Joint Ventures: What should be included in the heads of terms?

Before entering into a joint venture (JV) agreement or shareholders' agreement the parties should set out 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:

Parties

• Who are the parties?
• What is each party providing to the JV (cash and/or assets)? If assets (e.g. real estate / IP) how are those assets being valued?

Business

• What is the purpose of the JV? Is it establishing a new business line, acquiring a particular asset, developing IP or land?
• Will the parties (or affiliated entities) provide services (including office or other accommodation, support services, facilities, staff, staff training, etc.) to the JV?
• Are there any conditions to be satisfied on or prior to entering into the JV?

Funding

• What initial 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?
• Will there be third-party financing?
• What will the financing requirements be going forward (for example working capital requirements, development and expansion costs, overspends)?

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?

Deadlock and disputes

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

Find out more here about 'deadlock and dispute' mechanisms.

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?
• How are the interests valued?
• Are any particular transfer mechanisms required in the circumstances (for example, lock-in periods, ‘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?

Other

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

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

Employment Parties should consider the following specific questions:

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