What is a Joint Venture?
A joint venture is an agreement that sets out the relationship between two organisations that have agreed to work together on a specific project, usually to make a profit. Joint venture agreements can be created between individuals, businesses, and even government organisations.
How is a Joint Venture established?
A joint venture is set up by creating or establishing a joint venture agreement that the parties that are entering into the joint venture sign. There is a lot of flexibility in how organisations structure their joint venture. This means that joint venture agreements need to be tailored to suit the parties.
Should we form a new company for the Joint Venture and own shares in that company ?
There is no hard and fast rule to this one. Joint ventures can be incorporated (i.e. a new company is created and the joint venturers own shares in the new company) or unincorporated (i.e. no new company is created and both joint venturers enter into the joint venture agreement in their own capacity – e.g. as their current trading entity).
Incorporated vs Unincorporated Joint Ventures
The main difference between the two types is that incorporated joint ventures are formalised by creating a company to carry out the project whereby the parties become shareholders in the company. The obligations and rights of the organisations who create an incorporated joint venture will be set out in the shareholders agreement. Unincorporated joint ventures are a contractual relationship between two or more parties.
Incorporated joint ventures can be attractive to businesses, especially when the project involves financial risk. Because companies are separate legal entities, they can sue and be sued, accrue debt and so forth. What it all boils down to is that companies help to protect the people who create them so that if it all goes belly up, the people behind the venture won’t go bankrupt themselves.
Do they go on forever?
Joint ventures are not designed to be ongoing relationships. They are generally set up so that two or more organisations work together on a specific project. Given that they are specific to a project the joint venture agreement for the project will specify if each organisation will contribute their own money, assets and resources, and how profits will be divided up.
Obligations of Joint Venturers
Unlike a partnership, organisations that form a joint venture don’t have a duty of care to each other and they cannot make contractual agreements that bind the other parties in the joint venture. Each party is responsible for servicing its own debts and contractual obligations. The tax obligations are also more flexible.
What sort of terms and conditions should be in a Joint Venture Agreement?
In general, the following terms should be included in a joint venture agreement:
- The objectives of the joint venture
- What each organisation will contribute to the joint venture – this can be money, assets, resources, technology and so forth
- Milestones and timeframes
- The role of each organisation in the joint venture
- Responsibility for debts and losses – who is responsible for what (these are generally shared equally)
- Distribution of profits
- Who owns intellectual property (existing and to be created from the joint venture)
- Governance and management of the joint venture
- Other obligations of each party
- Reporting requirements (accounting, auditing etc)
- How the joint venture will be marketed
- Confidentiality requirements
- The dispute resolution process
- When and how the joint venture will be terminated
There can be plenty to think about in any Joint Venture Agreement. So if you need a Joint Venture Agreement drafted or reviewed – feel free to get in touch. It would not be an understatement to say ‘we can help’.