Manufacturing Joint Ventures

The ongoing global supply chain disruption caused by COVID-19 and Brexit continues to affect the manufacturing sector, particularly the import and export market. The issues have caused significant shortages of labour and key manufacturing components in the UK, as well as spikes in transportation, energy and material costs.

Amidst these pressures, joint ventures can play a significant role in stabilising operations and adapting business models, particularly as a way to have a domestic presence in overseas markets. They are flexible vehicles that can suit both crisis and growth periods, allowing parties to share costs, reduce capital and limit risk. 

What is a joint venture?

A joint venture is a commercial arrangement between two or more independent persons or businesses to pool resources and work together for a common goal, either in relation to a specific project or a wider collaborative venture for an indefinite period of time.

Advantages of joint ventures

• Share existing knowledge or skills - joint ventures can be mutually beneficial arrangements where two or more businesses with distinct knowledge come together to develop a service or product they can jointly utilise. Alternatively, they can be an arrangement combining one party’s knowledge with another’s resources to develop that knowledge into a product that can be manufactured, such as Oxford University and Astra Zeneca’s joint venture to develop a COVID-19 vaccine.
• Pool resources - this can include staff, distribution networks, equipment or finance. This is particularly useful in the manufacturing sector, which often requires a significant financial investment in research and development, as well as plant and machinery, in order to develop a product. It can also assist with cross-border strategic planning. 
• Spread risk - by working together, parties can attempt to limit their potential exposure or loss if the joint venture is ultimately unsuccessful.

Types of joint ventures

The most common form of a joint venture is a limited liability company. The parties set up a single, separate company in which all the trading activities, assets and liabilities are held. Anything developed as part of the joint venture will be owned by the company, including any intellectual property. The company will usually be a newly incorporated entity owned by each joint venture party. Ownership may be on an equal basis or a minority/majority basis, depending on the commercial terms of the proposed venture.

Alternative forms include a collaboration agreement or a form of partnership. Under a collaboration agreement, each participant retains their respective assets and does not pool revenues and costs; it is a contractual relationship only. A partnership takes the middle ground between these two options, either as a simple partnership, a limited partnership or a limited liability partnership. This is less common than the first two approaches, often due to the lack of transferable investment in an LLP or unlimited liability in a partnership, but they can be appropriate in specific circumstances.

Joint venture companies

A joint venture company is often the most appropriate structure to conduct a joint venture. It is a tried and tested corporate structure underpinned by an established body of law and practice in England and Wales.

A key advantage of a joint venture company is the parties’ ability to limit their liability in respect of the joint venture company’s liabilities and losses. As the joint venture company has its own legal personality, it is liable for its own debts and tax. However, unless the joint venture company is also creditworthy, it is likely that the shareholders will have to support the joint venture company through personal or corporate guarantees or other assurances to third parties.

Joint venture companies can provide flexibility and certainty, depending on the nature of their constitution. The constitution will clearly set out the aim and scope of the joint venture, the relationship between the parties and the extent of each party’s control over the joint venture company. They can be specific in both time and scope, allowing parties to pursue other commercial interests outside of the joint venture. Furthermore, if each party is a corporate entity, a joint venture can, subject to independent tax advice, be a tax-efficient approach to extracting profits.

The constitution of a joint venture company 

The relationship between each joint venture party with their fellow business partners and the joint venture company will be controlled by the constitution of the joint venture company, which is usually comprised of bespoke articles of association and a shareholders’ agreement. The articles are publicly available and set out the rules that govern how the company operates. The shareholders’ agreement is a private document that places direct obligations on each shareholder (and often the joint venture company itself). These documents overlap to a certain extent and generally cover the key areas of the joint venture company, such as its 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 in the future. Having a written agreement in place gives parties certainty as it expressly sets out each party’s obligations and how the joint venture business is to be conducted.

Here to help

If you are considering entering into a joint venture or setting up a joint venture company and would like some more information, please do not hesitate to contact our Manufacturing Team below.