Joint Venture Agreements

The parties of a joint venture can set up a special purpose vehicle (SPV), also known as a joint venture company (JVC), with a separate legal identity, where the parties will have limited liability.

Advantages

The main advantages of a JVC are as follows:

• as a separate legal entity a JVC can own and deal in assets, sue and be sued and contract in its own right;
• the JVC has a clear corporate identity with an established governance regime;
• JVCs carry a lot of flexibility in terms of governing share class rights (voting, dividends and capital), preferential rights and returns and debt structures (loan facilities, preference shares, etc.);
• liability of the parties is limited to the amount paid up on the JVCs share capital;
• employee incentive schemes are possible;
• if the shares are sold, the underlying business remains in place; and
• bespoke constitutional documents can be prepared to reflect wishes and motivations of the parties.

Disadvantages

The main disadvantages of a JVC are as follows:

• a new company will need to be incorporated and set up to trade;
• the company will be subject to corporation tax and then when dividends are extracted by the parties, they will then be subject to further tax on earnings;
• they are less flexible due to the legislative framework which applies; and
• there are more administrative requirements due to the reporting and compliance requirements.

A contractual venture is a legally binding contract between two or more parties who agree to collaborate on a specific business project or venture in order to achieve a mutual goal.

Such contractual ventures are often appropriate for short-term, single-goal ventures.

Advantages

The main advantages of a contractual venture are as follows:

• it is usually relatively quick to implement as there is no requirement to create a separate legal entity;
• each party to the contractual venture retains ownership of their own assets;
• each party to the contractual venture will be liable for their own debts, other than with regards to specific liabilities in respect of third-party contracts which might be shared in accordance with the agreement; and
• each party to the contractual venture will be subject to tax directly on its share of the profits and losses of the venture.

Disadvantages

The main disadvantages of a contractual venture are as follows:

• since there is no separate legal entity, there can be a lack of clear structure which can have an impact on internal operations and make dealing with third parties more challenging;
• there is a risk that the parties could be deemed to be a partnership and therefore be jointly and severally liable for all losses of the venture; and
• if finance is required, the lack of legal entity can make this challenging as there are no joint venture assets which can be used to provide security.

The parties to a joint venture can form an LLP which is formed by incorporation and comes into existence once registered.

Advantages

The main advantage of an LLP are as follows:

• it is a body corporate with separate legal personality meaning that the LLP and not its members will be liable to third parties;
• it has unlimited capacity, meaning that it can enter into contracts and hold property in its own right;
• it is treated as a partnership for tax purposes meaning that each party is taxed directly on its share of the profits and losses of the joint venture;
• it is a popular choice of structure for commercial joint ventures; and
• there is greater flexibility compared to a JVC as the legislative framework is less onerous.

Disadvantages

The main disadvantages of an LLP are as follows:

• the roles and responsibilities of LLP members are less clear than for directors and shareholders in a JVC; and
• LLPs are required to make public filings of accounts, although filing requirements are less onerous than for JVCs.

This will either be a partnership formed under the Partnership Act 1980 whereby the relationship between the parties is deemed to be a “relationship which subsists between persons carrying on a business in common with a view of profit”, for example in circumstances where there is a full pooling of profits and losses of the parties. Alternatively, there can be a limited partnership formed under the Limited Partnerships Act 1907 whereby at least one of the members of the partnership must be a general partner with unlimited liability and any limited partners cannot participate in the management of the partnership.

Advantages

The main advantage of a partnership are as follows:

• the arrangements will be governed by the terms of the partnership agreement made between the partners and are therefore more flexible;
• each partner will be taxed directly as individuals; and
• confidential details of the venture can remain private between the partners.

Disadvantages

The main disadvantage of a general partnership is that liability is unlimited and each party is liable for the whole of the liabilities of the joint venture.

The main disadvantages of a limited partnership are as follows:

• there must be a general partner to manage the joint venture who must have unlimited liability; and
• limited partners cannot have any involvement in the day to day management of the company without losing their limited liability status.

For either a general partnership or a limited partnership:

• raising finance can be challenging due to the fact that the partnership does not hold its own assets which can be secured and also does not have separate legal personality; and
• If any of the parties to the joint venture leaves, a new partnership arrangement will need to be entered into.

A joint venture broadly involves any arrangement where two or more existing businesses agree to cooperate and combine resources to target a specific business project or develop a new business.

As a general rule, any individual or legal person (i.e. a company or LLP) can enter into a joint venture, although there may be specific requirements, depending on the business sector.

Although there is no legal requirement for a joint venture agreement to be in writing, we strongly recommend that the terms agreed between the parties to a joint venture are set out in writing. This will help to avoid any uncertainty or ambiguity as to what has been agreed and thereby reduce the risk of litigation.

A joint venture should include provisions which set out:

• how the profits and costs will be shared between the parties;
• what each party is contributing to the arrangement, be it financially or otherwise;
• how liability and risk will be split between the parties;
• what will happen in the event of a dispute and how this will be resolved;
• confidentiality provisions;
• restrictive covenants/non-competition provisions;
• intellectual property provisions;
• the term of the joint venture and what happens if one of the parties wishes to exit before the end of the term; and
• termination provisions.

1. Create a business plan, including the short term and long term goals and consider if a joint venture is the best option.
2. Enter into an initial agreement with the other party. This could be a confidentiality/non-disclosure agreement, an exclusivity agreement or a combination of the two, in order to provide the parties with the confidence to provide each other with commercially sensitive information and to provide a period of exclusive negotiation.
3. Each party should conduct due diligence on each other and also the proposed business plan in order to decide whether or not to proceed.
4. Choose the structure of the joint venture. Is a JVC, an LLP, a contractual venture or a legal/general partnership the most appropriate structure to achieve your goals?
5. Enter into heads of terms which outline the main terms of the proposed joint venture. This can save time in negotiations later down the line. Tax and legal advice should be sought at this stage when it comes to drawing up and negotiating the heads of terms.
6. A joint venture agreement should be drafted, negotiated and entered into, including the additional documentation which will be necessary, depending on the form of the joint venture, i.e. shareholders agreement and articles, LLP agreement, partnership agreement, etc.
7. Once established, the parties should continue to establish clear performance indicators and set targets in order to continuously monitor performance

It is possible to enter into a joint agreement with an overseas company, although you will need to consider and take advice around cross-border legal and tax issues which may arise as the result of such overseas relationship.

We strongly recommend that a joint venture agreement is drawn up by a solicitor, or at the very least, is reviewed by a solicitor. This is in order to ensure that the agreement fairly represents the interests of both parties and helps to reduce the risk of litigation in the future.

Working closely with a leading International law firm on a joint venture by a North West-based brewery. This involved advising and preparing the overarching agreement for the development of four sites and the operation of those four sites following development.

Advising MGH Bowen Ltd in connection with an investment by Breedon Aggregates England Limited into H.V. Bowen & Sons (Holdings) Ltd, which operates a gritstone quarry at Tan-y-Foel, Welshpool, Powys.

This matter involved an initial reorganisation of the H.V. Bowen group and new shareholder arrangements between MGH Bowen and Breedon Aggregates England. We also worked closely with our Employment and Property Teams.

Acting for ACE UK in relation to its sourcing of a recycling plant (and related services) from manufacturers in France and its venture with Sonoco for the commercial operation of the plant to recycle beverage cartons. We have also advised ACE UK on its joint venture to commercialise/exploit by-products of recycled cartons.