You are entering into a co-operative arrangement with another party to jointly develop and market a product. What is the best way to protect the interests and align the goals of the parties? The best way to form a joint venture ("JV") with the other party and have a joint venture agreement to set out the object, scope, structure, finances and govern the rights and obligations of each party.
This guide gives an overview of the matters to consider in a joint venture, summarises the key terms required for a joint venture agreement and provides a checklist for setting up a joint venture (with sample templates).
A joint venture is a business arrangement where 2 or more parties agree to combine their assets and resources with the aim to fulfil a specific business activity. In a joint venture, parties are responsible for all things associated with this particular business activity, including the profits, losses and expenses etc. However, apart from the joint venture, the parties and their own personal businesses are not affiliated in any other way.
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Before you decide to set up a joint venture agreement, it is important to keep a few things in mind:
You should decide on what you would want the joint venture to accomplish and the goals of this business.
Decide with your business partner(s) the specifics of the business venture:
Be as specific and detailed as possible so that all parties in the joint venture are clear and in agreement to avoid future disputes.
Also, consider if a joint venture is necessary. Is a joint venture the right type of arrangement in light of the purpose or relationship? Would other alternatives suffice?
Would these agreements fit better with your current business needs already?
Another important item to consider is the scope of the joint venture. You may not want the joint venture to compete or encroach on your existing business.
Consider implications of such scope in connection with:
Background of your business partner: If you do decide to proceed with a joint venture, research well into the partner/company that you will be working with and find out the values and vision that they hold to see if they align with yours.
Learn about their corporate culture and goals, then compare them with your own. Examine the past business deals/ joint ventures that they did to see if they are reliable business partners.
This due diligence process is important because your reputation can be detrimentally affected by the acts of your business partner, even if the acts are not related to the particular joint venture itself. Make sure that your partner is someone that you can trust and are comfortable working with.
Foreign partner: If your partner is located in a foreign country, remember to take the time to discover the culture and business etiquette of your partner’s country. For example, the business culture in China and the US will differ significantly.
Learn how to read contracts and how partnerships work in your partner’s country to behave accordingly. 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.
Joint ventures can be established in various structures. The more common cones include joint venture companies (JVC), partnership, limited partnership, limited liability partnership (LLP) or a contractual relationship:
An equity joint venture means the parties set up a JVC which is a separate legal entity. The parties would 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 to share the management and profits of the joint venture. This is generally a tax-efficient structure as the tax liabilities are look-through. However, the partnership is not a separate legal entity, all partners bear unlimited liabilities for the partnership. Limited partnership and limited liability partnership are modified partnership arrangements whereby only the general partners are responsible for the unlimited liabilities of the partnership, with the limited partners limited to their shares of liabilities of the partnership.
Contractual joint ventures are established as unincorporated ventures based simply on a contract between the parties detailing their cooperation, without the creation of an independent legal entity. Contractual joint venture is generally suitable for a one-off single-purpose project such as research and development co-operation.
It is important to be clear on the structure of the joint venture as each structure will require different drafting in the relevant legal agreements and procedures.
It will depend on various factors when deciding which joint venture structure to adopt for the joint venture and depends on the specific circumstances surrounding the particular 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.
If it is an equity joint venture, 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 share 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 into to support the financing of the joint venture.
By, making all economic matters clear and transparent, it will prevent disputes in the future.
The following are some preliminary matters to consider when negotiating a joint venture with a potential partner:
For a comprehensive list of business plan checklist for a joint venture company, please refer to:
For a joint venture project and agreement checklist, please refer to:
Before setting up any business, it is fundamental for businesses to create a detailed joint venture agreement with their partners.
There are several areas that the agreement should cover:
The agreement should first make clear the objectives and business plan of the joint venture.
It should highlight the structure of the joint venture, concerning ownership structure, voting rights, governing body and legal system etc. The question 'What are the duties of each party and what are their rights?' needs to be answered.
It should also include the composition of the management team of the business and the key players. This includes the company secretary, board members, and executive team members etc. It is also important to clearly state the operations and accounting responsibilities of each partner. For instance, Who will be running the day to day operations and who will be doing the bookkeeping and record-keeping?
Plan ahead so your business can be set up smoothly for the long run.
In addition to the financial contributions of each party, the joint venture agreement should also clearly 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 intellectual property contributions of each partner for the joint venture as well as 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. How much will each of the partners get from the joint venture? How much of the losses will each partner be liable to? 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 prevent any hard feelings in the future regarding profits and losses.
The plan should also show the liabilities of each partner and their relevant indemnities. Parties need to decide whether any of them will be indemnified against all potential liabilities arising out of the joint venture agreement.
If any dispute does arise, however, parties to the joint venture would usually be 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 include the dispute resolution procedure to be adopted when disputes do unfortunately arise. Apart from the common court litigation, there are various other kinds of more efficient and less costly alternative dispute resolutions including arbitration, mediation and negotiation etc.
It is important to be clear about which dispute resolution procedure would be prioritised so that even if disputes do arise, parties would be able to settle their differences in a calm and agreed manner.
Other information on these alternative dispute resolution can be found here: https://docpro.com/blog/what-are-the-alternative-dispute-resolutions-to-court
Insurance is also an important element to include in the agreement, as joint ventures are short-term business partnerships. It is therefore important for parties involved to be insured, including 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 insurances 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. Joint ventures are not supposed to be long-term agreements but are short-termed business ventures with a specific and defined goal.
To end the business partnership on a good note, it is important to spell out 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 are going to be a minority shareholder in the joint venture, you may want an agreement that is 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 at https://docpro.com/document-search/joint%20venture.
Not all joint ventures work out, making it fundamental for parties to 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 practice or market environment etc.
Hence, parties should always discuss contingencies plans beforehand to mitigate any sudden future changes. Communicate with your joint venture partner and decide on how you are going 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 in advance, you and your partner can establish adaptive processes in the structure of your joint venture down or even incorporate clauses in the joint venture agreement ahead of time.
This will allow greater flexibility and adaptability when changes do occur. Moreover, such a discussion can give you an insight as to your prospective business partner’s corporate practices and flexibility, which might be a good indicator of whether he is a good business fit for you.
Having a joint venture is an important decision that should not be looked upon lightly. Before making this important business decision, remember to think carefully on the purpose, plan and details of the joint venture, choose your partner carefully and draft a detailed and comprehensive joint venture agreement to better protect you and your partner’s interests.
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.
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