Considerations for Joint Venture agreements

For a few, the last 18 months has offered an opportunity to innovate, develop new products and plan new business opportunities. Against the backdrop of Covid-19 and Brexit, businesses looking to enter new markets or launch new products or services may feel that now is the right time.

Joint ventures (JV) have traditionally been used by new market entrants for a number of reasons for this. For example, those who have developed a new piece of technology together may now wish to monetise that opportunity. Alternatively, one party may be more experienced in providing certain skills whilst others may have more contacts within a sector or territory. By combining forces, they are able to provide a better offering. Some joint ventures may simply exist because the market they operate in is very competitive and by joining forces, two business may want to consolidate, on the understanding that they are “better together”. With all JVs, there is an element of risk sharing which could be beneficial, especially in the current climate.

When embarking on a JV in any industry, it is important to consider:

• the structure of the JV vehicle
• the founders’ objectives
• whether any technology or products are being developed
• the market
• the anticipated timing of development of the product/technology
• tax and any regulatory issues such as competition law issues.

In addition, issues relating to employees, premises and logistics also need to be considered.

Each set of circumstances is different, and it is important to ensure that the documents governing the relationship between the parties are tailored to a specific venture. A JV corporate vehicle is very important and traditionally where business is being conducted domestically, English law limited companies have been popular. Again, this might not be suitable for all.

As with any JV, there will be a number of initial discussions between the founders. However, without a formal JV agreement clearly defining each party’s roles and responsibilities and setting out the JV’s objectives and “rules of play”, there is the risk of uncertainty and disagreement.

A well drafted bespoke JV agreement is therefore a key document when parties are looking to collaborate, and it is important that the parties obtain practical and clear advice from the outset. The document needs to be workable in order to help the parties navigate issues arising from the JV. The document should at the very least deal with:

• management and governance issues of the joint venture
• when shareholder consent is required and control issues
• funding
• dividend policies
• intellectual property issues regarding any brand, technology or product
• exit scenarios
• sale of shares and restrictions on exiting shareholders
• disputes between the parties.

Those involved should also develop a comprehensive business plan to deal with how the business is to operate during a defined period and which can be adapted by them depending on the business’s circumstances.