Joint venture agreements

A joint venture is where two or more separate businesses get together for a joint project, which might be a new product, a new market or a property development. Each keeps its own business and puts something into the venture, whether that’s money, people, customers, technology or premises. The joint venture agreement records who is putting in what, who decides what, how the profit (or loss) is shared, and how it ends.

I should say that joint ventures aren’t the bulk of my work. I do a small number each year, usually one or two, for owner-managed businesses. If you’re a listed company setting up a cross-border JV with a competition law angle, I’m not the right solicitor for it and I’ll tell you so.

How a joint venture differs from a shareholders’ agreement

People often use the two terms as if they meant the same thing, and a JV which is carried on through a company does end up with a document that looks a lot like a shareholders’ agreement. The difference is in who the parties are and what they bring.

In an ordinary company the shareholders are usually individuals who work full time in that business. In a joint venture the parties are separate businesses with their own interests, their own other customers and quite possibly a competing product. A JV agreement therefore has to deal with things which a normal shareholders’ agreement hardly covers, such as what each party is obliged to contribute and when, what the venture is and isn’t allowed to do, how it trades with its own owners, who owns what it creates, and what each party can carry on doing outside it.

The three main structures

The simplest is a purely contractual joint venture, where there is no new entity and the two businesses just sign an agreement. It suits a single project with a clear end, such as a joint bid or a one-off development, and it’s quick and cheap to set up and to unwind. The drawback is that there’s no separate entity to hold assets, employ people or ring-fence liability, and if the agreement is loosely drafted the two of you can end up being treated as a partnership, with each liable for what the other does.

The second is a JV company, where each party holds shares in a new limited company which runs the venture. This is the usual choice for anything long term or anything carrying real risk, because the company owns the assets, signs the contracts and limits each party’s exposure. It needs articles, a shareholders’ agreement written for a JV, and usually a set of contracts between the company and each of its owners.

The third is a limited liability partnership, with each party as a member. It gives limited liability with more flexibility over how profits are shared, and it’s taxed differently from a company, although whether that’s an advantage depends on your circumstances and is a question for your accountant.

I can help you decide which approach works best for the venture and protects you. I’ve also written about the options when you’re going into business with someone, and there’s a set of joint venture agreement FAQs as well.

What the agreement needs to cover

The agreement starts with contributions. Cash is easy to describe, but contributions in kind are harder, so if one party is supplying staff time, a customer list or the use of its premises, the agreement needs to say how much, for how long and what happens if it isn’t provided. If the venture will need more money later, it should say whether the parties are obliged to provide it and what happens to a party who can’t or won’t.

It then deals with control, which means who sits on the board or management committee, which decisions need both parties to agree, and what happens when they don’t. A 50/50 venture has to have a deadlock mechanism of some kind, even if it’s only escalation to the two owners followed by a right to buy each other out.

Intellectual property often causes problems once a joint venture is over. Each party usually brings existing IP and licenses it to the venture, and the venture then creates something new. The agreement should say who owns the new material, who can use it outside the venture and who gets it when the venture ends, as it costs a good deal more to resolve those questions at the end than at the start.

There are also the limits on what each party can do outside the venture, such as whether they can compete with it, deal with its customers directly or set up something similar with someone else.

Finally the agreement needs to deal with exit. Every joint venture ends at some point, whether because the project finishes, one party wants out or the relationship breaks down, so the agreement should set out the triggers, whether one party can buy the other out and at what price, and what happens to the assets, staff, customers and IP if it’s wound up.

When one party is much bigger

Many joint ventures are between a small business which has the idea or the know-how and a larger one which has the money or the route to market. The larger party tends to produce the first draft, and it tends to give them control of the board, the IP and the exit. If you’re the smaller party, the points worth negotiating are a veto over the decisions which matter to you, getting your own IP back if it ends, and a fair price mechanism if you’re bought out. If you’re the larger party, you’ll want to be sure that what you’re paying for is actually owned by the people you’re dealing with, and that they can’t take it elsewhere.

Fees and timescale

I don’t have a standard price for a joint venture, because a two-page collaboration agreement and a JV company with a full set of documents are very different pieces of work. I’ll give you a fixed fee with a written scope once I’ve seen what’s proposed, and it’s agreed before I start. A simple contractual JV can be done in a couple of weeks. A JV company takes longer, and the timetable mostly depends on how long the two sides take to agree the commercial terms.

The most helpful thing you can do before instructing anyone is to agree the main points between you in a page of heads of terms, covering contributions, the ownership split, who decides what and how it ends. It makes the drafting quicker, and it will also show up any points which the two of you haven’t yet agreed.

Next steps

Perhaps you’re not sure which of the options to go for, or perhaps you have everything agreed and now need the legal paperwork drafting. Either way, get in touch and tell me who the parties are, what the venture is for and what each of you is putting in. If you’ve got heads of terms or a draft from the other side, send those too.