
Insight
A Joint Venture Agreement (JVA) is often a sensible way for several individuals or businesses to pool their resources and expertise to pursue projects which would be more difficult to achieve by themselves. Entering into a JVA is a big decision and can be a complicated endeavour. This article summarises the key points which are important to consider before entering into one.
How are joint venture agreements usually structured? A JVA is typically created through one of four legal forms:
Each legal form has its own characteristics and the decision will depend ultimately on which form best suits the type of work being undertaken. There may also be tax implications which factor into the decision-making process for which legal form is chosen. Most JVAs will take the form of a Company or LLP (JVC) as both of these structures have a separate legal personality, allowing the JVC to enter contracts and own property in its own right.
The JVC will need to be financed in order to begin carrying on its business. When it comes to funding a JVC, there are several important considerations including:
A key element to consider at the outset is the clear division of responsibilities between the JVA partners and the JVC. For example:
A JVA will usually involve the JVA partners gaining access to each other’s confidential information. A process of due diligence may precede entering into the JVA so that each party can feel comfortable about the working practices and financial viability of the other partners, or a JVA may be predicated around the business contacts of one JVA partner and the technical know-how of another. There is likely to be a mutual flow of confidential information between the JVA partners in relation to the running of the JVC so it is important that relevant confidentiality provisions are included in the formal JVA so that any confidential information cannot be disclosed or used by one party for any reasons other than in respect of the JVC.
JVA partners will often provide the JVC with access to their IP (e.g. certain technology or software). This gives rise to several considerations, such as:
Before entering into a JVA, it is also important to consider the termination of the JVA. For instance, will the JVA run indefinitely or operate only until a certain goal has been achieved, such as the research and development of a new product or development of a particular property?
Closely linked to this, is the question of what provisions should be put in place to allow for an exit. Will a JVA partner be able to transfer their interest in the JVC to another third party and, if so, what mechanism is in place for them to do so? It is also important to consider whether the formal JVA should contain provisions which require a JVA partner to relinquish its interest in the JVC (for example, in the event that they default on their responsibilities to the JVC).
It is clear that entering into a JVA can easily become a complicated matter and it is important to agree these fundamental points at the outset. We regularly help businesses who are entering enter into a JVA; if you would like more information, please get in contact with our Corporate & Commercial Team.