Joint Venture Agreements | Core Aspects
Finding the right “Joint Venture” partner can open up new markets and distribution networks, and combining distinct skills and resources of separate but complimentary businesses should make achieving common objectives easier. As compared to going it alone, a joint venture eases the level of resource commitment (financial or otherwise) of each joint venture party.
However, it is by no means free from potentially fundamental difficulties. The set-up and operation of a separate joint venture vehicle often means additional cost in both monetary terms and human resource. If contributions are not purely monetary there may be disagreement as to the value each party brings to the arrangement and, in turn, expectations as to control and financial return.
Most often, joint venture parties will be separate businesses with separate leadership, used to autonomy in decision making. That can also create tensions as to the division of control in relation to their joint enterprise. If those originating businesses operate in the same space then competing interests can also mean frictions arise.
A joint venture agreement will not resolve such commercial issues. It can however bring into focus the parties’ respective expectations, and identify and address potential problems at an early stage, which may create more fundamental difficulties further down the line, when less easily resolved.
Having determined that operating through a separate jointly owned company is the right model, what should the respective holders ensure that the agreement governing the venture will cover? Unsurprisingly, such an agreement will to an extent need to be tailored to the particular circumstances of the parties and their business, but there are common aspects one would expect to be included.
Identifying the exact nature and scope of the new undertaking’s activities is fundamental. The term of the agreement should also be set out – is the venture to be finite to achieve a specific project within a given timeframe, or endure for the longer term? Expectations as to turnover, and any geographical limitations (e.g. excluding territories in which one shareholder already operates) should also be incorporated.
The agreement should identify the contributions to the venture which the respective parties are obliged to provide and, if the joint venture is to be financed, how that financing will be serviced. If the parties’ contributions by their nature create associated legal relationships, such as the licensing of intellectual property rights or the secondment of employees, the terms of those relationships should be clearly set out, possibly by way of separate stand-alone agreements.
The respective shareholders’ powers and in turn the levels of control can be a key area of friction. If the equity in the business is not to be divided equally, shareholders with smaller interests will invariably seek minority protections, giving them a veto on critical decisions, such as the issue of further shares or acquisition and disposal of major assets.
If the essential nature of the respective shareholders’ ongoing commitments, financial returns or voting rights are not to be identical, then it may well be that having separate classes of shares will deal with that most effectively.
Balance of power is not an issue confined to shareholder level. The directors will be the company’s governing mind, so each joint venture party will often want the ability to nominate a representative to the board, and to ensure the board meeting quorum and voting rights are structured so as to achieve the agreed balance of board level decision making powers.
Unrealistic profit expectation is another common cause of discord. The understandable desire to expedite returns on investment may need to be tempered by the need to meet financing obligations or to reinvest into the business. Joint venture partners must therefore understand their respective financial needs, and care should be taken before deciding to record in the shareholders agreement a commitment to fixed dividends.
The agreement should also address how and when shareholders will be able to exit the joint venture, and in what circumstances the venture should terminate, as well as the consequences of termination. Those might include forced buy-sell mechanisms aimed at achieving a speedy determination of share value if deadlock arises on exit from the venture. The parties will also want certain provisions of the agreement to survive termination, for example, confidentiality and non-compete / non-solicitation clauses.
The above is by no means an exhaustive summary of the provisions which a joint venture agreement might cover. Issues such as tax, dispute resolution mechanisms and employment matters may well have to be catered for. However, this provides a flavour of the type of provisions that, if included, should produce an agreement creating a solid foundation for the sound operation of a joint venture.
If you require any further information, advice or assistance please contact our head of Corporate/ M&A, David Hill at email@example.com
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