Joint Venture Companies

Joint venture agreements take place between all types of business and cover a wide range of collaborative business partnerships and arrangements. These involve differing degrees of involvement by the parties involved and may be for a fixed or an indefinite period.

Typically, joint ventures are carried out through a new company as a company structure offers the parties limited liability and it is generally easier to set out the rights between the parties in share rights.

Joint Ventures Agreement Solicitors

Whilst a corporate joint venture offers many benefits, joint ventures can be carried out through limited partnerships, general partnerships and also through contractual relationships. However, creating a joint venture can be a complex undertaking.

The key terms that the parties in a joint venture need to consider when establishing and launch planning a joint venture as a legal entity are set out below and are generally contained in a shareholders’ agreement or a joint venture agreement (JVA), which is essentially the operating agreement for the new entity:

  • the business of the joint venture
  • the composition of the board and management arrangements
  • share capital and funding of the joint venture company
  • distribution of profits
  • restrictive covenants
  • protection of minority and majority interests (if applicable)
  • resolution of deadlocks
  • transfer of shares, and
  • termination

Looking at these key terms in detail:

Business of the Joint Venture

The business of the joint venture will be set out in the JVA. This also usually includes details of the commercial objectives of the joint venture parties and what their business relationship is and can also include any financial targets or milestones.

The Composition of the Board and Management Arrangements

The JVA will provide that each joint venture party is entitled to appoint a number of parties to the Board. This will depend on the respective power of the joint venture parties. In a joint venture where the shareholding is 50:50, each joint venture party will be entitled to appoint the same number of directors to the Board. The JVA will also set out the scope of the Board’s decision-making powers right from the launch phase and it will also set out how day-to-day matters are to handled and also exceptional matters. In a 50:50 joint venture, the JVA will also set out how deadlock will be dealt with at Board level.

Share Capital and Funding of the Joint Venture company

The JVA will set out the initial funding – for the joint venture which can be a combination of subscription of shares and also loans. If assets are to be transferred to the joint venture in return for shares, tax and valuation advice should be taken on the value of the assets and any transfer should be done by a separate business agreement. This would apply to the transfer of any know-how or other intellectual property rights to the joint venture. The JVA should also document how any future funding requirements will be met.

Distribution of Profits

The most common way is to distribute profits is by dividends, but profits can also be extracted by paying fees for services provided to the joint venture by any of the parties.

Restrictive Covenants

These type of covenants or restrictions may be included to prevent the joint venture parties from competing with the business of the joint venture and or soliciting customers, suppliers and employees of the joint venture company.

We can advise you on the likely enforceability of these type of restrictions because they will only be enforceable to the extent they are no wider in scope or duration as is reasonably necessary to protect the legitimate business interests of the joint venture company.

Protection of Minority and Majority Interests

A minority shareholder will need to consider the extent to which that shareholder wants to exercise control and the statutory powers may be supplemented by contractual powers in the JVA. For example, the JVA may contain a power of veto so that certain matters called, ‘Reserved Matters’ require the consent of all the shareholders. Reserved matters typically include structural changes such as the issue of new shares and financial decisions such as the declaration of a dividend, but they can also include major strategic decisions such as large disposals or acquisitions of assets.

Resolution of Deadlock

Where the parties have equal bargaining power as in a 50:50 joint venture, the parties are governed by the principle that they need to agree on all matters before a decision is taken. There will be times when the parties do not agree and this may give rise to a deadlock, which can be seen as one of the disadvantages of entering into a joint venture. For this reason, some JVA’s contain mechanisms to deal with deadlock, other JVA’s are silent on the point, taking the view that the joint venture parties are either sufficiently invested to resolve deadlock or that an irreconcilable difference means in all likelihood that the joint venture is effectively at an end.

Transfer of Shares

The joint venture parties are collaborating because of the respective strengths each brings to the business arrangement and it is for this reason that they will want to ensure that the shares of each joint venture party are not freely transferable. Typically therefore, the JVA will contain prohibitions on transfers to competitors, conditions attaching to transfers to family members and also pre-emption rights which are rights of first refusal before shares can be transferred to a third party. There will also be a requirement for any person to whom shares are to be transferred to sign a Deed of Adherence to ensure that that person is also bound by the same restrictions as the person transferring the shares.

Termination

If a joint venture is set up for a specific project then the JVA will usually provide that the joint venture, and the agreement between all parties, comes to an end on the completion of that project. Joint ventures may be set up to exist for a fixed term and again this will be stated in the JVA. If the joint venture is to carry on for an indefinite period of time, the joint venture parties should still consider whether to include termination events. The usual termination events are: one of two joint venture parties is selling its shares in the joint venture; a material breach of terms of the JVA which has not been remedied; insolvency and unresolved deadlock on a key issue.

These are some of the key terms that are usually included in a JVA but it is not exhaustive, JVA’s can also include other business arrangements between the parties such as ownership of intellectual property rights and licence arrangements.

We also offer legal advice on more general commercial matters, like terms and conditions, and contracts, and when things go wrong can provide alternative dispute resolution services (ADR).

Servicing clients in Ascot, Bracknell, Camberley, Weybridge, Guildford and the surrounding areas.

Contact us for more information on joint venture projects, how to set up a joint venture and the documentation required for your joint venture project.