A joint venture can take many forms. Taking the widest definition, this can mean a strategic arrangement between two or more businesses, where resources are pooled, to work together on a specific project or an ongoing basis. Joint ventures are a useful way of collaborating with other businesses and to combine different areas of expertise for targeted or general business purposes.
There is a business risk to the parties, however, as each party relies on the other to ensure their goodwill is not damaged by putting their name to a joint venture. It is important that the parties to the joint venture define their respective roles and responsibilities early on and how the parties will work together to achieve the joint venture’s targets. Ideally, this will be formally recorded in a joint venture agreement.
Categories of Agreements
There are several types of ways to structure a joint venture. Before taking too many steps towards a joint venture it is important to note whether the deal is for a short- or long-term arrangement, whether a separate company should be set up for the purpose, whether it is purely a loose collaboration agreement or whether there is a view to a merger or acquisition in the future.
Here are a few key considerations:
- Contractual Joint Venture – A contractual joint venture can take the form of two or more parties coming together to collaborate on a specific project, share the costs of R&D act or share knowledge and expertise on an ongoing basis. As the parties are free to negotiate the contract terms however they see fit, the parties may share in profits and liabilities equally or in such proportions as they may determine. A collaboration agreement should be carefully drafted to ensure that the parties are not in partnership (and therefore required to share profits and liabilities equally) without realising it.
- Partnership – If two or more parties start working together and carry on a business in common with a view to profit they will form a de facto partnership, even if the parties are unaware of this. Partnerships are governed by the Partnership Act 1890 and will not form a separate legal entity. This means the partners (whether individuals or companies) will share profits and be responsible for the liabilities equally unless the parties have entered into a partnership agreement setting out their agreed terms.
- Limited Liability Company – If the joint venture will involve a high-cost project, eg developing a new product or service, and both parties will put capital into the venture, they may decide to form a new company for this purpose (sometimes called a ‘special purpose vehicle/SPV’). Setting up a new company will keep the parties’ existing businesses separate from the joint venture and the businesses’ assets will be protected as, legally speaking, the new company will be a completely separate entity. The parties will share in the profits of the joint venture company through dividends. When setting up a limited company, the articles of association should be carefully drafted and a shareholders’ agreement put in place between the members to ensure that the rights and obligations of the parties are clearly set out from the outset.
Advantages of joint venture agreements
There are several benefits to being in a joint venture. In sharing resources, the companies can:
- Access greater resources – the parties may be able to benefit from having access to better resources such as specialised staff, technology and finance at a lower cost than if they had to acquire those resources for themselves.
- Spread risk – Joint business arrangements provide an opportunity for businesses to hedge some risk by sharing some of the financial responsibility.
- Flexibility – Joint ventures are flexible structures (at least at the more relaxed end where the joint venture is a loose collaboration rather than an SPV). A joint venture can have a limited lifespan and only cover part of what you do, limiting the parties’ commitment and business exposure.
Disadvantages of joint venture agreements
Potential disadvantages are as follows:
- Disagreements – joint ventures may fail because of disagreements. It is typically a result of the parties not taking the time to discuss and agree the objectives of the joint venture. Without a well-drafted joint venture agreement, it may be that the parties fail to consider what resources each party will provide and how the joint venture will be financed. This can result in major disagreements and can eventually cause the joint venture to fail.
- Loss of commitment – Either party’s existing business or personal interests may take precedence at different times and one party may be left driving more than their share of the load. If the remuneration or profit share is not amended to reflect the change in responsibilities, it may be that one of the parties will eventually walk away.
- Loss of reputation – A bad venture or a bad PR story for a joint venture could leave some reputational damage to the parties involved. Even with a well-drafted agreement, it will be difficult to avoid collateral damage even if both parties were not the cause of the failure. It is therefore imperative that due diligence is carried out on any potential business partners and they are chosen wisely.
At AMD Solicitors, our experienced team can guide you through a joint venture or collaborative business venture and ensure you are advised on your legal risk and commercial options. Our expert team of commercial solicitors in Bristol can provide guidance and assistance throughout the entire process.