When two or more business entities come together to form a new business entity, it is called a Joint Venture. The risks and rewards of this business is shared among the co-venturers. The specifics of which are defined at the time of creation of the venture, which is solidified by a Joint Venture Agreement.
In this article, we explore some of the most common frequently asked questions we receive in relation to this type of business entity.
What is a Joint Venture Agreement?
A Joint Venture is where two or more separate businesses get together for a joint project or strategic alliance. A Joint Venture agreement is the contract between the business entities that establishes their duties and obligations during the course of the business relationship.A JV agreement can be limited to one specific project and be time bound. It can also be an agreement of operating a specific kind of business as a going concern, and therefore not time bound. In case of a time bound arrangement, the joint venture agreement concludes when the project underlying the same comes to an end.
What are the types of Joint Venture Agreements?
There are three main ways a Joint Venture takes place:- Contractual Arrangement
In this JV option, each party retains its own legal identity, and the JV does not have its own legal entity. That means that one party will usually be the lead or host, signing and entering into contracts with third parties, and the agreement will set out what each party’s liabilities to the other will be.
- Limited Liability Partnership
- Share Option
- own and deal in assets
- sue and be sued
- contract in its own right
Is a joint venture agreement legally binding?
A joint venture agreement is the same as other contracts. So once it is drawn up and signed, it is legally binding by all parties involved. When drafting a JV agreement, it's vital that all parties clearly define what percentage each will own. How each will ensure that they recover their share of profits and pay their losses must also be detailed in the agreement. Forming a joint venture does not normally require regulatory approval. One thing to bear in mind is if forming a JV will raise competition challenges - for instance, if the JV will have a significant market share.In these circumstances, the joint venture may be subject to review by the Competition and Markets Authority. If you think this applies, it’s a good idea to seek guidance from the outset.
What should a joint venture agreement include?
A written JV agreement reduces the chances of commercial litigation if differences arise further down the line between business entities. As a commercial contract lawyer, my recommendation for a JV agreement includes:- The parties, name and purpose
- The structure of the JV
- Contributions
- Profit sharing details
- The rights and duties of the parties
- Dispute resolution mechanism
- Confidentiality undertakings
- Non-competition clause
- Intellectual property clause
- Warranties and representations
- Termination clause
- Exit clause
- Governing law and jurisdiction
What's the different between a joint venture agreement and a partnership?
A joint venture involves two or more persons or entities joining together in a specific project. A partnership denotes individuals who join together for a combined business venture. A business partnership typically lasts for many years unless there are differences between the parties involved.You don’t need to register a joint venture but if you set up a separate legal entity, such as a company, you do need to comply with the relevant rules on company set ups and HMRC registration requirements.
What due diligence is required when forming a joint venture?
Due diligence will include checking your joint venture partner's legal status, that they have the right to enter the joint venture, and that they own assets they will be putting into the joint venture. Those are just to begin with. Due diligence aims to ensure any agreements you enter into are valid and to minimise the risk of future legal problems.Why do you need a solicitor for joint venture matters?
The biggest reason to take expert advice is to ensure you select the right structure for the joint venture, and then properly document it. If it’s the limited company JVC route, it’s imperative that the shareholders agreement deals with things like deadlock. If it’s the contractual route, then liability is a key issue.Our commercial lawyers are experts in handling Joint Venture agreements of all kinds across all sectors.
So get in touch today to discuss how Your Business Lawyer can help with your company law requirements.
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation.
