A joint venture agreement is an ideal solution for a business initiative between two or more parties, potentially ensuring the success of that prospect more quickly and easily than if those businesses were doing it alone. Such an arrangement allows the parties to pool resources and finances together, and if executed and carried out correctly, can be a win-win for all involved.
This essential guide to joint venture agreements will help any entrepreneur or business owner to understand whether such an agreement would be a suitable option for a possible business endeavour.
What is a joint venture agreement?
A joint venture agreement (JVA) is a business arrangement or contract between two or more businesses or entrepreneurs who wish to undertake a new enterprise together. By collaborating and bringing together resources and finances, each party is in a more powerful position than undertaking the enterprise alone. Such an arrangement is especially useful for a specific or shorter-term business endeavour, but joint ventures can also be used for ongoing long-term prospects.
A JVA is a formal written document or contract which establishes the arrangements agreed between the parties for the new venture, without which the parties would be at increased risk of fallout or unmet goals. The agreement should be drawn up by a joint venture solicitor with combined legal advice on aspects of commercial, corporate, partnership, employment, IP, taxation, and competition law. The solicitor should also be able to change the wording of the agreement by way of a supplemental agreement, addendum or deed of variation or amendment, if the circumstances of the joint venture should so require.
A verbal JVA is possible, but highly risky, and if a common undertaking, a common interest, and control cannot be shown, and in the absence of clear terms, a court will impose terms it deems fair and reasonable, which might not be what the parties had intended.
Advantages & disadvantages of entering into a JVA
A JVA allows access to greater resources, talent, technology, and financing, as well as the possible penetration of new markets. Sharing financial responsibility ensures the spread of the financial risk involved. A JVA is a flexible structure, the terms of which can be negotiated between the parties to suit their individual and combined needs. Each party can continue running their own separate businesses alongside the joint venture and retain their own identities.
If, however, a document is not well drafted, conflict can arise, which can ultimately lead to the demise of the joint business venture. Either party may also have other separate businesses which are given priority over the joint venture, leading to a lack of commitment to the project and the other party walking away.
Entering into a JVA also means relying on the reputation and goodwill of the other business, which is always a risk. It is therefore essential that each party carries out due diligence on the other before signing on the dotted line.
Different objectives and methods of working can often lead to disputes, as can an imbalance in the contributions made to the joint venture. It is therefore vital that the JVA deals with all these scenarios to aid resolution in the event of a dispute.
Steps to take before entering into a joint venture
Before finalising a JVA, a business owner or entrepreneur should ensure that a joint venture is the right route to success for them, and if it is, whether it will be for a short-term specific business idea or whether a long-term arrangement might be on the cards.
During negotiations, the parties should consider entering into a confidentiality or non-disclosure agreement as well as an exclusivity agreement to protect their positions pending completion of the JVA. All due diligence on the other party should be carried out at this stage and the mechanics of the arrangement and the type of structure considered and determined. Asking as many questions and contemplating as many scenarios as possible will give the joint venture the best chance of success for the future. A heads of terms document can also be useful to outline the key points of the joint venture.
Once all these issues have been dealt with, the JVA (and associated paperwork, such as a shareholder agreement or partnership agreement depending on the type of structure chosen) can be drawn up after taking proper legal advice. If the process is straightforward and all parties compliant and in agreement, it can be completed within as little as 4-6 weeks.
Types of joint venture structure
The structure of the joint venture should take the form best suited to the business collaboration. Advice on this should always be sought. The structure can either be a contractual joint venture with no separate legal entity, where the terms of the agreement are set out in a JVA, or a joint venture entity with a separate legal entity, such as a partnership or a company.
Contractual Joint Venture
Contractual joint ventures are usually used for a specific project or on a short-term basis. All terms should be included in the written agreement, as there is no separate legal entity to accommodate these and no relevant legislation in the absence of agreed terms; courts will therefore infer terms from the actions of the parties under general contract law principles.
The fact that there is no separate legal entity makes setting up and dismantling the venture very easy, but also means a possible unclear overall structure and makes internal operations more complicated. It may be helpful to set up a management committee in a larger venture or appoint individual managers in a smaller setting, to oversee the general management of the joint venture.
It also may be more difficult to raise external debt finance as there is no separate entity owning assets, each party retaining ownership of their own assets.
Profits do not have to be pooled together here, and each party to the joint venture can keep their own respective profits or share in the profits (and liabilities) as they see fit. Each party is taxed directly on its share of the profits.
A JVA is a private document and can therefore be used to record the agreed terms of profit and loss distribution between the parties.
Partnership
A partnership is usually for an indefinite period. Each member of a partnership will share the profits and losses of the business according to the terms of the partnership agreement if there is one, or otherwise as stipulated under relevant legislation, which normally provides for equal entitlement to profits and equal division of liabilities. Unless the partnership is set up as a limited liability partnership, the members will also share unlimited liability for the partnership and the actions of their partners.
Limited company
Setting up a company or a limited liability company (which limits member liability to a specific amount) is the most common vehicle used in joint ventures. However, it requires the execution of a shareholder agreement and articles of association, which are both supplemental documents to a JVA.
A shareholder agreement regulates the relationship between the shareholders who own the company and directs the operation of the company. A board of directors will need to be set up and directors can incur personal liability for any breach of their duties.
The articles of association, which is a public document to be filed at Companies House, define the purpose of the company and govern its operation as well as specifying the rights and responsibilities of the directors and members. Company accounts and other information also need to be filed on a regular basis.
The parties will share in the profits of the joint venture company by way of dividend payments. A UK-incorporated company will be governed by the Company Law Act 2006. Having a comprehensive legislative framework supports the contractual terms between the parties and the separate legal entity of the company allows it to enter contracts, borrow money, hold property, and be sued in its own name, keeping it distinct from the parties themselves.
What terms should be included in a JVA?
The following terms should be included in the joint venture agreement:
- The name of the joint venture and of the parties involved in it as well as where it will be based
- The purpose of the joint venture, whether a specific project or a longer-term business relationship
- How the joint venture is structured, whether contractual or by way of a separate legal entity as above
- The contributions to the joint venture, financial or otherwise, made by each party.
- Taxation implications on any financial contributions should be carefully considered
- How profits and losses of the joint venture are to be shared between the parties
- The rights and duties of each party, whether as partners in a partnership or as shareholders in a company or simply as parties to a contractual agreement
- A confidentiality or non-disclosure clause to protect access to any commercially sensitive information and penalties for any breach thereof. Such a clause should survive the termination of the JVA
- A non-competition clause, limited in time and geographical area, and which also must be reasonable and necessary
- An intellectual property clause granting access to IP rights as necessary and specifying ownership of any new IP established as a result of the joint venture
How any disputes are to be resolved, whether through arbitration, mediation, or the court - Warranties and representations which provide parties with options for redress if such factual statements prove untrue and adversely affect the joint venture success
- A termination clause specifying the circumstances in which the joint venture comes to an end and an exit clause allowing parties to withdraw early from the joint venture in certain circumstances (see below)
- A new investor mechanism which allows possible new investors to join the venture and accede to the JVA, meaning they will be bound by the provisions therein. They will also become a shareholder of the company if there is one
- The governing law and jurisdiction covering the joint venture, especially if the other party is an overseas company or individual
Ending a JVA
Comprehensive provisions within the termination clause as to how the parties can exit the joint venture are vital to avoid fallouts and disputes and to ensure all needs and business interests of the parties are met.
Termination is usually allowed by:
- Agreement between the parties
- The fixed term of the agreement coming to an end
- Completion of the specific joint venture project
- A material breach by one party which has not been satisfactorily resolved
- Insolvency of one party
- Deadlock on a significant issue which cannot be resolved
- Change of control of a party to the joint venture or of the joint venture company
- A sale of shares in a company joint venture from one party to the other
Termination methods include consensual termination or a winding up order by the court. Assets will usually be returned to the party who initially contributed them. Alternatively, termination can be achieved by a sale of a party interest by various methods, including tag along and drag along rights, the put and call option, the Russian roulette mechanism, or the Texas/Mexican shoot out option.
Joint venture agreement FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
