A joint venture is established where two or more participants join forces for a project. The reason for doing so, most commonly, is that neither party wishes to devote the entire financial commitment for the project so pull their resources with another.
Alternatively, the participants may have different skills or resources available and the parties may be considered more likely to succeed if their resources are pooled than if each party commences the enterprise separately.
- Before embarking on the project the parties should firstly identify the likely requirements that each party is being to the table:
- resources (staff, office space etc)
that you can provide and that you require from your joint venture partners, and ensure each proposed partner is able to provide these. A brief written specification of the project identifying the responsibilities of each side will help to avoid misunderstandings if prepared at an early stage in the negotiations. More specific considerations will depend on the purpose of the joint venture:
Single Project: Where a joint venture is created to deal with a single project e.g. the development of a property or other enterprise which is likely to last only for a limited period, a simple contractual agreement may be all that is required. In that situation, the management of the project is normally carried out by the existing management of the two parties.
Partnership: Where the project is likely to continue for a longer period, a partnership may be suitable. Partnerships are simple to set up and avoid the disclosure of accounting and other information required for limited companies. The main problem with partnerships is the unlimited liability of the partners for the partnership's debts.
Joint Venture Company: The most common form of joint venture is a joint venture company. The advantages of using a joint venture company are its limited liability status and the ability to keep the company's affairs separate from the other activities of the participants. The existence of share capital in the company also simplifies the division of the parties' interests and makes transfer of those interests easier. In addition, the management of the company can, if required, be kept separate from share ownership and the company will be able to raise finance by charging its assets.
Most joint venture companies are governed by a joint venture agreement or a shareholders' agreement as well as the usual Memorandum of Association and Articles of Association. The arrangements for a joint venture company need not be complicated. You can start with a simple ready-made company and amend and expand the arrangement as the business develops and profits increase.
Where two or more businesses pool their efforts for mutually beneficial purposes, their respective contributions and expectations should be specified in writing. In addition, a joint venture agreement is necessary to determine their respective duties and obligations in running the enterprise.
Issues during the Lifetime of the Agreement
The joint venture agreement should address in particular: financial arrangements for providing the initial capital and any additional cash required; the division of responsibilities; the division of profits (or losses); the appointment of directors (in the case of a joint venture company); management rights e.g. board representation and powers and where shareholders' approval is necessary; the preparation of accounts; the matters for which unanimity between the two parties is required (deadlock); the circumstances in which the joint venture comes to an end and the consequences of termination (see below); how long the joint venture is intended to last; and the arrangements which are to apply if a party wishes to transfer or dispose of its interest.
In addition, the agreement should address rights to, and ownership of assets including technology and other intellectual property brought into the joint venture, generated or exploited during the joint venture and each parties respective rights in those assets after the joint venture has ended.
Termination and the consequences of termination are generally the most difficult points in a joint venture agreement. It may be helpful to build in arrangements for arbitration or alternative dispute resolution if difficulties arise, preferably by an independent expert known to both parties.
Always ensure at the outset, if you can, that your exit route is safeguarded if things go less well than you expect. In particular if you are involved in a joint venture company, the Articles of Association or the shareholders' agreement often provide that a participant requiring to dispose of his or its stake must give the other participants a right of first refusal. Sometimes a 'candy bar' formula is used i.e. whereby a participant wishing to leave or end a joint venture offers to sell his shares to the other participant at what he considers the appropriate figure-but the other participant may then be obliged to sell his own shares at the same figure if he does not accept the initial offer.
If the joint venture is discontinued, the assets will normally be disposed of, the liabilities discharged and the net balance divided between the participants in proportion to their shares in the venture.
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