Joint venture solicitors

A joint venture is when two or more parties work together to achieve a certain goal or objective. This objective can be anything from property development to the creation of a new product or service.

Reasons to consider a joint venture

The common reasons that joint ventures are undertaken are to :-

• seek relationships with other businesses, which may provide access to skills and resources the other party lacks.
• expand the operations of a business.
• develop new products or services.
• gain access to new markets.
• reduce risks for a new business product or service by sharing risk.

It is important that the reasons and strategy behind the joint venture are explored early, to ensure that an appropriate structure is used (discussed further below).

For example, a party looking to develop a new product may consider undertaking the acquisition of a target company that holds valuable intellectual property needed to make the new product. In this scenario, an alternative to acquisition could be a joint venture with that target company to develop the new product. This could be a more flexible and cost-effective approach, as it will avoid the need to purchase the target entity and the consequences that flow from an acquisition.

Differing structures

The benefit of a joint venture arrangement is that it allows for different structures to be considered in achieving the goals behind the joint venture.

The main structures to consider are:

Company limited by shares

• This is a very common structure for a joint venture. This usually involves a new entity being incorporated (known as a ‘special purpose vehicle’ or ‘SPV’), with the participants of the venture being founding shareholders of the SPV.
• This structure provides the benefit of being a separate legal entity, meaning it can enter into contracts in its own name, own assets, employ personnel, and sue and be sued in its name. This also provides protection to shareholders and, to a degree, directors from personal liability.

Limited Liability Partnership

• LLPs are becoming an increasingly popular structure for joint venture arrangements.
• This structure involves the creation of an LLP as a separate legal entity, which, unlike other forms of partnership, provides limited liability to the partners.

The main difference between a private limited company and an LLP is that the concept of director (management of a company) and shareholder (owner of a company) is merged for an LLP (i.e. the partner wears both hats) and there is, generally, more flexibility for an LLP due to the different legislation regulating companies and LLPs.

Partnership

• A partnership is an inexpensive and flexible way for parties to undertake a joint venture. This differs from an LLP by there being no separate legal personality created.
• This structure provides a flexible approach to a joint venture with the ease in which it can be created and the flexibility that provides, however, it also means that the partners may have increased liability. A partnership means that all partners share in the profits but also in the losses. A partner can also be personally liable due to the actions of another partner, which is clearly a significant drawback.

Contractual joint venture

Another common structure that is used is one where the relationship between the parties is purely based on contract. The other structures base the relationship of the participants on being shareholders (such as in a private company) and partners (in the case of an LLP or partnership). A contractual relationship is based on the terms set out within the governing agreement itself.

This can be suitable for certain joint ventures, which may require a more flexible and short-term arrangement. The drawback, as with a partnership, is that there is no separate legal personality. This means that the joint venture is less flexible in what it can do, as this type of joint venture cannot contract in its own name or own assets.

Depending on the venture being undertaken, care would need to be had to ensure that the contractual venture is not construed as being a partnership (which may have negative consequences to the parties).

There is no one-size-fits-all approach to a joint venture. The structure should be dictated by the goals of the parties. It is therefore critical that parties seeking to establish a joint venture discuss their plans and goals with experienced lawyers to ensure that the appropriate structure is chosen for the venture.

Considerations

In addition to clearly knowing the goals and purposes behind a joint venture, parties should also consider issues which may arise in a joint venture, including:

• Duration of relationship- is the project limited to achieving a certain goal, or is it an ongoing relationship?
• Any obligations to inject more funding?
• Management powers and any matters which require approval by shareholders.
• Will any shareholders/partners have preferential rights and / or powers?
• Intellectual Property (IP) – If part of a joint venture is to create or develop new IP, which is based on an existing party’s IP, then who will own the new IP once it is developed?
• Dispute resolution – commonly a joint venture is between two parties. If there is a deadlock between the parties, or things go wrong, then how will this be resolved?
• Liability – should this be apportioned between the parties?
• Costs and profit shares – similar to the above, will all parties be equally contributing or does this need to be apportioned?
• Understanding between the parties – this is one that is often overlooked, though critical for a joint venture relationship. Are the parties compatible and able to work together? Is there a power imbalance?

These points, and more, should be considered by the parties when deciding on whether to undertake a joint venture. It is important that these are discussed with a legal adviser to decide on appropriate mechanisms to safeguard against any issues that may arise.

The company commercial team at Branch Austin McCormick based in London, have substantial experience with joint ventures, so please get in touch if you need further advice and assistance.