What is a joint venture agreement?

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In an everchanging business landscape, forming strategic collaboration through a joint venture (JV) has become a common path for success.

Unlike mergers or acquisitions, JVs allow companies to retain their distinct identities while working together on shared goals. JVs can be temporary, for a particular project, or more permanent, for ongoing business operations.

Several successful JVs illustrate the potential benefits of this business model. For example, the partnership between BMW and Toyota on hydrogen fuel cell technology combines their expertise to advance sustainable automotive technology. Another notable JV is the collaboration between GlaxoSmithKline and Pfizer, creating a consumer healthcare giant by pooling their over-the-counter businesses.

A joint venture agreement (JVA) lays the groundwork for such collaborations, providing a structured approach to mutual goals, resource sharing, and profit distribution.

This comprehensive guide aims to elucidate the intricacies of JVAs, their key components, and the legal considerations under English law.

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Understanding joint venture agreements

A JVA is a legal contract between two or more parties who agree to combine their resources and expertise to achieve a specific business objective. It outlines the terms of the partnership, including contributions, governance, profit sharing, and responsibilities. JVs can be established as separate legal entities or operate on a contractual basis, without forming a new entity.

While JVAs might sometimes be formed through verbal arrangements, seeking specialised legal guidance and creating a comprehensive written agreement is highly recommended. This document should clearly outline the duties and rights of each party, including provisions for modifying these rights.

A meticulously crafted JVA aims to pre-emptively address and mitigate potential sources of conflict through detailed and thoughtful drafting.

Key components of a joint venture agreement

• Objective and scope: Clearly defines the project’s aims, scope of activities, and duration of JV.
• Contributions: Details each party’s capital contributions, assets, expertise and knowledge, and resources.
• Governance and management: Establishes the structure for decision-making structure, roles and responsibilities, operation policies and management.
• Profit sharing and losses: Outlines how profits and losses are divided. Dealing with profit allocation, loss sharing and financial reporting.
• Intellectual property rights: Specifies the ownership and use of intellectual property.
• Dispute resolution: Sets forth mechanisms for resolving disagreements
• Termination clauses: Describes conditions under which the JV can be dissolved, exit strategies and post-termination obligations.

Structuring a joint venture

The legal framework for a JV does not adhere to a one-size-fits-all model. This flexibility allows your business collaboration to adopt a structure that aligns best with your current operations and the specifics of the project at hand. There are principally two ways a JV can be formed:

Contractual JV

This type avoids the creation of a separate legal entity; instead, the terms governing the JV are encapsulated within a contractual agreement between the parties, such as each party’s rights, obligations, and contributions.

Separate JV entity

This structure establishes a separate legal entity for the purpose of the joint venture. The various forms a joint venture entity can take include:

• Limited Liability Company: A JV can be structured as a separate company specifically formed company to fulfil the JV’s objectives. Each party holding shares in the new company and the shareholder’s liability is limited to the unpaid amount on shares. This structure provides clear governance and operational guidelines through the company’s articles of association.

• Partnership: Partners in a JV may choose to form a general or limited partnership. A traditional partnership arrangement which involves shared responsibilities and profits but may expose partners to unlimited liability.
• Limited Liability Partnership (LLP): This offers a flexible partnership structure with limited liability for the partners.

Given the diversity of legal structures a joint venture can embody consulting with a solicitor to determine the most suitable setup for your venture is advisable.