Why should I consider a joint venture and what do I need to do to ensure that the arrangement is workable for both parties? Martyn Tennant, partner and head of the corporate and commercial team at Swinburne Maddison LLP, explains further.
At its simplest, a joint venture does what the name describes: two (or, sometimes, more) parties get together to act jointly in business.
There are a number of ways in which parties can cooperate. Most commonly a special purpose vehicle (company or limited liability partnership) is used for the venture. However, joint ventures can also be implemented by formal partnerships or under simple contracts.
The approach chosen will depend on the nature of the venture, the parties’ respective approaches to risk and, often, tax considerations.
Why enter into a joint venture?
Joint ventures can be a useful way of delivering a particular project or business venture, but there are many issues to consider upfront to ensure that the arrangement is workable from both parties’ perspective.
Common drivers for joint ventures include:
- Changes in political and economic conditions such as deregulation and technological developments.
- Establishing non-core businesses.
- Exploiting new geographical markets.
- Entering new market sectors.
Joint ventures are typically utilised as part of strategic planning and in particular to share risk and cost between the joint venture parties. This is of particular importance if the parties are progressing with a concept that is new to both or either of them. In addition, the bringing together of resources will often result in improved efficiency and effectiveness due to increased capacity, improved expertise and shared insights.
Planning your joint venture
Nevertheless, because embarking on a joint venture can require significant reconstruction of your business, careful planning is needed, however favourable it may appear to your potential for growth. The joint venture must fit into your overall business strategy.
By reviewing your business strategy before committing to a joint venture, it will be easier to define what you can realistically expect. In fact, you might decide there are better ways to achieve your business aims.
Another factor, often overlooked, concerns competition law. There is a common misconception that competition and anti-trust law will apply only to the largest of joint ventures. This is not the case. If the impact of the joint venture has a bearing on consumer choice, even if limited to a specific geography, this will be an important consideration requiring clear advice.
If you decide to proceed, you will need professional advice to ensure your exposure to failure can be limited by use of the right structure, clear documentation setting out the rights and obligations of the joint venture parties and the right funding arrangements. Issues to be addressed include:
- Structure – what vehicle should be utilised for the project?
- Purpose – do both parties have the same objectives?
- Contributions – will these be balanced or will the funder be the senior joint venture party?
- Culture – do both parties share a business culture or does this need to be addressed to avoid difficulty once the project has commenced?
- Dispute Resolution – in any joint venture, points of difference will arise; clear lines of communication and escalating resolution procedures can assist with smooth progress.
A written agreement is essential
However a joint venture is structured, it is vital that the terms of the deal are recorded in writing. This is to ensure that both parties understand not only what is required of them in terms of funding and day-to-day operation but also what will happen if things go well or go badly.
Any agreement should, as a minimum, address:
- Objectives and purpose
- Obligations of the parties
- Day-to-day decision making
- Business plan
- Access to financial information
- Non-compete provisions
- Contribution of any intellectual property rights (including branding)
- Distribution of income
- Any time limits and exit planning
- Deadlock in 50:50 joint ventures and protection of minority interest in others
- Restrictions around the disposal of any interest in the joint venture
- Governing law and jurisdiction
How we can help
Swinburne Maddison LLP have a vast amount of expertise in dealing with joint venture projects of varying scale and degrees of complexity, including those with cross-border implications. Planning ahead is the key to success and working to an agreed framework and understood position can be key to a positive outcome. We work with your other advisors to ensure that any project has the best chance of success.