Joint ventures are becoming increasingly popular as way in which individuals or companies can achieve their goals by working together. Examples of joint ventures range from very simple arrangements between friends or colleagues to buy, develop and resell property all the way up to large companies such as Google and NASA developing Google Earth or Vodafone & Telefónica agreeing to share their mobile network.
There are a few ways to go about joint ventures so we will briefly outline the main options along with some thoughts on things to consider when entering into a joint venture.
The two most popular forms of joint venture are using a corporate vehicle such as a limited company, or simply a contract based venture under a collaboration agreement.
It is also possible to form a joint venture using a Limited Liability Partnership (LLP) and an unincorporated partnership. However, these are less common and so for the purposes of this article we shall stick with the company and contractual routes.
- Joint Venture Company
In most cases, using a limited company to conduct the joint venture is the most appropriate structure. The most significant advantage of this route is that the participants have the ability to limit their liability for the liability and losses of the joint venture business.
Such an arrangement would work well for circumstances where two individuals embark on a joint venture, or where two companies decide to work together.
- Co-operation Agreements
This form of joint venture is an arrangement where the participants agree to work together as independent contractors, rather than as shareholders in a company. The rights and duties of the participants and the duration of their legal relationship will essentially derive from the provisions of the joint venture agreement and the general common law rules.
Things to consider
Here are a few key points to consider when entering a joint venture. It’s worth nothing that this list is not exhaustive and each venture will have its own specific considerations.
- Relationship between the Participants
This is particularly important if a limited company is used. If the parties to the venture are equal, or 50:50 partners, it’s vital to understand what happens in a situation where the parties can’t agree (known as ‘Deadlock’). The decision making process can lead to all manner of disputes if it is not clear and properly documented.
- Dispute Resolution
If a deadlock does arise, there needs to be sensible way of managing this. Without a good, tiered process of resolving deadlock, joint ventures can reach ‘stalemate’ and find themselves unable to continue in any meaningful way.
Exiting a co-operation agreement may be as simple as serving notice under a termination clause. Although, it’s unlikely any well drafted agreement would allow either party to escape at any time without reason – if it did the parties may not be incentivised to commit time and resource the project.
When it comes to limited companies, consideration should be given to the process of selling a party’s shares in the joint venture company including the remaining party’s right of first refusal over the exiting party’s shares and valuation of those shares. In a joint venture company it may not be appropriate for one party to be able to sell their shares to an outside organisation, in the same way a shareholder could in an otherwise ‘normal’ company.
- Intellectual Property
Who will own any IP developed during the course of the venture?
Will there be a situation where one party brings their IP to the venture which should be licenced?
Much like a contract of employment, will the parties be restricted from trading in competition with the venture both during and after a party exits?
Individuals and businesses should carefully consider how they envisage a joint venture operating before entering into it. Sadly, those ventures which are entered into in good faith between friends, colleagues or associates which do not have the proper documentation are the ones most likely to cause a headache later down the line.
If you are considering a joint venture, and would like to discuss further, please contact Ed Manning.