Joint ventures – for better, for worse
Some practical advice for businesses considering a first joint venture
Joint ventures bring companies (and individuals) together for many reasons – to develop new products, tackle big projects, to access new markets or geographies, to pool resources and sometimes to share risk. However, with commitment comes responsibility.
Every joint venture should be structured around the clear goals and purposes of the coming together. Create a plan and have a purpose. That might be a single purpose – to win a new public sector contract, for example – or it might be for something longer term, such as the commercialisation of a piece of intellectual property. Ensure those goals are clearly defined and understood by all parties.
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At its most basic, a joint venture is nothing more than two or more entities (or individuals) coming together. It might be an informal agreement and short-lived, or it may by more complex creating a new business into which money, people and assets are transferred. A joint venture tends to take the form of a private limited company (ltd) where the parties are shareholders in that company. However, sometimes a joint venture can be a contractual arrangement, a partnership or a limited liability partnership (LLP). Whatever the approach, document everything. A more complex and comprehensive set of documents will, obviously, be needed for larger joint ventures.
Document clearly what each party brings to the joint venture, whether that is cash, people, skills, property or assets. That value will influence the ownership structure of the venture, which translates into what is taken out and who makes decisions. Consider whether any rights to financial return should be subject to performance conditions.
However the economic interests are split (this also needs to be carefully drafted) agreement is going to be needed on the division of responsibilities, who has overall control and what protections will be afforded to those who do not. It is also sensible to agree at this stage what will happen should parties fall out with each other. Problems anticipated and planned in advance will be resolved faster.
Joint ventures can, of course, involve multiple parties, and again advance planning should be given to scenarios where one party fails to deliver on their commitment. Should they be diluted or bought out, and if so on what terms?
And finally, consider at the outset the end of joint venture. Projects may have a finite lifespan or the joint venture may have run its course. Agree in advance your proposed route to exit or how it will be dissolved.
The above is a sample of matters to be considered. Any business contemplating a joint venture of any nature should take professional advice. Choose advisers that have experience of structuring joint ventures – they will have seen every twist, turn and outcome many times before.
If you would like more information or advice on joint ventures please contact Gillian White.