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Joint ventures: advice and documentation

An elastic relationship

1. The expression “joint venture” is often used to describe the relationship between two or more parties, whether they are individuals or limited companies, who agree to carry on business together, whether business generally or some specific project only, otherwise than in partnership.

2. The term “joint venture” is sufficiently elastic to cover a whole range of relationships from the very large, where for example two companies might wish to pool their patents in the hands of a jointly owned limited company for the purposes of exploiting valuable technology, to the very small, where for example of couple of individuals want to form a limited company, but not a partnership, to start up a new business.

Need for a written agreement

3. Nonetheless, whatever the size and nature of the proposed venture, in most cases it will be desirable to commit to writing at the outset what the aims of the venture will be, how these are achieved, what each party is to put into the venture and how any profits derived from the venture are to be disposed of. A well drafted, written joint venture agreement will specify the mechanics of how the proposed venture is to begin, how it is to be operated and how certain likely eventualities are to be dealt with; for example termination.

4. The exercise of formulating such a mechanism and committing it to writing very often disciplines the parties to turn their mind to a number of points about their proposed relationship which they had not previously considered. This document is intended as a useful check list of some of the points which might ordinarily be expected to be covered in a joint venture agreement and to which parties proposing to enter into such a relationship ought to apply their minds.

Formation of joint company

5. A fresh, off the shelf limited company is very often the most convenient vehicle for the carrying on of the business of a joint venture. An off the shelf company is like a piece of clay; it is relatively useless unless moulded into a suitable shape. Parties intending to form a joint venture company should therefore agree not only to acquire a company but to have its constitution changed to suit their needs. Answers to the following questions will be needed.

What will its name be?

What will its authorised share capital be and how will it be divided up?

What will be the main objects of the company set out in the memorandum of association?

What will be the regulations which govern the internal running of the company as set out in the articles of association?

Is it the parties’ intention that each of them shall share equally in the management and control of the company?

Where will the registered office of the company be situated?

Who will be the company’s auditors?

Where will the company’s bank account be held?

On what date will the company’s financial year end?

What number of shares in the company will each of the parties subscribe for?

Will they pay for those shares in cash or will one or all the parties give the company non-cash consideration for the shares which are allotted to them?

Who will be the first directors of the company?

Finance for the company

6. Once the company is formed and owned by the joint venturers, it will need finance to carry on the business for which it has been acquired. The joint venture agreement should specify any terms which have been agreed between the parties for the provision of finance over and above the cash which is subscribed by the shareholders for their shares. Points which ought to be addressed in this regard include the following:

Are any of the parties going to make a loan to the company?

If so, the terms of any loan should be agreed from the outset and set out in a proposed written loan agreement.

Is any party going to personally guarantee the overdraft or any other liability of the company?

If so, the joint venture agreement should provide for that party to be indemnified by the others if this guarantee is called upon.

Dividend policy

7. A limited company is managed by its board of directors and the directors have responsibility for deciding whether or not any profits of the company should be paid out to the shareholders by way of dividend. Unless the joint venture agreement specifies at the outset the intentions of the parties as regards distribution in each financial year of post tax profits then the potentially explosive situation can result in which any party in the minority may be blocked from realising his share of the profits of the venture.

Conduct of the joint venture

8. If the parties are proposing to enter into the joint venture for certain limited purposes and to ensure in any event that the business and structure of the joint venture company is not at a later date changed by the board of directors to the detriment of any of the joint venturers, it makes sense to list in the agreement any matters which are to remain constant throughout the venture and which may not be changed except with the consent of all the parties. Provisions of this sort are as follows:

The nature of the business of the company is not to be changed from a particular, specified business.

No changes to be made to the memorandum of articles of association of the company.

No new equity interest in the company is to be created or conferred on any person.

The company is not to sell or dispose of all or a substantial part of its assets and undertaking.

The company is not to borrow more than a specified amount in any financial year.

The company is not to introduce any employee share option or profit sharing scheme.

Service contracts

9. One of the parties may be intending to devote all or most of his time to the business of the joint venture whereas other parties, whilst making a contribution in other ways, may not. In circumstances where any party is to be employed in the business then it makes sense for the terms of his contract of employment to be settled right at the outset. Questions should be asked along the following lines:

How much time is he going to spend in the business?

How much is he going to be paid?

Will he be entitled to a car or a pension or private medical insurance?

Will his contract be capable of being terminated or is it to run throughout the joint venture?

Consultancy arrangement

10. Often individuals will not want to be employed by the joint company but will prefer that a consultancy agreement between the joint company and a company which they control is entered into. The terms of such a consultancy would need to be settled and incorporated into a separate document.

Non competition

11. A written joint venture agreement ought to provide (in most cases) that none of the parties shall be involved in any business which competes with the business of the joint venture. This may seem an obvious point but it is a point, which unless it is covered right from the outset, pass the potential to cause great harm to the joint venture if the parties fall out.

Long term supply

12. It is common enough for one or more of the parties to wish to take a benefit from the joint venture by causing the joint company to obtain its supplies of, for example, raw materials from that party or a company which he controls. In such a case, it will be desirable to draft a written supply agreement at the outset setting out the terms of that supply and the capability or lack of it of the company to terminate the arrangement.

Technology and trade marks

13. Similarly, the company may need to exploit in its business patents or trade marks or know-how belonging to one of the parties. In such a case it will be desirable to draft a licence agreement setting out the terms upon which this input into the company is to be made and what royalty or other fee is to be paid by the company to the party making that input. The question of trade mark and patent/know-how licences is a whole separate topic.

Input of existing business or assets

14. One or more the parties may have an existing business or assets which it is intended the joint venture company should use or carry on. If so, a business or asset sale agreement should be drafted.

Termination

15. Possibly the most important parts of any agreement are the provisions relating to how the agreement can be terminated and what is to happen after termination. Particular attention should be paid to this right at the outset especially since this is often the last thing which parties consider when they are in the full flush of optimism over the founding of a new venture. Questions which ought to be answered in the joint venture agreement include the following:

Can the agreement be terminated if one party is in breach of its obligations and if so how?

Is the venture such that one party should be able to terminate leaving the others to continue the venture or if one party wishes it to end it should this be binding on all?

What happens if one of the parties becomes bankrupt or is liquidated?

Are there to be any provisions whereby a party wishing to terminate the agreement is able to sell its share of the joint venture company to the remaining parties and if so on what terms?

What is to happen if the joint venture company becomes insolvent.

Deadlock

16. Any written joint venture agreement ought to provide for how any breakdown in agreement between the joint venturers which may occur in the future is to be resolved. What is to happen if the parties wish the joint venture company to take widely diverging courses, particularly if one of the parties owns a larger share of the company? It is wise to include a detailed mechanism enabling either or both of the parties, particularly a party who is in a minority, to sell his shares to the other if the deadlock between them cannot be resolved and for a means of valuation and payment in respect of those shares to be agreed.

Network of agreements

17. Except in cases where the simplest of joint venture relationships is envisaged, it is evident that a written joint venture agreement is very often the centre point of a network of additional agreements peripheral to it. These can include the following, all of which have been mentioned above:

Loan agreement.

Service contract.

Consultancy agreement.

Supply agreement.

Trade mark licence.

Patent/know-how licence.

Business/asset sale agreement.

Discipline

18. Accepting the discipline of reducing the parties’ thoughts on all of these topics to writing at the outset may seem cumbersome but in my experience it is essential. By thinking through the mechanism of how the joint venture will work, points of difference and points of agreement can be clearly identified from the start and the time spent in reducing them to writing may pale into insignificance in comparison with the time which has to be sent unravelling a venture which has not been properly documented or thought through.

Costs

19. Clearly it is desirable that parties to a joint venture should agree amongst themselves who is to bear the cost of documenting the venture; the cost of producing a coherent set of documents, maybe a network of half a dozen agreements, can be high but if the venture has any long term future money spent on getting it right at the beginning will be money well spent.