8 Aug 2022
9 Jun 2020
Business owner(s) often want to enter a cooperative arrangement with another party to jointly start a new business venture/activity. But how can they protect your interests whilst aligning them with the goals of the other parties? They can do so by forming a joint venture ("JV") with the other party, a business arrangement in which two or more individuals combine their resources to accomplish a task. Forming a joint venture requires the creation of a joint venture agreement to set out the object, scope, structure, and finances and govern the rights and obligations of each party.
This guide will give you an overview of everything you need to consider whilst forming a joint venture – we’ll summarise the key terms of every joint venture agreement and provide a checklist for setting up a joint venture, alongside sample templates for easy use.
A joint venture is a business arrangement where two or more parties agree to combine their assets and resources with the aim of working towards or beginning a particular business activity. In a joint venture, parties are responsible for all things associated with the activity, including the profits, losses, expenses etc. Other than the joint venture, however, the parties and their own personal business are not affiliated in any other way.
If you want more specific detail regarding joint ventures, you can see our entry here.
Before you decide to set up a joint venture agreement, it is important to keep a few things in mind.
First, you should decide on what you want to accomplish through the joint, and the overarching goals of the business.
You will have to determine (with your business partner(s)) the specifics of the business venture:
Where will you be doing the business?
How will you be doing it?
What are the main business goals?
Aim to be as specific and detailed as possible so that all the parties in the joint venture are informed.
Above all, at this stage, you should consider if a joint venture is really necessary. Is a joint venture the right type of arrangement considering the purpose or relationship? Or would other alternatives suffice?
Research and development agreement
License or franchise agreement
Distribution or agency agreement
Supply of goods or services contract
Merger or acquisition
Consider: would these agreements fit better with your current business needs? Would there be more value-added?
Another important item to consider is the scope of the joint venture. If you have an existing business, it is important to ensure that the joint venture does not compete with or encroach on it.
Consider implications of its scope in connection with:
Any activities the joint venture expressly intends to do or refrain from doing
Corporate opportunity and potential conflicts with each party’s other businesses
Any core technology or other intellectual property to be transferred or granted
Other intercorporate arrangements that will be required for the joint venture to operate
Background of your business partner: If you do decide to proceed with a joint venture, you ought to do your due diligence by researching the partner/company you plan to work with. Try to determine whether their values and vision align with yours.
You should also try to learn more about their corporate culture and goals, then compare them with your own. Examine the past business deals/ joint ventures they have done to see if they are reliable business partners.
The due diligence process is important because your reputation can be detrimentally impacted by the acts of your business partner, even if the acts are not related to the joint venture itself. It is also important to ensure that in general, your partner is someone that you can trust and are comfortable working with.
Foreign partner: If your partner is from a foreign country, remember to take the time to learn the culture and business etiquette of their country. For example, the business culture in China and the US differ significantly. Keep an open mind and learn about the differences between you and your partner’s cultural values and perspectives to avoid unexpected disagreements that stem from cultural differences between you and your partner.
You should also aim to investigate the specifics, such as the structure/layout of contracts, documentation, and how partnerships work in your partner’s country.
Joint ventures exist in various structures. The more common ones include joint venture companies (JVC), partnerships, limited partnerships, limited liability partnerships (LLP) or contractual relationships.
An equity joint venture is where the parties set up a JVC, a separate legal entity. In an equity joint venture, the parties agree to the respective equity contribution and ownership of the JVC. The advantage of an equity joint venture is that the liabilities of the parties are limited to their equity joint venture contributions.
A partnership is a joint venture where the parties agree to conduct business together and share the management and profits of the joint venture. This structure is a tax-efficient one, although, since the partnership is not a separate legal entity, all partners bear unlimited liabilities.
Limited partnership and limited liability partnership are modified partnership arrangements under which only the general partners are responsible for the unlimited liabilities of the partnership, while the limited partners are limited to their shares of liabilities of the partnership.
Contractual joint ventures are established as unincorporated ventures based on a contract between the parties detailing their cooperation, without the creation of an independent legal entity. Contractual joint ventures are generally suitable for one-off single-purpose projects like research and development cooperation.
It is important to be clear on the structure of the joint venture as each structure will require a different form of drafting, following the relevant legal agreements and procedures that apply.
Deciding which joint venture structure to adopt for the joint venture depends on the specific circumstances surrounding the business venture. These factors include tax, liability, regulatory issues, jurisdictional matters, the management or employment structure, formalities in terms of publicity and administration, legal requirements, etc.
The plan should also specify the financial contributions of each partner. In a contractual joint venture, each party is responsible for the profits, losses and costs associated with its share of the joint venture.
In equity joint ventures, the joint venture is an independent entity, separate from the other business interests of the participants. One will need to agree on the parties' respective equity shares and provide for the initial contribution accordingly.
How will the parties continue to finance the joint venture? It is also important to establish any guarantees that any party has entered to support the financing of the joint venture.
By making all economic matters clear and transparent, disputes can be prevented.
The following are some preliminary matters you must consider when negotiating a joint venture with a potential partner. We also included some questions you might want to ask yourself below.
What will be the name of the joint venture?
Are there any restrictions on the use of the name?
How will any existing brands be valued/protected?
How will any new IP be dealt with?
Is any due diligence to be completed before the joint venture is effective?
Is it a new business or would existing businesses be transferred to the joint venture?
Are there any restrictions in existing agreements?
Who will need to consent/provide their approval?
Check the existing companies' constitutions for any transfer.
Location and Facilities
Where will the joint venture carry on business?
Who will own the premises?
Will landlord consent be required?
Will it be necessary for the JV to continue to use any facilities of the existing entities?
Any contractual arrangements in place?
Will confidential information be disclosed during negotiations?
Has a confidentiality agreement or information exchange agreement been put in place?
Do the parties want to have a period of exclusive negotiation?
Is each party still free, pending its signature, to negotiate with third parties?
How long will the joint venture be?
Will indemnities/warranties be given?
Should they be capped?
Has a feasibility study or business plan been prepared?
MOU / LOI
Is a letter of intent or memorandum of understanding appropriate to establish points of principle?
Authorisation / Consent
What material authorisations, consents, licences or other conditions precedent will be required for the joint venture to commence?
Law and Jurisdiction
In which jurisdictions will the joint venture operate?
What governing law should apply?
For a comprehensive list of business plan checklists for a joint venture company, please refer to the checklist we created here.
For a joint venture project and agreement checklist, please refer to our checklist here.
Prior to setting up the business or joint venture, you should create a detailed joint venture agreement with your partners.
There are several key areas the agreement should cover:
The agreement should clarify the objectives and business plan of the joint venture.
It should address issues such as the ownership structure, voting rights, governing body, the legal system, etc. The question of 'what are the duties of each party and what are their rights?' needs to be addressed.
It should also establish the composition of the business’ management team and the key players. This includes the company secretary, board members, executive team members, etc. It is also important to state the operations and accounting responsibilities of each partner. For instance, who will be running the day-to-day operations and who does the bookkeeping and record-keeping?
It is crucial you plan so your business can run smoothly in the long run.
In addition to the financial contributions of each party, the joint venture agreement should also specify how the liabilities under the guarantee/bond/indemnities will be shared by the parties.
Here is an example of a clause for liabilities in relation to guarantees and bonds:
“Guarantees and Bonds
Unless the Participants agree otherwise, the Participants severally shall provide guarantees and bonds in proportion to their respective shares in the Services sufficient for the total of guarantees and bonds required of the Joint Venture by the Client. The Participants severally shall be responsible for any administration and required extensions of the guarantees and bonds they have provided.”
The plan should also indicate the intellectual property contributions of each partner for the joint venture and how these intellectual property rights are to be shared/owned by respective partners.
It is also important to allocate the profits and losses of the joint venture. What/how much will each partner get from the joint venture? What percentage of the losses will each partner be liable for? Is it all equally shared or does it depend on the value that each partner is bringing to the table?
This should be clearly defined and discussed among the partners to ensure there are no hard feelings in the future regarding profits and losses.
The plan should also mark out the liabilities of each partner and their relevant indemnities. Parties need to decide upfront whether any of them will be indemnified against all potential liabilities arising out of the joint venture agreement.
If a dispute does arise, parties to the joint venture are usually required by contract to provide information/evidence to defend third-party claims against other parties regardless of whether they are indemnified.
Here is an example of the clause specifying on parties’ indemnity:
Each of the Participants will indemnify and keep indemnified the other Participant(s) against all legal liabilities arising out of or in connection with the performance, or otherwise, of its obligations under this Agreement.
Schedule 3 to this Agreement sets out the Works or Services for which each Participant is responsible.
Each Participant will indemnify and keep indemnified the other Participants against all legal liabilities arising out of or in connection with the performance, or otherwise, of Works or Services deemed by Schedule 3 to be its responsibility.
Each Participant is required to co-operate and produce such information as is reasonably required by the Policy Committee in defending any claim made by the Client or any third party arising out of or in connection with the performance or otherwise of the obligations under this Agreement.”
The plan should also detail the dispute resolution procedure to be adopted when disputes do arise. Apart from court litigation, there are various other more efficient and less costly alternative dispute resolutions including arbitrations, mediations, negotiations, etc that you might want to consider.
It is important to be clear about which dispute resolution procedure should be prioritised so that even if disputes do arise, parties are able to settle their differences in a calm and agreed manner.
Additional information regarding alternative dispute resolution can be found here.
Insurance is an important element to consider and include in the agreement, as after all, joint ventures are short-term business partnerships. It is crucial that parties are insured under an insurance plan that covers worker’s compensation, property insurance, risk insurance etc.
Parties should be clear on how the business project is to be insured and what type of insurance will be used and maintained throughout the business venture. It is also important to specify the buyer and maintainer of the various insurances involved in the project for clear record-keeping.
Here is an example of the insurance clause of a joint venture agreement:
Each Participant will maintain insurance coverage as protection against all legal liabilities arising out of or in connection with Works or Services for which each is deemed responsible by Schedule 3.
Unless the Participants agree, each Participant individually shall make all reasonable efforts to maintain insurance coverage in the amounts $[XXX] as protection against all legal liabilities arising out of or in connection with the performance or otherwise of its obligations under this Agreement.
Each Participant shall make all reasonable efforts to maintain insurance cover in the amounts $[XXX] for public/third party liability insurance and any other insurances necessary to comply with the Services Agreement.”
The plan should include details of the termination of the agreement. As mentioned, joint ventures are not long-term agreements, but short-termed business ventures with a specific and defined goal, meaning that termination is something both parties should anticipate and be well prepared for.
To end the business partnership on a good note, it is important to spell out the details of the end of the contractual relationship in the agreement.
The clause for termination of the agreement will usually be in the form of a duration clause:
“Duration of the Agreement
If it has been jointly established by the Participants that the Proposal will not be accepted by the Client or if it has not been accepted by the Client within the period allowed for acceptance in accordance with the Proposal or any extension of that period agreed between the Client and the Joint Venture, this Agreement shall terminate immediately.
If the Proposal is accepted by the Client, this Agreement shall continue to have full force and effect and shall continue the same when the Services Agreement is entered into with the Client, until confirmation has been received from the Client that the Services have been completed, or the Services Agreement has been terminated and all accounts relating to the Services between the Joint Venture and the Client and third parties between the Participants are acknowledged as settled.
Provided that the terms of this Agreement shall nevertheless continue to bind the Participants to such extent and for so long as may be necessary to give effect to the rights and obligations specified in the Agreement.”
There are various elements to look at when choosing the right template for the joint venture. For example, if you plan to be a minority shareholder in the joint venture, you might want an agreement in favour of your status.
Here are some agreement templates for setting up a joint venture:
|If there are:||
Template to use
Equal in shares
You are the minority shareholder
You are the majority shareholder
Equal in shares
You are the minority shareholder
You are the majority shareholder
Other templates for a joint venture agreement and related documents for joint ventures can be found here.
Not all joint ventures work out, making it fundamental that parties discuss exit plans and contingencies before signing an agreement together. You never know when changes may come, whether in the form of government policies, business practices or market environment etc.
Parties should therefore always discuss the exit strategy beforehand to mitigate sudden future changes. Communicate with your joint venture partner and decide how you plan to react to various changes that may occur during the business, e.g., market changes, new competition, loss of key clients, new regulatory or legal changes, labour, resources, and equipment shortages etc.
By discussing contingency plans, you and your partner can establish adaptive processes in the structure of your joint venture or even incorporate clauses in the joint venture agreement ahead of time.
This will allow greater flexibility and adaptability when changes do occur. Moreover, it gives you insight into your prospective partner’s corporate practices and flexibility, which is a good indicator of whether he is a good business fit.
Having a joint venture is an important decision that should not be considered lightly. Before making such an important business decision, remember to think carefully about the purpose, plan, and details of the joint venture, choose your partner carefully and draft a detailed and comprehensive joint venture agreement such you and your partner’s interests are protected as well as possible.
Please note that this is just a general summary regarding joint venture agreements under the common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your local legal adviser.
Not the right document?
Don’t worry, we have thousands of documents for you to choose from: