General Issues
Overview
Joint ventures are a means by which companies and businesses undertake activities and projects jointly. The terms of a joint venture are entirely a matter for agreement. There are a number of different means by which joint ventures are structured.
Appropriateness
Joint ventures have proved a more successful mechanism for entering markets than acquisitions and other arrangements in many sectors. An alternative to a joint venture may be easier and more appropriate in other cases.
Potential Risks and Disadvantages
Apart from business risk, there are some inherent difficulties including the requirement for shared management. This may lead to a more cautious approach. There may be differences and disputes regarding management.
International Joint Ventures
The negotiation of a joint venture can be complex. This is doubly so where the other participant is in another jurisdiction. There is a range of corporate, tax, regulatory, employment, intellectual property, pensions and other matters to be considered, negotiated and agreed upon.
Initial Steps
A confidentiality agreement should be put in place at an early date if parties are sharing financial, technical and commercial information. A letter of intent or memorandum of understanding may be signed.The memorandum of agreement will set out key commercial terms. It will act as a roadmap and marker in the negotiation and conclusion of the agreement. The core terms and conditions will not usually be legally binding.
Due Diligence
Given the practical difficulties in enforcing warranties abroad, it is preferable for the parties to satisfy themselves in reation to the material issues in relation to the proposed joint venture in advance.
Due diligence may be appropriate as to matters relating to the. business and entity. Legal due diligence is appropriate in respect of property, corporate records, contract agreements, disputes, regulatory issues, employment, pension and related issues.
Warranties
Warranties and indemnities may be appropriate when assets are being contributed in by one party, and they are critical to the venture. Warranties may be given where the joint venture is in substance an acquisition or part acquisition
Regulatory Consent
The establishment of the joint venture may require regulatory consent. In the case of larger scale companies, mergers clearance may be required under the Competition Act domestically or exceptionally at EU level in the case of very large enterprises.
Structure of Joint Venture
A basic but important issue at an early stage is the structure of the joint venture. This may be determined by matters such as regulatory requirements, funding requirements, taxation arrangements, ease of establishment, ease of winding-up, impact on the management structure, the cost of filing, publicity obligations and treatment in the accounts of the participants.
Valuation of Contributions
The division of value and interest must be set. Many joint venture agreements will have a 50-50 arrangement. However, this is not necessarily so. Disputes and controversy may arise in determining the fair and relative value of the inputs given that they may involve existing assets and the present value of future expected earnings.
Agreement Matters
The essential legal arrangement is generally the formation of a company and the entry into a comprehensive shareholders agreement. There may be several ancillary documents. The agreement will usually cover the key matters commonly found in shareholders’ agreement
Agreement Issues
The joint venture company may or may not be party to the agreement depending on its terms. There may be as a single overall agreement dealing with multiple matters such as the contribution of assets by one party, warranties and indemnities, the corporate organisation on completion, valuation of contribution, pre-conditions, completion together with shareholder agreement provisions which govern the ongoing relationship of the parties.
Dividends and Returns
The parties may have different requirements in relation to dividends to be taken.
Relationship with Constitution
The company constitutional documents should conform with the shareholders’ agreement. Generally, at a minimum, following matters will need to be incorporated into the company’s constitution/memorandum and article.
Joint Venture Documentation
The main documents in a corporate joint venture are the company constitution / Memorandum and Articles of Association of the JV company and the joint venture’s shareholders agreement. In the case of non corporate joint ventures, the agreement between the party will be similar to the shareholders’ agreement with differences which reflect the absence of a separate legal entity.