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Joint ventures: a marriage of convenience

Commercial joint ventures can help pool resources, develop new products, tackle bigger projects, access new markets and otherwise reach the parts that solo companies cannot reach. Some planning can help. Here are a few pointers to make your commercial tie-up a success.

What's my motivation? Before you figure out how to structure your joint venture, you have to be clear about its purpose and its goals. As with every business, a joint venture needs a purpose and a plan. It might be to tackle a single project, like teaming up to win a contract that the joint venture parties could not hope to win alone. It might be to develop and commercialise a new, niche software application. It might be to buy and operate a business. Whatever the purpose, be clear in your own mind what your joint venture is intended to achieve - and make sure your partners share this vision.

Short or long term? A joint venture is simply two or more entities coming together to carry out a commercial enterprise. It might be short-lived with a limited purpose. It might be a long-term commitment. A joint venture might be no more than an informal agreement to co-operate on a project and split the resulting profits. More committed joint ventures often involve setting up a new company into which assets, working capital and people are transferred. In this latter case, more documents are needed, like a shareholders' agreement and agreements to transfer to the new joint venture company the things it will need to operate.

Funding a joint venture. Decide early on who is bringing what to the table. It might be particular assets, intellectual property, skills, personnel or working capital. The value of each contribution will translate into an ownership stake in the joint venture. This in turn translates into profit sharing and decision-making. Also, remember that interest paid on shareholder loans can be deducted from the taxable profits of a joint venture company.

Decision-making and control. Some joint ventures are genuine 50:50 partnerships. In these cases, neither party has overall control and all key decisions need the agreement of both. This is fine in practice until the parties fall out and find it hard to work together. Anticipate this and decide if you want your joint venture agreement to include some dispute resolution arrangements which might help break a deadlock.

In many joint ventures the parties contribute unequal shares. In these cases, how is power divided? Who controls what and who calls the shots? A well-designed joint venture agreement should make clear things like: (i) the decisions upon which all or most of the parties have to agree, and (ii) how many directors each party can appoint to the board.

If your joint venture is structured through a new company, consider how the board is comprised. Just because the joint venture partners appoint the directors, it does not mean the directors should simply do as they are told. Directors have independent duties and obligations to the company they represent and to its creditors, and not just its shareholders.

Dealing with disputes. What happens if the joint venture partners fall out? How should disputes be dealt with? Consider an escalation procedure which can help problems be nipped in the bud. If this fails, there is always the option of third party mediation. If the problem continues, is it serious enough to trigger a mandatory buy-out procedure? Do you want to be in a position of having to finance a buy-out? If dispute brings an end to the joint venture, how should the break-up be managed?

Exit strategy. If your joint venture has run its course, and hopefully achieved some of its goals, then bringing it to an end need not be messy or difficult. Particularly, if the parties anticipated the end game and planned for it. Profits can be spilt, the business sold and assets returned. Breaking up can be hard to do…but it can also be amicable.

Summary. A successful joint venture needs planning and that planning should cover:
• Structure and goals
• Financial commitments, contributions and revenue allocations
• Control and decision-making
• Dispute resolution procedures
• Strategy to manage exit and break up

This article by Corporate partner, Richard Beavan first appeared on the Private Client Adviser website on 8 October 2013.

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