Joint venture agreement
Whether you are looking to speed up the expansion of your business, then you should consider entering into a Joint Venture agreement. In doing so, you’ll benefit from sharing costs, risks and rewards with another commercial Company.
This section provides an overview of the main ways in which you can set up a Joint Venture, the advantages and disadvantages of doing so, what to look for in a joint venture partner and how to make it work. The author is a freelance lawyer who is specialised in complex business contracts. Please feel free to get in touch should you have any queries.
Definition of Joint Venture (JV) agreement
A JV is a contractual arrangement joining together two or more parties for the purpose of executing a particular business undertaking.
Why should you consider entering into a Joint Venture agreement?
The reasons behind forming a Joint Venture can be varied. Generally speaking, a company enters into a joint venture agreement because it lacks the required knowledge, technology or access to a specific market that is necessary to be successful in pursuing the project on its own. As an example, you may enter into a JV because of the lack of enough resources to pursue your business opportunity individually. Another reason may be that a potential partner owns the Know-how you need to make the Venture works. Moreover, you may be unsure about your project and sharing the risks and costs with a partner might help you succeed.
The choice of the Joint Venture Partner
The right business partner in a joint venture agreement is someone who has resources, skills and assets that complement your own. It is advisable to look for a partner among the existing customers and supplier you already have a long relationship with. Only after doing so, you should think about your competitors or other professionals. As an example, the ideal partner might be someone with a good distribution network. This would allow you to easily market your product abroad. A company with a lack of economic resources to exploit its intellectual property may be another good partner.
Issues in respect of the negotiation a Joint venture agreement
The main issues for a business thinking of setting up a JV include:
- Choice of the vehicle.
- Business plan
- The Scope of the Joint Venture.
- Financing – How will be financed the Joint Venture?
- Management – Which party will provide day to day operational functions?
- Establishing a lock-in period during which the partners have agreed that a voluntary dissociation should be unavailable
- Duration – Generally the ideal term of a JV is 3 years.
- Confidentiality – By signing a confidentiality agreement a party undertakes not to disclose your confidential information it learns in the course of negotiations, nor use it to your detriment.
- Sharing profits
- Intellectual Property – who will own the IP generated by the JV
- Disputes – how any disputes between the joint venture partners will be handled
- Exit mechanisms and Termination
Structure types of a Joint Venture
- Contractual structure. A joint Venture agreement is the simplest way for a project-based. Here the parties agree to associate as an independent contractor. In doing so, they parties balance their own economic interests and spell out any details of the purpose/project within the contract. The agreement, in turn, should outline the ground of the mutual business: parties’ duties and rights, profits to share, and eventual losses to face.
- Unlimited liability partnership or limited liability partnership. The unlimited partnership requires participants to abide by statutory obligations toward each other and third parties. As opposed to, the limited liability partnership may consist of one or more general partners with full liability. Moreover, it may have one or more limited partners who are not liable beyond the amount they have contributed to the partnership.
- Joint Venture Company. As a separate legal entity, the JV Company can own and deal with assets, sue and be suited and contract in its own right.
Examples of a Joint Venture
Over the last years, many famous Companies have decided of doing so, including, but not limited to Nokia, Fiat, Microsoft, Jaguar and so on. A list of the most famous Joint Venture Companies can be viewed by clicking here.
Benefits of joint venture
Forming a joint venture agreement has unique benefits that make it an attractive option for some businesses. The main advantageous are:
- It can surely enable businesses to foster their international development by having access to new markets and distribution networks.
- It will give you access to better resources, such as specialized staff, technology and finance.
- Shared risks and costs. That means that you are not alone in case the joint-group project fails, therefore you will support the losses with your partner.
- It can give you the chance to gain intellectual property, technology or other resources that are often difficult to build in-house.
- Joint ventures can be flexible. For example, a joint venture can have a limited lifespan and only cover part of what you do, thus limiting both your commitment and the business’ exposure.
- Enhanced credibility: by entering into a JV with a well know brand, small business, as well startups, can increase their market credibility and thus a strong customer base.
- Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.
Disadvantages of joint venture
Before you consider signing up to a joint venture agreement, it’s important to highlight what follows. The success in a JV depends on thorough analysis of mutual aims and objectives. Therefore issues are likely to arise if:
- an in-depth due diligence (including legal) has not been carried out;
- The partners do not establish an adequate lock in period. The parties often envisage a lock-in clause through which they undertake to make the Venture works within a specific frame-time. Its purpose is to avoid breaking up the arrangement at the earliest issue should arise.
- a Joint Venture agreement has an unclear purpose;
- There is not a clear agreement on the ownership of any new intellectual property relating to the JV. A question you should bear in mind is: What will happen if the joint venture modifies your intellectual property?
- Parties do not set out a ground of termination clause.
The content of this article is intended to provide a general guide to the subject matter. You should seek the assistance of a business contract lawyer prior to entering into any joint venture commitments.
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