Joint Ventures: What are the key considerations when entering into a JV?

A Joint Venture (JV) is a commercial arrangement between two or more parties for the purpose of executing a particular business undertaking. The reasons people to look to establish a joint venture are varied. It may be to share risks (especially in an uncertain market), utilise particular skills or technology that another entity holds, raise finance or enter into new markets.

In the real estate sector a common reason for entering into a JV includes being able to unlock certain development land or where one party needs to satisfy a key objective (for example, the provision of affordable housing).

The term 'joint venture' has no specific meaning in English law and there is no specific JV law. The legal form will be determined by a variety of factors, including 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 what your key considerations should be when looking at entering into a joint venture arrangement.

What are the preliminary considerations when joining a JV?

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:

• Objectivities: Does each party clearly understand the objectives of each of the other parties to the JV and the JV itself? This may sound obvious but needs careful consideration. For example, one party may be looking to achieve a specific return from an exit within a specific period of time, while another party may be wanting to establish a long term income producing JV.

• Due Diligence: What level of due diligence needs to be carried out on the parties to the JV? This should include the usual 'know your client / anti-money laundering' checks on the parties as well as financial due diligence (especially where the parties are providing funding to the JV) and due diligence on any assets that a party is bring to the JV (e.g. property or IP).

• Exclusivity: Should there be an agreement in place to cover exclusivity of negotiations and confidentiality of any information shared between the parties prior to entering into the JV documents? Parties are likely to be sharing sensitive information and should ensure they are adequately protected if the JV negotiations breakdown.
• Viability / Consequence: The viability of a JV is often under constant review and captured in the evolving drafts of the business plan during the negotiation phase. It is important to link the viability back to the objectives of the parties and the consequences certain events/actions might have on the JV. For example, if one party fails to provide a service to the JV what should the consequence be. Would it be possible to bring in another party to perform the service or does the JV instantly become unviable. This dynamic is important in ensuring a balance to the JV and keeping the parties true to the spirit of the JV.
• Pre-Conditions: Is the JV or 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, Subsidy Control, National Security Investment approval etc.)? These may impact the timeline for launch of the JV so should be considered at the outset.

A successful JV relies on a large amount of trust between the parties. The parties cannot cater for every eventuality but should work through the above points to understand the factors at play which could, if not considered and addressed from the outset, lead to distrust and disputes.

Click here to go through the typical questions that should be answered when considering a set of heads of terms for a JV. 

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;
• Financing;
• Confidentiality;
• Length of agreement;
• Involvement of certain individuals.

Common structures for a JV include:

• Private limited companies.
• Partnerships (limited partnerships or limited liability partnerships).
• Contractual relationships (for example, framework agreements, service contracts or supply contracts).

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