Insurance 7 July 2017

What is a joint venture and why are they important?

joint venture agreement
All joint ventures address business goals by two or more parties committing to work together

When asking “what is a joint venture?”, there’s no easy answer, as the term is wide ranging and is not defined in law. Here, corporate and commercial partner at Bircham Dyson Bell, Paul Voller, explains joint venture structures.

Joint ventures are a vital tool of business organisation. You can use them to spread risk, access resources and attack opportunities that you cannot, or would prefer not to, get to grips with on your own.

The term ‘joint venture’ is wide ranging.  It is not defined in law, and can cover anything from a corporate structure that is potentially as permanent as any company, or a loose alliance for a short-term project.

Whatever the structure, all joint ventures share the same basic feature of addressing a business goal by two or more parties committing to work together.

That commitment will be set out in the joint venture documentation, whatever form it takes, and will specify what the aim of the joint venture is, what the joint venture partners are to contribute to the joint venture and how they will take the benefits.

The commitment to the joint venture always has a time element, whether for the duration of a project or for a period or simply open ended until one side or the other gives notice. In any particular case these basic ingredients will shape the thinking about what form of joint venture to choose.

What is a joint venture, and what isn’t?

So, what is a joint venture? The structures fall into two broad groups – corporate joint ventures and unincorporated joint ventures. A corporate joint venture exists as a legal entity separate from the joint venture partners. This category of joint venture includes companies limited by shares and LLPs.

In contrast, unincorporated joint ventures do not exist as separate legal entities at all – they cannot own property, or sue or be sued, for example. These include contractual joint ventures and traditional partnerships.

The corporate forms tend to be most suitable for more permanent or are long-term projects. The unincorporated forms tend to be more suitable for shorter projects, or projects that require a less intense concentration of resources.

In comparing the different forms of joint venture, there is one factor that frequently trumps all the others – limited liability. Only corporate forms of joint venture offer limited liability without creating more elaborate intermediate structures.

In this way, not only is there a separate legal entity (the joint venture vehicle) that is the party liable to outsiders, but in the event of disaster, losses will, with very few exceptions, stay with the joint venture company. Unless the partners have specifically guaranteed the joint venture’s liabilities, will not require contributions from the joint venture partners.

The management of the joint venture will be another major consideration. A separate joint venture vehicle will have its own board.  It can be – and usually is – made up wholly or mainly of representatives of the joint venture partners. Good management is crucial when defining what is a joint venture.

A joint venture normally involves some sacrifice of control. For example, it is the trade-off for getting access to the other party’s resources.  As such there will invariably be tensions from time to time around the way the affairs of the joint venture are to be conducted.

Without the command and control that comes with running your own operations, the joint venture partners should expect to commit management time and resources to negotiating issues of joint venture management.

A collaborative attitude is key to unlocking the potential of any joint venture.  There needs to be a clear business plan supported with a formal agreement of what is a joint venture, setting out the rules for what the joint venture can and cannot do.

One of the areas that needs most care is the negotiation and documentation of the initial (and any ongoing) contributions of the parties involved. Not only is it important to deal with what is being contributed but also the value to be attached to the contributions.

This is important from a tax and accounting point of view, but also from the point of view of establishing that each side is satisfied about its and its partner’s returns.

Where goods or services are to be provided to the joint venture by one of the partners, the terms of supply and price need to be carefully negotiated so that there is a good understanding about the reliability of supply and the way in which value accrues to the partners.

It will be important to address the issue of competing activity, and the way in which confidential information is allowed to flow among the parties and any related group companies of theirs.

Amongst the matters that potentially need to be considered, termination is always an issue. Termination provisions deserve as much attention as the rest of the agreement. However, in practice discussing termination is often felt to be counter to the positive atmosphere of setting out what is a joint venture.

Moreover, parties are often reluctant to spend money on professional advisers to negotiate termination provisions.  However, a willingness to deal with what can be one of the more testing elements is often a good reflection of the willingness of the parties to negotiate a deal – which will be robust because it is built on a good understanding of each parties’ ambitions and concerns.

Joint ventures can take a wide variety of forms that are adaptable to virtually any circumstances.  Through joint ventures businesses can share resources, spread risk and gain access to business opportunities.

Especially for smaller businesses, the impact of the time and attention required to get things right should not be underestimated. But, with a clear vision of the goal, a well-documented agreement and good management, the parties will have that ability to realise what is a joint venture, including business opportunities it presents which they could not reach individually.

Paul Voller corporate and commercial partner at law firm, Bircham Dyson Bell

A guide to taking holidays as a freelancer or contractor

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

Q&A

If you’ve found the article above useful, but have a more detailed and bespoke question, then please feel free to submit a query to our expert. We at Business Advice will get in contact with them on your behalf and arrange for a personalised response. These questions and answers will then be collated on the site for any other readers who have similar queries.

Ask a question

On the up