Joint ventures: what are the key considerations when entering into a JV?

A Joint Venture (JV) is a commercial agreement between two or more parties. It is common to enter into a JV as a way to share risk, partner with particular skills, raise finance and enter into new markets (alliances such as this are often helped by a partner's expertise or resources).

There is no specific JV law and the legal form will be determined by the nature and size of the enterprise, the identity and location of the parties as well as the commercial and financial objectives.

This article sets out a summary of the process of joining a joint venture and what your key considerations should be for this kind of business arrangement.

What are the preliminary considerations when joining a JV?

Take a step back.

JV discussions often start informally and, before getting too far down the line, it is always worth taking a step back to check that certain points have been considered. These include:Does a feasibility study need to be carried out to check the viability of the JV? This will largely depend on what each party will be bringing to the arrangement and the nature of the business to be carried out.What level of due diligence needs to be carried out on the parties to the JV?Have conflicts of interest issues been considered? Although the parties will be acting together with a view to create a successful JV conflicts will inevitably arise between the parties to the arrangement and separate legal representation needs to be considered.Should there be an agreement in place to cover exclusivity of negotiations and confidentiality of any information shared between the parties?Is any party subject to any particular legal or regulatory constraints (this may include licences required for the business or businesses, merger controls, financial assistance, the Takeover Code, State Aid etc.)?Will the parties enter into a letter of intent or heads of terms to cover the initial detail of the arrangement? If so, will this be binding (in whole or in part) on the parties?

Understand who is involved.

It is essential to understand which parties will be involved in the JV you are entering into. Things to consider are:Where are the parties incorporated and what is their legal form (for example, individuals, companies, partnerships)?Will the JV parties hold the interest in the JV directly or via a newly created vehicle?Who ultimately 'controls' each of the JV parties and who has the power to negotiate and make representations on behalf of each party?Will the JV vehicle itself be a party to the JV agreement?Where there is any cross-border element, consider the which laws will govern the trade of the JV. For example, tax and foreign currency exchange issues.

What are the common structures of a JV?

The structure used will depend on various factors including:Whether the joint venture vehicle already exists.Where the parties are based.Split in shareholding (50:50 or other split).Tax, regulation, further financingConfidentiality.Length of agreement.Involvement of certain individuals.

Common structures for a JV include:Limited liability companies.Partnerships (limited partnerships or limited liability partnerships).Contractual relationships (for example, service contracts or supply contracts).

Find out more here on how to select the right structure for your JV.

What should be included in the heads of terms?

Before entering into a JV agreement or shareholders' agreement the parties should set out in a memorandum of understanding, or a heads of terms that outlines the key parameters of the relationship.

The heads of terms should be as comprehensive as possible. The contents will depend on the type of business of the JV but issues that are typically dealt with in the heads of terms include answers to the following questions:

Business

  • Is the purpose of the JV establishing a new business or acquiring a particular asset?
  • Are there any conditions to be satisfied on or prior to entering into the JV?

Funding

  • What funding is required (is there an agreed budget for years 1, 2, 3 etc.)?
  • Who is going to provide the initial funding and in what proportions?
  • How will the funding be provided (equity or loan)?
  • Will there be external debt?
  • Will any of the parties contribute assets rather than cash?
  • What will the financing requirements be going forward?

Profits and losses

  • Are profits and losses to be shared proportionally between the parties?
  • How much will be distributed and who decides when such distribution will take place?

Decision making

  • How are decisions of the JV made?
  • Who ultimately controls this process and what happens if the parties cannot agree?
  • What protections are in place for any party or parties holding minority interests?

Deadlock and disputes

  • What issues create a deadlock?
  • How will deadlock disputes be resolved?
  • What are the consequences of an unresolved deadlock?

Defaults

  • What constitutes a default?
  • Should there be any cross default provisions with other agreements?
  • What are the consequences of an event of default?

Transfers

  • Can the parties transfer their interests in the JV?
  • Will there be any preemption rights?
  • What happens on the change of control of one of the parties?
  • How are the interests valued?
  • Are any particular transfer mechanisms required in the circumstances (for example, ‘drag-along’, ‘tag-along’ rights or ‘Texas shoot out’ or ‘Russian roulette’ provisions)?

Term

  • Is the JV for a fixed term or will it last indefinitely?
  • What is the planned exit from the JV?
  • What issues or actions would lead to an early termination?

IP and Employment considerations

Intellectual Property (IP). Parties should consider the following specific questions:

  • What IP rights (if any) will be conferred on the joint venture? Will the joint venture have a licence, or will it be transferred the IP to use going forward?
  • Who will own any IP that is developed by the joint venture?
  • What happens to the IP rights after the end of the joint venture?

Employment. Parties should consider the following specific questions:

  • What is the proposed management structure?
  • Will the joint venture have its own employees? Will any party second staff to the joint venture?

Want to know more?

The above is only an indicative guide to some of the considerations around entering into a JV.

Please get in touch if you would like to discuss any of the above or your particular JV arrangements in more detail. Our legal experts are happy to talk you through all the details relevant to your requirements, services, costs and more.

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