Joint Venture Agreements

The parties to a joint venture can set up a special-purpose vehicle (SPV), also known as a joint venture company (JVC), with a separate legal identity, in which the parties have limited liability.

Advantages

The main advantages of a JVC are as follows:

• As a separate legal entity, a JVC can own and deal in assets, sue and be sued and contract in its own right
• The JVC has a clear corporate identity with an established governance regime
• JVCs carry a lot of flexibility in terms of governing share class rights (voting, dividends and capital), preferential rights and returns and debt structures (loan facilities, preference shares, etc.)
• Liability of the parties is limited to the amount paid up on the JVC's share capital
• Employee incentive schemes are possible
• If the shares are sold, the underlying business remains in place
• Bespoke constitutional documents can be prepared to reflect the wishes and motivations of the parties

Disadvantages

The main disadvantages of a JVC are as follows:

• A new company will need to be incorporated and set up to trade
• The company will be subject to corporation tax, and then when dividends are extracted by the parties, they will be subject to further tax on earnings
• They are less flexible due to the legislative framework which applies
• There are more administrative requirements due to the reporting and compliance requirements

The parties to a joint venture can form an LLP by incorporation, which comes into existence upon registration, creating a separate entity for the venture.

Advantages

The main advantages of an LLP are as follows:

• It is a body corporate with separate legal personality, meaning that the LLP, not its members, will be liable to third parties
• It has unlimited capacity, meaning that it can enter into contracts and hold property in its own right
• It is treated as a partnership for tax purposes, meaning each party is taxed directly on its share of the joint venture's profits and losses
• It is a popular choice of structure for commercial joint ventures, particularly where management flexibility is important. There is greater flexibility than with a JVC, as the legislative framework is less onerous

Disadvantages

The main disadvantages of an LLP are as follows:

• The roles and responsibilities of LLP members are less clear than for directors and shareholders in a JVC, so management provisions should be drafted carefully
• LLPs are required to make public filings of accounts, although filing requirements are less onerous than for JVCs

This will either be a partnership formed under the Partnership Act 1890 whereby the relationship between the parties is deemed to be a “relationship which subsists between persons carrying on a business in common with a view of profit”, for example in circumstances where there is a full pooling of profits and losses of the parties.

Alternatively, there can be a limited partnership formed under the Limited Partnerships Act 1907 whereby at least one of the members of the partnership must be a general partner with unlimited liability and any limited partners cannot participate in the management of the partnership.

Advantages

The main advantages of a partnership are as follows:

• The arrangements will be governed by the terms of the partnership agreement made between the partners and are therefore more flexible and can be drafted to suit different commercial priorities
• Each partner will be taxed directly as a separate person
• Confidential details of the venture can remain private between the partners

Disadvantages (General Partnership)

The main disadvantage of a general partnership is that liability is unlimited and each party is liable for the whole of the liabilities of the joint venture

Disadvantages (Limited Partnership)

The main disadvantage of a limited partnership is that there must be a general partner to manage the joint venture who must have unlimited liability. Limited partners cannot have any involvement in the day-to-day management of the partnership without losing their limited liability status.

For either a general partnership or a limited partnership:

• Raising finance can be challenging due to the fact that the partnership does not hold its own assets which can be secured and also does not have separate legal personality
• If any of the parties to the joint venture leaves, a new partnership arrangement will need to be entered into, and this can create additional costs and disruption to management

In this type of arrangement, the parties remain separate and do not create a new enterprise, but they still need to plan how management and decision-making will work in practice. A contractual joint venture is a legally binding agreement between two or more parties who agree to collaborate on a specific business project or venture to achieve a mutual goal, setting out their responsibilities, contributions, and obligations.

Such contractual joint ventures are often appropriate for short-term, single-goal joint ventures.

Advantages

The main advantages of a contractual joint venture are as follows:

• It is usually relatively quick to implement as there is no requirement to create a separate legal entity
• Each party to the contractual joint venture retains ownership of their own assets
• Each party to the contractual joint venture will be liable for their own debts, other than with regards to specific liabilities in respect of third-party contracts which might be shared in accordance with the agreement
• Each party to the contractual joint venture will be subject to tax on its share of the venture's profits and losses, which can be a key benefit

Disadvantages

The main disadvantages of a contractual venture are as follows:

• Since there is no separate legal entity, there may be a lack of clear structure, which can affect internal operations and day-to-day management and make dealing with third parties more challenging
• There is a risk that the parties could be deemed to be a partnership and therefore be jointly and severally liable for all losses of the venture
• If finance is required, the lack of legal entity can make this challenging as there are no joint venture assets which can be used to provide security
• There can be uncertainty as to ownership of any assets created (like goodwill and intellectual property) unless that is addressed at the start  

A joint venture is a commercial arrangement where two or more businesses collaborate and combine resources to pursue a specific business opportunity or project while remaining separate legal entities, and to create a platform for a new product or service.

As a general rule, any individual or legal person (i.e. a company or LLP) can enter into a joint venture, although there may be specific regulated requirements depending on the business sector and the entity involved.

Although there is no legal requirement for a joint venture agreement to be in writing, we strongly recommend that the terms agreed between the parties to a joint venture are set out in writing, and that an expert solicitor reviews the agreement. This helps avoid uncertainty or ambiguity and reduces the risk of litigation.

The documentation required for a joint venture will depend on the structure and legal form of the arrangement. However, a number of core documents are commonly used to establish and govern the relationship between the parties.

Typical joint venture documentation may include:

• Shareholders’ Agreement / Investment Agreement / Joint Venture Agreement – setting out the commercial terms of the joint venture, including governance, funding obligations, profit distribution, exit arrangements and dispute resolution mechanisms
• Articles of Association – the constitutional document of the joint venture company which governs how the company is run, including shareholder rights, voting procedures and director powers
• Share Sale and Purchase Agreement – required where one party acquires shares from another party in the joint venture company as part of the arrangement
• Co-operation Agreement – used where the joint venture is structured as a contractual arrangement rather than through a separate corporate entity
• Partnership or Members’ Agreement – applicable where the joint venture operates through a traditional partnership or a limited liability partnership (LLP)
• Intellectual Property Licences – documenting the transfer or licensing of intellectual property rights, technology or software that will be used by the joint venture
• Asset Transfer Agreement – where assets are transferred into the joint venture entity by one or more of the parties
• Service, Employment or Secondment Agreements – governing the roles and responsibilities of individuals working within the joint venture business
• Loan Documentation and Security Agreements – required where the joint venture is financed through loans from the parties or external lenders

Where a new limited company is established for the purposes of a joint venture, a number of key issues should be considered, including:

• Tax Treatment – ensuring that the structure chosen for the joint venture provides the most efficient tax treatment for each of the parties as well as for the joint venture itself
• Objectives of the Parties – identifying the underlying commercial objectives of the parties and what each party intends to achieve through the joint venture
• Duration – determining the intended period during which the joint venture will operate and whether it will be for a fixed term or continue indefinitely
• Exit Strategy – considering the methods of exit at the end of the joint venture, such as the sale of the joint venture business or shares in the joint venture company
• Profit Extraction – agreeing how profits generated by the joint venture will be pooled and distributed between the parties
• Resources and Contributions – identifying the resources that each party will commit to the joint venture, including financial investment, assets, or the transfer or licence of intellectual property rights to the joint venture company
• Equity Structure – determining how the equity in the joint venture company will be held between the parties and whether different classes of shares are required to provide differing rights to voting, income or capital
• Cash Contributions – agreeing how much funding each party will contribute to the joint venture, when those contributions will be made and whether additional funding may be required in the future
• Decision Making and Governance – establishing how the joint venture will be managed, including board composition, voting rights and the authority of directors
• Veto Rights – identifying whether either party will have veto rights over certain key decisions, such as major investments, changes to business strategy or the transfer of shares
• Transfer of Interests – determining whether a party can transfer or sell its interest in the joint venture and whether the other party will benefit from rights such as a right of first refusal
• Drag and Tag Along Rights – considering whether mechanisms should exist to allow one party to compel the other to sell (drag-along rights) or to allow minority shareholders to participate in a sale (tag-along rights)
• Capital Distribution – agreeing how capital will be distributed if the joint venture is sold, restructured or wound up
• Employees and TUPE – considering whether employees will transfer to the joint venture entity and whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply
• Deadlock Provisions – determining whether mechanisms should be included to resolve situations where the parties cannot agree on key decisions, such as buy-out rights, arbitration, sale of the joint venture or, in some circumstances, liquidation
• Dispute Resolution – agreeing how disputes arising under the joint venture agreement will be resolved, including whether mediation, arbitration or litigation will be used
• Restrictive Covenants and Non-Competition – considering whether the parties should be restricted from competing with the joint venture business or from soliciting its employees or customers
• Data Protection – addressing how personal data will be shared or processed within the joint venture and identifying which party will act as data controller where relevant
• Accounting Considerations – addressing financial reporting obligations and how the joint venture will be accounted for in the parties’ financial statements
• Regulatory Issues – identifying any regulatory requirements that may apply to the joint venture, including competition law considerations or the need for licences, approvals or regulatory consent

Joint venture agreements typically include dispute resolution provisions, which may involve negotiation, mediation, arbitration or court proceedings, depending on the circumstances of the case.

Discover our Joint Venture Disputes services.

A joint venture is usually formed for a specific project or defined objective, whereas a partnership often involves an ongoing business relationship.

1. Create a business plan, including the short term and long term goals and consider if a joint venture is the best option.
2. Enter into an initial agreement with the other party. This could be a confidentiality/non-disclosure agreement, an exclusivity agreement or a combination of the two, in order to provide the parties with the confidence to provide each other with commercially sensitive information and to provide a period of exclusive negotiation.
3. Each party should conduct due diligence on each other and also the proposed business plan in order to decide whether or not to proceed.
4. Choose the structure of the joint venture. Is a JVC, an LLP, a contractual venture or a legal/general partnership the most appropriate structure to achieve your goals?
5. Enter into heads of terms which outline the main terms of the proposed joint venture. This can save time in negotiations later down the line. Tax and legal advice should be sought at this stage when it comes to drawing up and negotiating the heads of terms.
6. A joint venture agreement should be drafted, negotiated and entered into, including the additional documentation which will be necessary, depending on the form of the joint venture, i.e. shareholders agreement and articles, LLP agreement, partnership agreement, etc.
7. Once established, the parties should continue to establish clear performance indicators and set targets in order to continuously monitor performance

It is possible to enter into a joint venture with an overseas company. However, cross-border legal and tax issues will need to be considered and legal advice should be sought, particularly where regulated markets or different legal systems apply.

We strongly recommend that a joint venture agreement is prepared or reviewed by a solicitor to ensure the agreement protects the interests of the parties and reduces the risk of future disputes and litigation, and to provide practical management protections.

Working closely with a leading international law firm on a joint venture by a North West-based brewery. This involved advising and preparing the overarching agreement for the development of four sites and the operation of those four sites following development, including management and financial arrangements.

Advising MGH Bowen Ltd in connection with an investment by Breedon Aggregates England Limited into H.V. Bowen & Sons (Holdings) Ltd, which operated a gritstone quarry at Tan-y-Foel, Welshpool, Powys.

Acting for ACE UK in relation to its sourcing of a recycling plant from manufacturers in France and its joint venture with Sonoco for the commercial operation of the plant to recycle beverage cartons, supporting product strategy and management of the ongoing arrangements. In each case, our expert solicitors worked with the relevant stakeholders and partners to provide commercial legal advice, draft the key contract documents, and support management teams through the process.