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If you are considering a new manufacturing joint venture and would like some more information, please do not hesitate to contact our Manufacturing Team below.
The manufacturing industry has been under constant pressure since the disruption to the global supply chain caused by COVID-19 and Brexit. This pressure has been further exacerbated by a drop in industrial production, the volatility within the UK economy, the ongoing war in Ukraine and the rising costs of energy, transport, and raw materials.
A joint venture is a flexible arrangement that manufacturers can utilise in both times of crisis and growth, allowing the partners to share costs, spread risk and reduce capital expenditure. In a global market, a joint venture can also provide a platform for manufacturers to expand into overseas markets whilst potentially limiting the exposure of both partners to risk.
What is a joint venture?
In a joint venture, two or more independent entities enter a commercial arrangement to pool resources. The joint venture can be for a specific project with a limited shelf life or a general business activity for an indefinite period.
Why enter a joint venture?
- Spread risk – All parties involved in a joint venture share a proportion of the risk. This means that should the venture ultimately fail, the potential exposure or loss of each joint venture partner is shared.
- Combine skills and expertise – A joint venture can be a vehicle for a party to share knowledge, expertise and insight with another party with greater resources to develop a product or service, such as Siemens Energy and Air Liquid's proposed joint venture to develop industrial-scale renewable hydrogen electrolysers to combat climate change. Businesses can also use joint ventures in similar markets with specialised knowledge that can be shared to develop a mutually beneficial product or service.
- Pool resources – As well as skills and expertise, a joint venture can allow the parties to share staff, technology, equipment, or finance. The pooling of resources within the manufacturing sector is a significant advantage as projects normally require a significant financial investment in research and development and plant and machinery to develop a product.
- Overseas markets – Joint ventures can allow parties to enter the global market, especially in countries with restrictions regarding trading. As well as simplifying the process of beginning trading in a new country, the parties can take advantage of the pooled network of connections and customers, along with any existing infrastructure that one party may already have.
Vehicles for joint ventures
The first decision the parties will need to agree on is the form of the joint venture. The most common form is the creation of a new joint venture company. This is the most commonly used vehicle for a joint venture as it is a tried and tested corporate structure underpinned by an established body of law and practice in England and Wales.
A joint venture company can be owned equally or on a minority/majority basis, depending on each party's stake in the venture and the commercial terms they can agree on. Once formed, the new company will carry out all the trading activity of the joint venture. It will also hold all assets (this will be anything developed by the project, including intellectual property) and joint venture liabilities.
The ability for parties to limit their liability in respect of the joint venture company's liabilities and losses is a key advantage. The joint venture company has its legal personality and is therefore liable for its own debts and tax. However, as the joint venture company will have no credit history, the joint venture partners will likely be required to provide third-party security, or guarantees, before any third party is willing to grant credit terms to the joint venture company.
The constitution of a joint venture company
The parties to a joint venture can set out the joint venture's aim, time and scope, as well as the relationship between them and the extent of control through the constitution of the joint venture company. This provides flexibility and certainty, allowing parties to pursue other commercial interests outside the joint venture. Furthermore, if each party is a corporate entity, a joint venture can be subject to independent tax advice and be a tax-efficient approach to extracting profits.
The constitution of the joint venture company will normally be comprised of bespoke articles of association and a shareholders' agreement that will regulate the relationship between each joint venture party. Articles of association contain the rules that govern how the company operates and are publicly available at Companies House. The shareholders' agreement is a private document that places direct obligations on each shareholder (and often the joint venture company itself). The constitution would govern issues such as the joint venture company's principal aim, decision-making processes, funding, confidentiality, access to information, non-compete restrictions, share transfers and how a party would exit from the joint venture.
A written agreement gives parties certainty as it expressly sets out each party's obligations and how the joint venture business is to be conducted.
Alternative joint venture vehicles
If incorporating a company is not appropriate for the joint venture, alternative structures exist, including a collaboration agreement or a form of partnership.
A collaboration agreement is the simplest and most limited form of a joint venture. It is a contractual arrangement in which each party retains their assets and revenues, and costs are not pooled as the relationship is purely contractual.
A partnership can take several forms, including a simple partnership, a limited partnership or a limited liability partnership and can be seen as a middle ground between a joint venture company structure and a collaboration agreement. Partnerships tend to be appropriate only in specific circumstances due to the lack of transferable investment in an LLP or the unlimited liability in a partnership that is often commercially unattractive to the parties.