture company has articles of association?
A joint venture will have articles of association if you have elected to have a separate legal entity of a company to operate your joint venture. The articles of association supplement the provisions of the joint venture agreement.
The articles of association state the purpose of the company and govern its operation as well as specifying the rights and responsibilities of its members and directors. The articles of association of a company are a public document filed at Companies House.
As the joint venture agreement is a private document and can be kept confidential to the parties to the agreement, this document should be used to address and record the agreement on the responsibilities of the parties and profit and loss distribution. The articles of association should focus on company matters such as dividend payments, and operative issues, such as voting and the convening of general meetings.
For more information on articles of association read Articles of association: a guide for founders and shareholders.
The difference between a joint venture and a partnership
A limited liability partnership establishes a single business enterprise for a broad long-term purpose, whilst a joint venture is commonly used for a specific business collaboration or one-off project. The practical differences between a joint venture and partnership are set out below:
|A joint venture exists for a limited period, usually until the project or business activity is completed.||A partnership is usually for an indefinite period.|
|Profits don’t have to be pooled together and divided between the parties. If two parties establish a joint venture to produce a specific product, the parties can agree to sell the product in their respective separate businesses and keep the profits.||In a partnership, the profits are divided according to provisions of the partnership agreement.|
|There is no legislation imposing default terms in the absence of agreed terms in a joint venture. Instead, the courts will infer the terms from how the parties acted.||In the absence of terms in a partnership, legislation will stipulate certain terms between partners concerning aspects like profit and loss distribution. The default position in a partnership is joint and equal liability and joint entitlement to profits.|
The difference between a joint venture and a joint operating agreement
A joint operating agreement (JOA) is an agreement that governs a joint venture structured as an unincorporated association. JOA’s are particularly common in the energy sector and are used in the oil and gas industry to share costs and risks between oil companies. Any JOA needs to be both industry and location specific.
The difference between a joint venture agreement and a consortium or collaboration
A consortium or collaboration agreement is an association of two or more individuals, companies or organisations with the objective of participating in a common activity or pooling their resources to achieve a common goal. Consortiums are usually formed by an agreement or by a memorandum of understanding. A key feature of a consortium is that members retain their separate legal status.
The difference between a consortium/collaboration and a joint venture is that the consortium or collaboration cannot be incorporated as a legal entity. This has two practical implications:
- Control - in a consortium or collaboration arrangement the members exercise management control. In a joint venture the entity exercises management control.
- Contracting – a joint venture with the legal entity of a company or partnership can enter into contracts. A consortium or collaboration usually has to set up a special purpose vehicle to enter into contracts.
What should be included in a joint venture agreement?
A joint venture agreement should include:
- The parties to the joint venture, its name and purpose.
- The structure of the joint venture – is the joint venture a contract or a separate legal entity, such as a company or LLP.
- Contributions - the contributions can be financial or the use of your IP or other form of contribution. It is important that contributions are agreed to avoid disputes over how any IP created by the joint venture or profits should be shared.
- Profit sharing - commercial solicitors are often asked by start-ups and entrepreneurs about the mechanics of profit sharing if they enter into a joint venture agreement. That isn’t a surprising question as the key point of a joint venture is normally to make money and therefore profit sharing needs to be covered in detail. You do not need a separate profit-sharing agreement that specifies the ratio that parties will distribute profits and losses as your joint venture solicitor can deal with all those points in the joint venture agreement. Expect to be asked some questions about your profit sharing plans as it is important that your joint venture agreement covers the ‘what ifs’ and the unexpected. If you elect to have a separate profit-sharing agreement then it is important that the terms are consistent with the joint venture agreement.
- The rights and duties of the parties - if the joint venture is in a company structure, the rights of each shareholder. If the joint venture is a partnership, the rights of the partners.
- Dispute resolution mechanism – for example, the use of arbitration or the court jurisdiction to prevent a dispute over competing jurisdictions in a cross border joint venture.
- 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. A confidentiality clause is recommended with a duty to inform the other party if there is a breach of confidentiality and with penalties for breach of contract. The non-disclosure clause should state it survives the termination of the joint venture agreement so the parties are still contractually obligated to protect confidential information after the joint venture has been terminated.
- 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. Any non-competition clauses should be limited to a specified period and geographical location to be enforceable, non-compete clauses must also be reasonable and necessary to protect the legitimate interests of the parties. What is ‘reasonable’ depends on the facts and circumstances of the joint venture. Generally, a clause preventing a party from conducting competing activity for a period of five years after termination of the joint venture would normally be viewed as unreasonable and therefore unenforceable whereas two years may be considered reasonable.
- Intellectual property clause - intellectual property rights are important as a party may need to grant the other party access to its IP. The agreement should specify the licenses granted. In addition, where a joint venture is established to produce intellectual property, the agreement should specify the ownership of the new intellectual property. For example, the agreement could say the joint venture owns the new IP and set out how the rights and interests in the new IP will be distributed on termination of the joint venture, or that each party to the joint venture has joint ownership of the new IP but the parties are subject to restrictive covenants which prohibit disclosure of it to competitors, or the new IP is assigned solely to one party and licensed to the joint venture whilst it is in operation. A joint venture agreement should also cover intellectual property licensing when one party to the joint venture exits but the joint venture continues in operation.
- Warranties and representations - statements of fact made by the parties and warranties provide potential avenues of redress in the event that the joint venture success is adversely affected by an untrue statement made by one party. For example, the warranty that use of IP in the joint venture won't infringe any third-party IP rights or a representation that there is no litigation existing, or pending against the parties, that may adversely affect the joint venture.
- Termination clause - most joint ventures are short term collaborations between entrepreneurs or companies, so exit strategies and termination clauses are important as the optimum time for the end of your joint venture may be more complicated than a specified date and instead governed by whether the project has met interim goals or secured funding.
- Exit clause - there are various reasons why you may want to withdraw from a joint venture before its agreed end date. It’s common for a joint venture agreement to contain an exit clause enabling a party to withdraw from the joint venture and realise their interest by selling it to a third party. The method of sale is likely to be the same as the agreed mechanisms in the agreement for selling an interest on the termination of the joint venture. Provided there are multiple parties to the joint venture when one party withdraws and sells its interest the joint venture can continue operating. When drafting a withdrawal clause that includes the option of sale of shares to a third party, pre-emption rights may be applied to the transfer of the shares. Pre-emption rights give the company shareholders the right to be offered the transfer shares before they are offered to a third party who isn’t already a shareholder of the company. Pre-emption rights are normally contained in the company’s articles of association. The third party who purchases the joint venture shares is usually required to enter into a shareholder agreement or deed of adherence that includes an obligation on the third party to comply with the terms of the joint venture agreement.
- Governing law and jurisdiction - there is no single piece of legislation dealing with the creation of joint ventures or resolving joint venture disputes. Depending on the structure of the chosen joint venture, a combination of common law, corporate, company, partnership, competition and IP law will govern how any joint venture dispute is dealt with. It is therefore crucial that a commercial solicitor ensures your joint venture agreement is drafted in a way that is consistent with all these areas of law and is as clear as possible to reduce the risk of a joint venture agreement dispute.
Joint venture employment considerations
Your joint venture may require employees so you will need to consider if you and the other parties to the joint venture are intending to recruit employee or transfer employees from your existing business. If you are recruiting into a highly specialist area, such as a tech or digital business, you may need business immigration advice and a sponsor licence. If you are transferring employees, you may need joined up commercial and employment law advice on the TUPE arrangements.
Can you change a joint venture agreement?
There are several ways you can change a joint venture agreement. A specialist commercial solicitor will have the experience to ensure that joint venture agreements cover various eventualities. For example, one party not being able to contribute the agreed funds or supply the specialist tech support that was promised as their side of the deal. If the existing wording of the joint venture agreement doesn’t cover the issue that has arisen you can use a supplemental agreement, addendum or a deed of amendment or variation.
These documents should detail the specific terms and definitions that are being amended or expanded upon to make the change legally effective. All parties to the joint venture must either sign the addendum or follow the joint venture amendment process as stated in the original agreement. It is as important to get any addendum right as it is to get the terms of the original agreement correctly drawn up.
How do you terminate a joint venture agreement?
The triggers for terminating the joint venture and procedure should be clearly set out in the termination clause in the joint venture agreement. A well-drafted document will contain comprehensive provision on how the parties can exit the joint venture as covering the potential reasons for ending the joint venture agreement reduces the risk of joint venture fallouts and joint venture disputes.
A joint venture agreement will usually allow termination by:
- Agreement between the parties to end the joint venture early.
- Expiry of the fixed term of the joint venture.
- Completion of the specified joint venture project.
- Exit by sale of shares in a company joint venture through the sale of shares by one party to the other.
- By a material breach of the joint venture agreement which has not been remedied to the satisfaction of the non-breaching party.
- Insolvency of a party to the joint venture.
- Change of control of a party to the joint venture or a change of control of a company joint venture.
- Unresolved deadlock on a material issue.
Potential termination methods include:
- Consensual termination – the assets are distributed by returning the asset to the party that acquired or funded the asset. Alternatively, the assets are sold to the highest bidder.
- Winding up – a court can order a winding-up or the joint venture agreement can include a procedure for voluntary liquidation. On liquidation, it is usual for the assets of the joint venture to be distributed to the party that contributed them.
- Sale of interest – provision may be included in the agreement to facilitate the sale of shares by various methods.
The options for the sale of an interest include:
- Tag along and drag along rights - this provision enables one party to sell its shares in the company joint venture to a third party, provided the third party purchases the shares of all the other joint venture parties. As all parties interests are sold, the joint venture is terminated.
- The put and call option - this provision allows the holder of the option (usually all the parties to the joint venture) to give notice and require the other shareholders to buy or sell their entire shareholding. The price payable for the shares will be dictated by the agreement, such as ‘fair price’ or by a specific formula. By buying the entire shareholding, or requiring a holder to buy the entire shareholding, the joint venture arrangement is terminated.
- The Russian roulette mechanism - this allows Party A to serve notice on Party B for Party A to sell its shares at a price specified in the notice. Party B has a period of time to accept the offer and buy the shares of Party A (following which Party B will become the sole owner of the company joint venture entity). Alternatively, Party B can reject the offer but must then sell its shares to Party A for the price specified in Party A’s original notice. In a joint venture with two parties, this would result in termination of the agreement.
- The Texas/Mexican shoot out option – in this provision Party A serves a purchase notice on Party B stating that they are willing to buy out Party B at a specified price. Party B has a period to serve a counter-notice indicating either an intent to sell at that price, or to buy Party A’s interest at a higher price. The parties then continue to bid for the other’s shares until one party agrees to sell their shares. In an agreement with two parties, this would terminate the joint venture.
When entering a joint venture agreement, it is important to carefully consider all your termination options and negotiate joint venture end clauses that suit your needs and business interests.
What are the alternatives to a joint venture?
If your planned business project is a one-off collaboration with others, then a joint venture is probably the right legal route for your business project as the alternate options are best preserved for when you want to enter into a long-term business relationship. The analogy for an entrepreneur is that a joint venture is like a second date or even an engagement, whereas alternative business relationships are more akin to marriage and meant to last a life time or certainly longer than a one-off project.
After a successful joint venture, you could consider a second joint venture (with or without the same business partners or on different terms) or:
- Merging with a business partner - to pool resources, skills, and technology. But any long-term business collaboration merger involves not only pooling of resources but sharing of profit and potentially loss of business control if you are used to being entrepreneur in full control of your own business.
- Forming a partnership or company - a partnership agreement or company shareholder agreement can specify the rights of partners or shareholders, their obligations and responsibilities, and how profit will be distributed. However, the key difference between a joint venture agreement and a partnership agreement or company is that a joint venture is intended to be a relatively short-term collaboration between business partners for a specified goal. In contrast, a partnership or company formation is normally set up with business partners who intend to remain in business together in the long term.
- A strategic alliance with other business partners but this type of alliance is normally to share access to technology or resources to reduce overheads rather than to collaborate on a specific business project or to share profit.
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. These are the types of questions that need to be asked with a joint venture with an overseas based company or individual:
- Will the joint venture will be located overseas and governed by the law and taxation rules in a different jurisdiction?
- Are there restrictions on foreign investment, ownership, or control in the overseas jurisdiction and how will this affect you or your business?
- Does the law applying to the foreign party render any part of the joint venture agreement void or unenforceable?
- If there is a dispute with your joint venture partner which country will have jurisdiction to resolve the disagreement?
Will competition law affect my joint venture?
Competition law may affect your joint venture. Failure to comply with competition law can have serious financial consequences for your business and personal implications for those involved in a joint venture.
The Competition and Markets Authority (CMA) is the UK government body responsible for preventing anti-competitive activities. The CMA has published guidance on joint ventures and how to avoid a business collaboration breaching competition law. This is a specialist area of law so if there is any risk of competition law affecting your joint venture you need expert legal advice as you don’t want to experience the hassle and expense (both financial and reputation to your business) of the CMA questioning whether your joint venture agreement complies with UK competition law.
For general information on competition law and your business read our article: Competition law: an overview.
Do you need a joint venture solicitor to prepare a joint venture agreement?
You don’t have to use a joint venture 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 joint venture 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.