What is a Joint Venture Agreement (JV)?
A JV is a business arrangement between at least two parties with a view to realizing profit by working together and leveraging from each parties’ respective strengths.
Before you enter into a Joint Venture Agreement (JV), you should properly consider the legal and practical considerations. We have put together a list of 8 issues that you should consider before entering into a JV.
Below are some tips for parties to keep in mind before entering into a joint venture. Above all else, it’s important that parties engage in open and frank discussions to allow themselves the flexibility to maximise the commercial benefits of the JV.
Briefly, they are:
- due diligence – doing a background check on your partners
- determine the scope and documenting your objectives, roles and goals
- working out the structure of the JV – what form will the JV take and how will it be founded
- determine the dispute resolution & exit strategy – what if things don’t work out?
- records and confidentiality
- cultural clashes and fiduciary obligations
- getting independent expert advice
- communicate – make sure their are open lines of communication.
Due diligence – doing a background check on your partners
A party to a JV’s reputation will be tied to their JV business partners’ reputation. The wrong partner can undo many years of goodwill a business has accumulated. Parties should consider undertaking a brief check of the credentials of their business partners to ensure that there are no hidden time bombs which could affect the JV.
These searches may include searching court records, credit histories or reviewing financial/accounting records. Be aware that your potential JV partners may also be undertaking a check of your own history
– so it may be in your interest to ensure that any potential issues are disclosed early on.
Scope and JV Agreement – documenting your objectives, roles, and goals
Parties to a JV should agree on the objective of the JV and their respective roles before starting any work on the JV itself. What will each party do, and how will they do it?
How will any property (including intellectual property created by the JV) be owned and dealt with? Who will be part of the management team for the JV and what will their obligations include?
Also consider the scope of the business and territory of the JV. Are there any carve-out areas or exclusions that any individual party may retain for themselves. Once agreed upon, these terms should be documented in a written agreement, including the performance indicators so that each party will know how every partner is contributing to the JV.
Structure– what form will the JV take and how will it be funded
It is important each participant obtains separate legal advice to choose the best structure as there will be issues regarding individual liability
and consequences for tax. Generally, JVs can be either incorporated (a company regulated by a shareholders agreement) or unincorporated (a contractual arrangement regulated by a joint venture agreement).
Consideration should be given to how will each member of the JV finance the venture (and in what proportion). Will parties be allowed to use
their interest in the JV to finance this or their own businesses? How will losses, profits, liabilities and responsibilities be shared?
Dispute resolution and exit strategy – what to do if things don’t work out
What events will constitute a breach or default of the JV and what are the consequences of default? These should carefully considered and documented. If things do not work out or if there is a dispute, what is the procedure for parties to resolve their dispute? Will the dispute be referred to mediation, arbitration, or facilitated negotiation? What are the time frames in which any dispute resolution must take place?
If the dispute cannot be resolved, what procedures exist to allow one party to terminate their interest in the JV? Usually, a termination done without consent may lead to protracted and costly litigation. The JV agreement should also document how and when a party may transfer its interest and if there are to be pre-emptive rights that allow a participant the opportunity to purchase the interest of the exiting participant.
Particularly in 50/50 joint ventures, consider inserting
‘deadlock’ provisions so if parties cannot agree on fundamental issues, a procedure enables a party to buy out the interests of, or be bought out by, those involved in the deadlock.
Also consider how a change in ownership or control of a parties’ interest is dealt with, and the procedure to allow a new party to join the JV (if any). The detail of these clauses and their application to each participant must be considered carefully, all possible scenarios should be considered (from either sides, as you may be a continuing or an exiting the JV) and document any specific exceptions (such as restraint of trade clause).
Records and confidentiality
Like any other business, the importance of maintaining organised and accurate records (both financial and business) is crucial for audit
and compliance purposes. Accurate records are important in resolving disputes between JV partners. The Courts have consistently held that parties to a JV must keep book and accounts to allow the JV to be assessed with reasonable facility and within a reasonable time if required.
Parties to a JV may also wish to consider putting in place a system of confidentiality agreements so that any information disclosed in the course of negotiating, setting up, and operating the JV are not later used to that parties’ disadvantage.
Culture clashes and fiduciary obligations
Each business operates differently and have employees and owners with varying personalities. There is potential for significant differences between JV partners would should be carefully considered.
Alignment or at least consideration of the differing business cultures is key to the success of any JV and reducing damaging situations which could impair the operation of the JV.
Parties to a JV should be aware that a fiduciary relationship may arise in the course of JV negotiations and operations. As such, there will be further obligations of trust and confidence which may be imposed on parties negotiating a JV (such as non-disclosure of confidential information).
Get independent expert advice
It’s important that parties to a JV talk to their lawyers, accountants and financial advisors so that they are able to provide advice on is being sought to be achieved, and the method to be employed.
These experts can assist parties to navigate any potential issues which may apply to their individual circumstances to minimise future heartache, stress, and costs.
Communicate
Above all else, communication is key especially once you are once you’re involved in the JV. Be sure to simply communicate your venture and with key stakeholders such as financiers, other parties to the JV, experts and customers, and then keep those lines of communication open for success.