The adage of the ‘whole being greater than the sum of its parts’ very much applies when it comes to joint ventures between business entities. Done well, joint ventures have the potential to combine and provide a stronger overall offering due to the synergy of both sides. Perhaps one side brings a particular technology while the other brings brand and market access, or both have solutions that can combine to create a complete customer offering. Joint ventures are commonplace within the UK across a wide variety of industry sectors, venture types, and scales. Take, for example, the 50/50 joint venture between retail giants Marks and Spencer and Ocado in mid-2019. Ocado gave Marks and Spencer access to its online market, and Marks and Spencer gave Ocado access to its hugely popular food range and loyal customer base. As a result, the venture saw a 40% rise
in retail revenue in early 2021.
In this article, we will explain the benefits of joint ventures, the types of joint ventures, and what is involved in drawing up a joint venture agreement.
What are the benefits of joint ventures?
As confirmed in research
by Deloitte, businesses enter into joint ventures (JVs) for three main reasons, each providing benefits. Firstly JVs allow business entities to ‘pool resources’, leading to lower overall company risk, increased access to funds (as investors and lenders can see the lower risk), and increased market share. By pooling resources, it may also be possible to reduce costs and increase overall operational efficiency.
Secondly, JVs facilitate access to new markets, whether in different geographies or products. Providing rapid access to a new market with operational and delivery mechanisms already in place can lead to a considerable increase in demand and sales.
And finally, JVs offer a viable alternative to mergers and acquisitions, especially where funding is not available for such a transaction and during periods of recovery.
What are the different types of joint ventures in the UK?
When entering into a joint venture, it is important to consider the different types of joint ventures available and select the most appropriate for the parties involved. Most joint ventures take the form of one of the following:
- a corporation (typically a private limited liability company incorporated under the Companies Act 2006)
- an unlimited liability partnership (as governed by the Partnership Act 1890)
- a limited liability partnership (LLP) (incorporated under the Limited Liability Partnerships Act 2000)
- a limited partnership (LP) (incorporated under the Limited Partnership Act 1907)
- an unincorporated, contractual arrangement
- a private fund limited partnership (PFLP)
In the majority of cases, joint ventures in the UK are formed as limited liability companies or limited liability partnerships. As a legal entity in its own right, JVs of this type can hold assets and liabilities, enter into contractual arrangements, and limit the exposure of shareholders and members.
Where businesses enter into a contractual JV, this may be done in several ways, including in the form of an agency agreement, distribution agreement, franchise, or Intellectual Property licencing.
The appropriate form of JV will depend on the nature of the businesses involved, the scale and number of employees, where the participants are located, and the objectives of those involved from a commercial and financial perspective.
Which laws govern joint ventures?
Under English law, there are no specific provisions relating to the establishment of joint ventures. That said, joint ventures still need to adhere to company and partnership, tax, competition, intellectual property (IP), and common law, in addition to the contents of the joint venture agreement.
If the joint venture involves an entity in the UK and an entity in an overseas jurisdiction (i.e. a cross-border arrangement JV), depending on the circumstances, it may be preferable to establish the new JV company vehicle outside of the UK.
What is included in a joint venture agreement?
When entering into a joint venture, it is essential that the correct type of agreement be used depending on the form of the JV and the shareholding arrangements. In the case of a corporate joint venture, the following are required:
- the articles of association
- the joint venture agreement (or shareholders’ agreement)
The JV agreement is intended to establish in writing the fundamental rights and obligations of those involved in the venture, with the aim of making sure that the resulting business is run in a way that meets the stated intentions of those involved. It also sets out what should happen if there are problems in the running of the JV. JV agreements set out (as a minimum) the following details:
- the objectives and scope
- how the business will be financed
- structure of the board and management
- how profits will be shared
- how shares can be transferred
- provisions for unwinding a deadlock (in a 50:50 venture)
- how the JV can be terminated
- any restrictive covenants
Several other documents may be required depending on the form of the JV, including a management agreement, purchase of assets contract, IP rights agreement, guarantees, property arrangements, and contracts for the supply of goods and services.
- Determine and agree on the strategic objectives of the new joint venture, including identifying the key synergies of working together
- Assess how the new JV business entity will operate
- Agree on the business and management structure for the JV
- Determine the appropriate legal structure for the new joint venture – to make this decision, it is recommended to seek the guidance of a specialist in commercial law who will take into account the common objectives of the parties involved
- Work out the capitalisation and financial arrangements of the new joint venture – including shareholding, transfer of assets, sharing of profits, and liabilities
- Determine which documents are required to enter into the JV – again, a commercial law Solicitor will be invaluable in explaining which documents are needed and can draw these up for you
- Draw up the JV agreement and any other required documents; have these reviewed before being signed off.
You can get legal assistance from LawBite
Joint Ventures are common, as in business, partners seek to share costs, data, expertise, resources and rewards.
At LawBite, our expert lawyers and solicitors can help your business craft an agreement document that meets your needs. Download our legal document templates
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