Joint Ventures

Individuals and companies may want to join forces for a variety of strategic, financial, and other business reasons. When two or more independent parties decide to collaborate for their mutual benefit, they may form a joint venture. Joint ventures can be formed for a single purpose, such as development of a product or technology, or for a broader objective, such as operating a particular line of business together. They can exist for a definite or indefinite period of time.

The most common reasons to form a joint venture are to:

 

                     Spread costs and risks

                     Avoid competition  

                     Expand market reach

                     Access  financing

                     Access  new products, services, and technologies

                     Gain entry into a new market

                     Enhance credibility and reputation

                     Explore the viability of a potential merger  

 

Despite potential advantages, joint ventures are complicated arrangements that often last for a long time period and can be difficult to exit without mutual agreement between the parties. Although the parties initially share a common goal, conflicts can emerge over time as their interests and priorities evolve and sometimes diverge. Therefore, the purpose and scope of the joint venture, and any actual or potential differences in the parties’ goals and interests, should be identified and carefully considered to determine whether a joint venture is the best structure for them.

 

When discussing a potential joint venture the parties should clearly express their goals. For example, some may wish to increase their profits while others are interested in the development of technology only and intend to use that technology independently of the other party in the future. Then, the parties should review and consider each other’s technical, operational, financial, accounting, regulatory, legal, and tax requirements. Depending how the cooperation is structured the obligations of one party may be transferred to another. A legal counsel should definitely assist at this stage. Based on the goals and circumstances of the parties, attorneys can recommend how to structure the cooperation and manage it efficiently to reach mutually beneficial results.

 

As in a regular business entity parties make contributions to the joint venture, which can be in the form of cash, intellectual property, services, and other items of value. The role of each in the governance, management of the venture, voting on certain matters, veto power, and other important items are negotiated and then documented. Once the parties agree on the main features of their cooperation, it is put in a term sheet. Based on it attorneys prepare multiple legal documents to ensure the parties’ objectives and long-term goals are represented and protected.

 

The same laws that apply to any business enterprise apply to the joint ventures, i.e. employment laws, intellectual property, securities regulations, anti-monopoly, other state and federal regulations. Usually an experienced business attorney composes a memorandum of law, which reviews all applicable laws and regulations so the parties can estimate the scope and complexity in advance. 

 

If after careful consideration of all pros and cons, the parties decide to proceed, they can form a joint venture either by

 

·                    Creating a new entity which will be jointly owned

·                    One party buying an interest in an existing entity’s line of business; or

·              Entering into a contractual relationship in which both parties have independent structures and agree to collaborate for a particular purpose (sometimes referred to as a strategic alliance).

 

Joint ventures are usually complex transactions that typically involve different types of documents to cover and effectuate all agreements of the parties. There is also the added challenge of structuring and managing what will be an ongoing relationship between the parties after the negotiations conclude. For these and other reasons joint venture transaction terms tend to be less standardized than ones in a merger and acquisition or financing transactions may be.

 

As a starting point, the prospective partners and their attorneys need to understand the goals and expectations of each party. The questions to ask:

 

              Are the parties motivated by commercial or strategic interests, such as to use the joint venture to develop a new technology or product for use later independently in their respective businesses, or is it primarily focused on generating a financial return together?

                     Is the joint venture’s purpose critical to the current operation of either party primary business or is it more incidental, long-term, or speculative in nature?

                     How involved does each party want to be in the management and operation of the joint venture?

                     What kinds of contributions are expected? 

                     What are the desired returns?

 

By understanding different factors and motivations, parties and their attorneys will be in a better position to develop a list of documents and issues and formulate a successful negotiating strategy.

 

Let’s briefly review key issues to consider when contemplating a joint venture transaction.

 

                     Ownership and control of the JV. How ownership and control be allocated between the parties? How interest will be split? How decisions will be made? Will parties participate equally in the management of the venture? Will any have approval or veto rights? Exclusive voting on certain matters? How conflicts will be resolved if parties cannot agree?

 

                     Contributions to the JV. The parties need to decide on, and value, their respective contributions to the venture whether it is in cash, tangible or intangible assets. Also, they need to negotiate in advance whether they will be willing to make additional contributions over the life of the venture if needed.

 

                     Economic rights of the JV parties. Will the parties hold the same class of equity or whether any parties will hold equity with superior rights or preferences? Also the parties should agree on a framework for how profits and losses will be distributed. 

 

                     Restrictions on the JV parties. If the business of the parties overlaps, or is likely to overlap in the future, the parties need to decide whether or not they will have an obligation to refer corporate opportunity to the joint venture instead of pursuing it independently; also whether the parties agree to non-compete, non-solicitation, confidentiality and other restrictive covenants. These issues can have a significant impact on both parties’ primary businesses and should be considered at an early stage.

 

                     Exit strategies. Regardless of the parties’ present goals, they should negotiate possible exists should their future positions change. A variety of different mechanisms can be incorporated to allow for a termination or sale of the joint venture as a whole and also the sale of one party’s interest in and exit from the joint venture under various circumstances.

 

                     Services or support from the JV parties. In many joint ventures, one or more parties will provide services to, share assets with, or license IP to the venture. These arrangements are usually documented in separate ancillary agreements that often require extensive negotiations between the parties and their counsels.

 

As previously stated, joint ventures are usually not standard transactions since the interests and objectives of each party vary greatly. Documenting a joint venture may be challenging since it involves a wide range of issues and subject matters. What kind of documents will be prepared by the counsel and executed by the parties once all preliminary negotiations are completed depends on the nature of the business and parties’ objectives. The following is a list of the common documents that are often prepared regardless of the industry.

 

·         A term sheet incorporating all main agreements of the parties

·         Confidentiality agreement to cover preliminary discussions and due diligence process

·         Letter of intent, which is usually non-binding, but serves as a memorandum of understanding 

·         Confidentiality agreements covering future business operations of the parties

·         Exclusivity agreements

·         If a new entity is being form, all entity formation documents

·         Joint venture agreement that includes the important terms relating to governance, equity interests, and equity rights of the parties

·         Contribution documents. Depending on the nature of assets contributed to the joint venture and the form of transfer, a contribution agreement, asset purchase agreement, bill of sale, deed, assignment agreement, and other necessary conveyance documents are entered into to effect the transfer of assets

·         Intellectual property assignments or licenses

·         Services or support agreements

·         Distribution or manufacturing agreement

·         Loan agreements

·         Guaranties

·      Permits and approvals. Depending on the nature of the joint venture’s business and assets, it is often necessary to obtain new business licenses, permits, and approvals from relevant authorities to enable the joint venture to operate its business in the selected jurisdictions

·         Employment and incentive equity arrangements

More in this category: « Acquisitions Mergers »

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.