Joint ventures remain popular as vehicles for collaboration and expansion. Our job is to fit the rewards with the risk, investment and commitment involved within the legal agreements.
Making a joint venture agreement work
Joint venture agreement structure
There are a variety of possibilities for you to consider. The structure most appropriate for any particular joint venture agreement will be dependent upon the parties, their respective objectives and roles.
The three most popular structures for a joint venture agreement
The most typical joint venture structures are:
- A company especially created for the joint venture agreement. Often known as a special purpose vehicle company and the most common structure;
- Partnership or limited liability partnership (LLP); or
- Under a collaboration agreement – which does not involve the creation of a new vehicle.
Joint venture agreement share structure
If you are using a special purpose vehicle for the joint venture you need to consider the equity structure. The equity structure should cater for:
- Management during the life of the joint venture; and
- Disbanding once the purpose behind the joint venture has been served.
Management of the joint venture:
Typically you will need to consider:
- How will the equity in the joint venture company be held between the parties? Is it appropriate to issue each party to the joint venture agreement with a separate class of shares so that the parties can have differing rights to voting, income and equity?
- Will the parties be required to fund the joint venture and if so, how?
- How will capital distributions on the sale or breaking up of the joint venture be dealt with?
- How will intellectual property created under the joint venture agreement be handled?
- Is any party required to licence intellectual property to the joint venture vehicle and on what terms?
- If there is a dispute under the joint venture agreement how will this be dealt with?
- Who has the power to appoint directors and control the board under the joint venture agreement?
- How will the joint venture be terminated and is there a timescale?
- Will certain parties under the joint venture agreement have the power to veto actions other shareholders propose?
We often see convertible shares used in joint venture agreements whereby a loan can be converted into equity. Convertible shares provide the benefit of a loan which is repayable. But, with convertible shares there is the option to convert the loan into capital.
Joint ventures – setting out the management structure
The best joint venture agreements include an element of flexibility for developments in the business.
Compliance issues for the JV
We will deal with all or any common compliance issues such as:
- Where will the joint venture company be incorporated?
- Does the joint venture group’s proposed business require any consents, licences or approvals?
- To what extent can shareholders in the joint venture compete with the joint venture company?
- Will the joint venture company employ dedicated staff? If so, will there be a requirement to consult with employees under TUPE?
- Where the joint venture involves the sharing of data have consents been obtained and who is the data controller.
Many intellectual property joint ventures are formed for the purposes of creating or developing software. You need to set out clear terms on what happens to existing software and intellectual property shared with the joint venture as part of the collaboration. Following on from that is consideration about how new software, technology and intellectual property created by the joint venture will be owned.
Unfortunately, ownership of intellectual property can be a common area of dispute. To avoid disputes, you should set out the position at the start of the joint venture.
- You need to consider how the rights relating to existing intellectual property brought to the joint venture by any party are to be dealt with. Intellectual property covers a variety of rights such as trade marks, design rights, copyright for software and patent rights all of which are of value.
- The rights relating to intellectual property created by the joint venture. You need to think about ownership and entitlement to income. Issues are frequently addressed by way of a licence.
- Ownership of intellectual property when the joint venture is disbanded needs to be agreed.
Financial obligations under the joint venture agreement
Funding and business plans will require consideration. Our specialist commercial solicitors are able to discuss:
- How will the joint venture company be funded initially?
- Are shareholders to be obliged at the outset to provide future funding?
- Will the joint venture company borrow from banks? If so, will shareholders guarantee any of the joint venture company’s obligations?
- What will be the process for drawing up and agreeing budgets and business plans?
- What is the dividend policy of the joint venture company?
Management of the board of directors
A key force is the composition of the board of directors under the joint venture. The board will make the day to day decisions.
Areas for you to consider:
- What is the composition (and balance) of the joint venture company’s board to be?
- How will the chairman be appointed? Will he have a casting vote at board meetings?
- Will certain matters require shareholder approval (and, if so, by what majority)?
- Who will have the right to appoint the CEO/CFO/other senior management?
- Will the joint venture company have its own employees, separate to those on the board?
- What are the quorum, notice period, board papers and other requirements for joint venture company board meetings? Is there to be a minimum frequency for board meetings?
Accounting for the joint venture
Accounting aspects should be addressed in the documentation implementing the joint venture agreement. Considerations include:
- Who will be the joint venture company’s accountants/auditors and financial director?
- Does the joint venture company have to be managed in a particular way, or have a particular year end, for accounting purposes?
- Is any special access to the joint venture company required for either party’s accounting, audit or compliance purposes?
- Are there any other accounting drivers or issues?
Joint venture agreement exit arrangements
The exit strategy is a very important consideration in any joint venture agreement. In practice, details on how an exit will happen and how the parties will be paid needs to be reflected in the joint venture agreement and in the articles and shareholder agreement since it overlaps between the scope of the joint venture and the share capital of the joint venture.
Similar considerations are required if the joint venture vehicle is an limited liability partnership LLP or a common law partnership.
Issues to think about related to exit from the joint venture
Common issues include:
- Who will own the technology and other intellectual property?
- Is the joint venture to be of fixed term or indefinite duration? If fixed term, is there an overall exit strategy?
- Can a shareholder terminate the joint venture early (e.g. on material breach, insolvency, change of control)?
- Is a shareholder permitted to exit by transferring its shares? If so will any other person have the right to first refusal?
- Will other shareholders have specific veto rights on transfers to third parties?
- On a transfer, if permitted, is the transferor to be given drag along rights? Are other shareholder(s) to be given tag along rights if a major shareholder wishes to exit?
Joint venture agreement – recent cases
We handle small investments into a joint venture through to complex joint venture agreements involving substantial investment and multiple parties. Our recent instructions include:
- The review of a joint venture agreement between a commercial services business and a software house developing specialist applications for the business with the view to re-sale into other commercial services businesses on a joint basis to fund the development. The focus was on ownership of the intellectual property created, securing licence arrangements and management of the sales channel.
- Drafting the articles of association and shareholders’ agreement for a joint venture between a large financial institution and a small business that had a patent the financial institution wanted to exploit. The joint venture agreement required service level agreements for the use of the financial institution’s trading platforms. The shareholders’ agreement dealt with debt financing convertible into shares at the election of the financial institution.
- Working on a joint venture involving a US bank, a European venture capitalist and a specialist UK business dealing with the provision of marketing of financial services. We were acting for the UK business and the focus was on agreeing the service level agreements for the provision of services to the joint venture business and establishing the arrangements for holding of equity and flow down of profits.