The adage of the ‘whole being greater than the sum of its parts’ aptly applies to joint ventures between business entities. Done well, joint ventures have the potential to provide a more robust overall offering than a single organisation due to the synergy of both sides.
For example, 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. They are commonplace within the UK across various industry sectors, venture types and scales.
Take, for example, the arrangement 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'll explain the advantages and disadvantages of joint ventures, the types of joint ventures and the steps/considerations involved when your drafting a Joint Venture Agreement.
What is a joint venture?
A joint venture is a business arrangement in which two or more parties combine their resources to accomplish a shared goal. This may involve pursuing a new project or undertaking a different business activity. All parties involved in the joint venture are responsible for the profits, losses, and costs associated with it.
What are the advantages and disadvantages of a joint venture?
Advantages of joint ventures
As confirmed in research by Deloitte, businesses enter into joint ventures for three main reasons, each providing benefits outlined below:
- ‘Pooling 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, reducing costs and increasing overall operational efficiency may also be possible)
- Facilitating access to new geographical markets and product specialities – 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
- Offering a viable alternative to mergers and acquisitions – especially where funding is unavailable for such a transaction and during recovery periods
Disadvantages of joint ventures
Of course, but fortunately, the challenges accompanying setting one up can be solved with a solid Joint Venture Agreement (keep reading) and excellent professional advisors to guide you. Possible problems may include:
- Reduced flexibility and control – as you have to consider and, in some cases, consult with your partner when making certain decisions
- A clash of cultures – bringing two businesses together can result in a clash of cultures and personalities
- They are never 50/50 – one partner will always put more resources, capital, and/or expertise into the venture, which can result in disputes if not appropriately addressed in the Joint Venture Agreement
- Communication breakdowns – considerable effort must be put into ensuring communication flows between the two businesses, as breakdowns are a common cause of disputes and/or project delays
What is the difference between a joint venture and a partnership?
The critical difference between a partnership and a joint venture is that two or more people set up the former to operate a long-term business. Two established companies create the latter to achieve a specific goal. Thus, most are short-term.
In addition, each partner is jointly and severally liable for the business under a partnership model. In this case, if one company gets into debt, the other partner is not liable.
How do joint ventures work?
Before entering into a joint venture, it’s crucial to research potential partners and select one who shares your organisation’s values and has a similar culture. During negotiations, it’s essential to consider how effective communication between the two entities will be achieved, as communication breakdowns are the leading cause of failures.
Where businesses enter into a contractual joint venture, they can do so via an agency agreement, distribution agreement, franchise, or Intellectual Property licencing.
The appropriate form of the joint venture 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.
What laws govern joint ventures?
Under English law, there are no specific provisions relating to the establishment of joint ventures. That said, they 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.
Special consideration to jurisdiction must be paid in cases where the joint venture is a cross-border endeavour. Under American and English law and other common law systems, the legal processes surrounding these ventures are based largely on the principles of contract law. If two parties agree to do something, it will be described and defined in detail, with the rights and obligations of both parties clearly documented.
Furthermore, the agreement’s provisions will be enforceable and transparent remedies available. Corporate structures and shareholder agreements are generally more regulated under civil law systems (used in most EU/EEA countries), therefore, you will need to carefully consider how the laws in a civil law jurisdiction could impact your commercial ambitions.
There are definite advantages to setting up a cross-border venture’s headquarters in England and Wales, especially in terms of taxation. For example, the corporation tax rate is low, and no withholding tax is imposed on outgoing dividends. In addition, commercial law in England and Wales is renowned for its business-friendly structure.
What are the first steps to take when developing a joint venture?
1. Determine and agree on the strategic objectives of the new joint venture, including identifying the critical synergies of working together.
2. Assess how the new business entity will operate.
3. Agree on the business and management structure.
4. 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.
5. Work out the capitalisation and financial arrangements of the new joint venture – including shareholding, transfer of assets, sharing of profits, and liabilities.
6. Determine which documents are required to enter into the joint venture – again, a commercial law solicitor will be invaluable in explaining which documents are needed and can draw these up for you.
7. Draw up the Joint Venture Agreement and any other required documents; have these reviewed before being signed off.
How to structure a joint venture?
When entering into a joint venture, it’s crucial to consider the different types available and select the most appropriate for the parties involved. Most 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 most cases, joint ventures in the UK are formed as limited liability companies or limited liability partnerships. As a legal entity in its own right, joint ventures of this type can hold assets and liabilities, enter into contractual arrangements, and limit the exposure of shareholders and members.
What is included in a Joint Venture Agreement?
When entering into a joint venture, the correct type of agreement must be used depending on the form of the venture 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 Joint Venture Agreement is intended to establish in writing the fundamental rights and obligations of those involved in the venture, aiming to ensure 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 a dispute develops. Joint Venture Agreements set out (as a minimum) the following details:
- The objectives and scope of the project
- How the business will be financed
- The structure of the board and management
- How will profits be shared
- How shares can be transferred
- Provisions for unwinding a deadlock (in a 50:50 venture)
- How the venture can be terminated
- Any restrictive covenants
- How disputes will be resolved
Several other documents may be required depending on the form of the joint venture, including a management agreement, purchase of assets contract, IP rights agreement, guarantees, property arrangements, and contracts for the supply of goods and services.
Get legal assistance from LawBite
Joint ventures are common, as in business, partners seek to share costs, data, expertise, and resources. However, no matter the arrangement, it’s important to ensure that expectations around responsibilities, risks, and rewards are clear and aligned.
To do this, it’s essential to work through these issues and document them. Our expert lawyers and solicitors are here to help your business with the key considerations and draft Joint Venture Agreement that reflects your interests. To find out more, book a free 15 minute consultation or call on 020 3808 8314.