Joint Venture Agreements – Key points to consider

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:

• Limited liability company (Company)
• Limited liability partnership (LLP)
• Partnership (or limited partnership)
• A purely contractual co-operation agreement.

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.

How are joint ventures funded?

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:

• Whether each party to the JVA (JVA partner) will contribute the same amount to the JVC?
• Will one party contribute cash and another party contribute assets to the JVC?
• Will a third party, such as a bank, be providing some of the financing and, if so, what security will they require over the JVC?
• If further funding is required, will each of the JVA partners be obligated to provide a proportion of the further financing (in line with their relevant proportions of ownership over the JVC)?

Division of responsibilities & decision making in JVAs

A key element to consider at the outset is the clear division of responsibilities between the JVA partners and the JVC. For example:

• Will the level of control each JVA partner has be linked to the resources which they have contributed towards the JVC? And, if so, how will this contribution be quantified where the contribution is not monetary?
• What will the management structure of the JVC be? How many directors will each JVA partner be entitled to appoint as directors of the board of the JVC?
• How will any deadlock over a decision be resolved? Are there any decisions or actions which the JVC should not be able to take without the prior agreement of all of the JVA partners?

Confidentiality and JVAs

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.

Intellectual Property (IP) and JVAs

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:

• Will the IP rights be transferred to the JVC, or will the JVA partners enter into a licence agreement with the JVC?
• Where a JVA partner licences their IP rights to the JVC, what compensation (if any) will they receive? This may include a lump sum payment or royalties
• Where the JVC creates its own IP rights, who will own these rights?
• Upon termination of the JVA, what will happen to any IP rights owned by the JVC?

Term of the JVA & exiting the JVA

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.