Joint ventures – 10 key takeaways

Often when joint ventures go wrong, it is because the parties realise, that they do not agree about how to run the business. This could be down to many different issues. For example, personal differences, funding or disagreements about the direction of the joint venture.

I believe it’s always wise to have a comprehensive and candid discussion with your potential joint venture partners before embarking on the venture. The conversation should be about what your commercial aims are, what you both want to achieve with the joint venture and what is the overall strategy? Also, topics which can seem counterintuitive to discuss in the beginning such as grounds for termination  and agreeing what the predicted consequences  would be of a termination - should be  prioritised A thorough initial conversation will in many instances make it clear whether you are aligned on the basics of the joint venture, and it will be a good indicator as to whether you should progress or not.  

Being in a joint venture means working with another party or other parties. This can be very difficult. Especially, if you have been used to working for yourself, it is not easy having to consult with someone else, share ideas and sometimes experience that other people do not necessarily agree with you.

Therefore, before you enter into a joint venture agreement, you need to consider very carefully, how and to what extent, you are prepared to work with another party. Do you have ‘red lines’, which cannot be crossed? If you have strong reservations about working with other parties, then you should not be afraid of concluding, that a joint venture may not be for you, and you should instead focus on other ways to grow your business.

On the other hand, if you flourish when collaborating with other businesses, then a joint venture can be an excellent way to grow your business and access new markets, technologies and skills.

Another aspect you need to consider is how you are going to structure the joint venture. 

One option is to carry on the joint venture in a company owned by one of the participating businesses. The parties involved will then agree profit sharing and how the joint venture is to be funded.

Another model which is more widespread, is that the businesses involved in the joint venture set up a private limited company, which will run the joint venture. The articles of that company and a joint venture agreement containing provisions about how the joint venture partners wish to run the company, including the rights and obligations of the joint venture company, should be prepared and agreed between the parties.

Having clear rules about the governance of the joint venture company is extremely important. These rules should be set out in the articles and the joint venture agreement. They could for example, deal with the number directors, who appoints them, the voting rights and frequency of board meetings. The articles and joint venture agreement should also set out, if there are decisions, which can only be made by some shareholders, or if there are decisions which require all the shareholders to consent.

Depending on the nature of the joint venture company you could also consider setting up sub-committees dealing with specialist and technical issues. This is relevant in joint ventures where for example, the parties are bringing pharmaceuticals to the market. A sub-committee consisting of experts from the involved parties could act as a forum for settling specific technical questions.

Like any other business the joint venture company will need money to continue. It is important there is a clear agreement about funding. For example, will the joint venture company generate revenue from day one? If not, will the joint venture partners provide funding—for example, through a loan? If so, how will the loan be repaid, and under what terms?

Frequently, there will be clauses in the joint venture agreement, that the parties are not obliged to provide further funding during the term of the joint venture agreement. This does not mean that a joint venture party cannot provide funding to the company. It only means that the parties are not obliged to provide funding. Therefore, if no party is obligated to provide funding, the agreement should include provisions allowing the company to access loan funding, along with clear terms outlining how and under what conditions this should occur.

IP is typically one of the biggest assets of a company. It is therefore important that the joint venture agreement sets out how IP should be dealt with.

If one of the joint venture parties has supplied the IP, it should be clearly stated whether the IP transferred to the company or whether it is being licensed and if so, under what terms the licensing will take place. 

If the joint venture company creates IP, the joint venture agreement should state how that IP is dealt with. Will this be owned by the company or perhaps jointly with the joint venture partners? One should be mindful that if the joint venture is very reliant on certain IP, that it is owned by the joint venture company or at least that there is a clear license from the IP owner to the joint venture company. The critical thing to note here is that this will make it easier for the joint venture company to obtain funding from investors.

The IP will in many incidents be part of the service and product sold. Where it forms a more independent part of the offering, it is often licensed to generate revenue.

In that situation the joint venture company needs to decide if the license is given on an exclusive basis or non-exclusive basis. The advantage of licensing it on a non-exclusive basis is that the joint venture company can license it to others as well as use the IP in its own business. This approach maximises the value of the IP, creates additional income streams, and fosters broader market opportunities without limiting its usage to a single entity.

Like many other businesses the joint venture company will be run with a view to generate profit.

The financial reward which many joint venture partners will be looking for is a dividend paid to the joint venture partners and perhaps down the line - a share of any proceeds in a sale.   
There should be clear rules in the joint venture agreement about dividend payment and how any proceeds sale should be dealt with. For example, a joint venture agreement could include provisions for building up reserves to reinvest in the business, ensuring that dividends are only distributed once sufficient funds have been retained to support future growth and operational stability.

There could also be guidelines for what kind of revenue the company will charge its customers, such as up-front payments, royalty and milestone payments. However, such rules should not be too rigid. The board and the sales staff should be able to deal with this on a case-by-case basis.    

Whilst it may seem counterintuitive when you set up a joint venture, there should be clear rules set, from the outset, for when the joint venture can be terminated. Such rules may also address the consequences of a breach of the joint venture agreement, outlining the steps to be taken and the remedies available to resolve the situation.

Depending on the nature of the collaboration, there may be termination provisions, such as when the joint venture's purpose has been fulfilled or when a specified time limit has expired. In the clause allowing for termination there should also be rules about the effect of termination. For example, what to do with IP, any confidential information and customer contracts.  

Joint ventures can be very complex. Therefore, it is important that the venture partners take early advice from their advisors such as lawyers, accountants, bankers and financial planners before the joint venture is set up.