When it comes to collaboration between businesses a joint venture agreement (or JV agreement) ensures that the parameters of your business project are clearly defined and that you and your proposed business partners are protected in case of a dispute. In this article we answer your frequently asked questions on joint venture agreements.
Click to jump to individual FAQs:
- What is a joint venture agreement?
- Does a joint venture agreement have to be in writing?
- Who can enter a joint venture agreement?
- How do you structure a joint venture?
- Do you need a solicitor to prepare a joint venture agreement?
- What should be included in a joint venture agreement?
- Do you need to register a joint venture?
- Are there alternatives to a joint venture?
- Does a collaborative tender need a joint venture agreement?
- Can you enter a joint venture agreement with more than two parties?
- Can you enter a joint venture with an overseas based company?
- Do you need a separate profit sharing agreement with a joint venture agreement?
- What laws apply to English joint venture agreements?
- Can you change or extend a joint venture agreement?
- Do you need a joint venture agreement if your joint venture company already has articles of association?
- Do you need heads of terms with a joint venture agreement?
- How do you terminate a joint venture agreement?
- Can you withdraw from a joint venture?
- Can you dissolve a joint venture?
- What’s the difference between a joint venture and a partnership?
- What’s the difference between a joint venture and a shareholders’ agreement?
- What’s the difference between a joint venture and a joint operating agreement?
- What’s the difference between a joint venture agreement and a consortium?
- What’s the difference between a joint venture and a collaboration agreement?
- Should joint venture agreements contain warranties?
- Can a non-competition clause be used in a joint venture agreement?
- Should a non-disclosure clause be included in a joint venture agreement?
- Should intellectual property clauses be used in a joint venture agreement?
What is a joint venture agreement?
A joint venture is an arrangement between two or more parties to carry on a business project or activity together. The agreement formalises the arrangement reached by the business partners. Without an agreement in place the joint venture parties risk commercial litigation if they fall out over any ambiguity about exactly what was agreed or how any disputes should be resolved.
Does a joint venture agreement have to be in writing?
A joint venture agreement doesn’t have to be in writing – it may arise if the parties agree an arrangement to carry on a project or business activity together. In some circumstances, this intention can be inferred from the facts and conduct of the parties.
To establish a non-written joint venture, in addition to an understanding between the parties, there must also be:
- A common undertaking such as contributing an asset, capital, or skill for a specific business purpose and
- A common interest and
- Some control over the joint venture.
However, it is very risky to enter a non-written business collaboration with another party without a written agreement to protect your commercial interests and to minimise the risks of litigation if you fall out with the other parties to the agreement.
If there is no written agreement, the court will impose terms based on its interpretation of the parties’ intention. If there is no evidence of what the parties intended, the court will impose terms it considers fair.
For more information on joint venture disputes read our article Joint Venture Disputes: Why They Arise and How You Can Resolve Them.
Who can enter a joint venture agreement?
A joint venture agreement can be made between individuals, partnerships, limited liability partnerships (LLPs) and limited companies. The agreement can also be very flexible as it can be made between a company and an individual or two individuals or between two partnership firms.
How do you structure a joint venture?
There isn’t a set legal structure for a joint venture. That means that your business collaboration can take the form that best suits your planned project. A joint venture can either be:
- A contractual joint venture with no separate legal entity or
- A joint venture entity – this can take a number of different legal forms and professional advice should be taken on the preferred legal and most tax efficient structure for your venture. A joint venture entity can be a Company (limited liability company) or Limited liability partnership (‘LLP’) or Partnership (or limited partnership).
Do you need a solicitor to prepare a joint venture agreement?
You don’t necessarily need a solicitor to prepare a joint venture agreement if your business collaboration is very simple with minimum expenditure and is a low risk arrangement. For example, if two small business owners decide to pool costs and agree to sell items from a stall at a fair and split the proceeds. As this is a one-off, modest profit venture it would not be cost effective for a solicitor to prepare the agreement.
However, most joint ventures are longer term business collaborations with some financial or time commitment with the need for a detailed agreement to protect the interests of the parties. For these joint ventures we would always recommend a solicitor’s input on drafting the agreement.
What should be included in a joint venture agreement?
A joint venture agreement should include:
- The name of the joint venture and its purpose
- The parties to the joint venture
- The duration and structure of the joint venture
- The financial and other contributions of each party
- The agreed method of profit and cost division between the parties
- The duties and obligations of each party and the rights the parties grant to each other and third parties
- If the joint venture is a separate legal entity in a company structure, the rights of each shareholder, and if the joint venture is a partnership, the rights of the partners
- Dispute resolution mechanism
- Confidentiality undertakings
- Warranties and representations
- Termination and exit clauses
- Governing law and jurisdiction of the agreement
Do you need to register a joint venture?
You don’t need to register a joint venture but if you set up a separate legal entity, such as a company, you do need to comply with the relevant rules on company set ups and any HMRC registration requirements.
Are there alternatives to a joint venture?
There are alternatives to entering into a joint venture, such as:
- Forming a partnership. A partnership agreement can specify the rights of partners, their obligations and responsibilities, and how profit will be distributed. However there is a key difference between a joint venture agreement and a partnership agreement. A joint venture is intended to be a relatively short term, specific collaboration between business partners. In contrast, a partnership is normally set up with partners who intend to remain in partnership in the long term.
- Merging with another business partner to pool resources, skills, and technology but, like a partnership, this is more suited for long-term business collaboration rather than a specific business project.
- A strategic alliance with other business partners but this type of alliance is normally to share access to technology or resources to reduce overheads rather than to collaborate on a specific business project.
Does a collaborative tender need a joint venture agreement?
If you decide to tender for a contract with a third party you could enter into a joint venture agreement to try to win the tender with the agreement specifying who will do what if you win the tender and how profits will be shared. However, you don’t need to enter a joint venture agreement to tender with a third party. An alternative is to enter a teaming agreement.
A teaming agreement is a contract regulating the rights and obligations when one party submits a tender to a third party and sub-contracts with another party (or parties) to jointly work on the tender. A teaming agreement enables the parties to combine their capabilities for the tender and share the tender costs. Entering a teaming agreement means the parties retain control over their respective work and it is therefore better suited to collaborative tenders.
Can you enter a joint venture agreement with more than two parties?
Either form of joint venture (contractual or separate legal entity) can be between any number of parties but if there are more than two parties to the joint venture agreement there is an increased risk of disputes and therefore it is best to take specialist legal advice and get a detailed agreement drawn up.
Can you enter a joint venture with an overseas based company?
Whilst a joint venture agreement can be established with an overseas company or person it is important that the complex legal and tax considerations are considered so that your business interests are protected. For example, you will need to consider whether:
- The joint venture will be located overseas and governed by the law and taxation rules in a different jurisdiction
- There are restrictions on foreign investment, ownership, or control
- Any law applying to the foreign party renders any part of the joint venture agreement void or unenforceable
- If there is a dispute which country will have jurisdiction to resolve the disagreement.
Do you need a separate profit sharing agreement with a joint venture agreement?
A profit sharing agreement specifies the ratio that parties will distribute profits and losses. As a joint venture agreement can deal with profit and loss distribution between parties you therefore don’t typically need a separate profit sharing agreement. If you decide to enter a separate profit-sharing agreement it is essential that the terms are consistent with the joint venture agreement to avoid ambiguity and dispute.
What laws apply to English joint venture agreements?
There is no one statute or piece of legislation that deals with joint ventures. Instead, depending on the structure of the chosen joint venture, a combination of these laws will govern the agreement:
- Common law
- Corporate, company or partnership law
- Commercial and contract law
- Competition law
- Intellectual property law
- Tax law
Seeking legal advice from a commercial solicitor will help ensure you’re aware of all the applicable laws and that your joint venture isn’t breaching any such laws.
Does competition law affect joint ventures?
Competition law does affect some joint ventures and failure to comply with competition law can have serious financial consequences for the business and personal implications for the directors of the business.
The Competition and Markets Authority (CMA) is the UK government body responsible for preventing anti-competitive activities. The CMA has published guidance on joint ventures and avoiding business collaboration breaching competition law.
Can you change or extend a joint venture agreement?
There are a number of ways you can amend a joint venture agreement. You can use:
- A supplemental agreement – this type of agreement is often used when extending the length or scope of the original agreement
- An addendum to the joint venture agreement
- A deed of amendment or variation.
These documents should detail the specific terms and definitions that are being amended or expanded upon to render the change legally effective. To give legal effect to the amendment, all parties to the joint venture must either sign the addendum or follow the joint venture amendment process as outlined in the original agreement. It’s as important to get any addendum right as it is to get the terms of the original agreement correctly drawn up.
Do you need a joint venture agreement if your joint venture company already has articles of association?
The articles of association of a company govern the operation of the company and state the purpose of the company, the rights and responsibilities of its members and directors, and the way in which the company must operate as a whole. A joint venture will obviously only have articles of association if it is a company and the articles of association will supplement the provisions of the joint venture agreement.
Whilst the joint venture agreement will cover the responsibilities of the parties and profit and loss distribution, the articles of association will address issues such as dividend payments, and operative matters such as voting and general meetings.
When considering confidentiality issues surrounding your joint venture it is worth noting that the articles of association of a company are a public document filed at Companies House, whereas a joint venture agreement is a private document and can be kept confidential to the parties to the agreement.
Do you need heads of terms with a joint venture agreement?
A letter of intent, or heads of terms, can be used to outline the key points of the joint venture plans before the precise wording of the joint venture agreement is finalised. The head of terms therefore states the material terms agreed between the parties and reflects their joint venture expectations and intentions.
A letter of intent or heads of terms isn’t legally binding, unless otherwise stated and therefore it is not legally enforceable if one party pulls out. It is however a useful document to be referred to when drafting the agreement.
How do you terminate a joint venture agreement?
How a joint venture is ended is governed by the termination clause in the joint venture agreement. A well-drafted agreement will contain comprehensive provision on how the parties can exit the joint venture as this limits the potential for joint venture disputes.
A joint venture agreement will usually allow termination by:
- Agreement between the parties to end the joint venture early
- Expiry of the fixed term of the joint venture
- Completion of the specified joint venture project
- Exit by sale of shares in a company joint venture through the sale of shares by one party to the other
- By a material breach of the joint venture agreement which has not been remedied to the satisfaction of the non-breaching party
- Insolvency of a party to the joint venture
- Change of control of a party to the joint venture or a change of control of a company joint venture
- Unresolved deadlock on a material issue.
Potential termination methods include:
- Consensual termination – the assets are distributed by returning the asset to the party that acquired or funded the asset. Alternatively, the assets are sold to the highest bidder.
- Sale of interest – provision may be included in the agreement to facilitate the sale of shares by ‘tag along and drag along rights’. This provision enables one party to sell its shares in the company joint venture to a third party, provided the third party purchases the shares of all the other joint venture parties. As all parties interests are sold, the joint venture is terminated. Another share sale option is the ’put and call option’. This provision allows the holder of the option (usually all the parties to the joint venture) to give notice and require the other shareholders to buy or sell their entire shareholding. The price payable for the shares will be dictated by the agreement, such as ‘fair price’ or by a specific formula. By buying the entire shareholding, or requiring a holder to buy the entire shareholding, the joint venture arrangement is terminated. A third method for the sale of joint venture shares is the ‘Russian roulette mechanism’. This allows Party A to serve notice on Party B for Party A to sell its shares at a price specified in the notice. Party B has a period of time to accept the offer and buy the shares of Party A (following which B will become the sole owner of the company joint venture entity). Alternatively, Party B can reject the offer but must then sell its shares to Party A for the price specified in Party A’s original notice. In a joint venture with two parties, this would result in termination of the agreement. Another option for the sale of shares is a ‘Texas/Mexican shoot out’ provision. Party A serves a purchase notice on Party B stating that they are willing to buy out Party B at a specified price. Party B has a period to serve a counter-notice indicating either an intent to sell at that price, or to buy Party A’s interest at a higher price. The parties then continue to bid for the other’s shares until one party agrees to sell their shares. In an agreement with two parties, this would terminate the joint venture.
- Winding up – a court can order a winding-up or the joint venture agreement can include a procedure for voluntary liquidation. On liquidation, it is usual for the assets of the joint venture to be distributed to the party that contributed them.
When entering a joint venture agreement it is important to carefully consider all the termination options and negotiate clauses that suit your business interests.
Can you withdraw from a joint venture?
Your business priorities may change resulting in your wanting to step away from the joint venture. Whether you can withdraw from the joint venture depends on the terms of the agreement. It’s common for this type of agreement to contain an exit clause, enabling a party to withdraw from the joint venture and realise its interest by selling it to either another party or a third party. The method of sale is likely to be the same as the agreed mechanisms in the agreement for selling an interest on the termination of the joint venture. Provided there are multiple parties to the joint venture when one party withdraws and sells its interest the joint venture can continue operating.
When drafting a withdrawal clause that includes the option of sale of shares to a third party, pre-emption rights may be applied to the transfer of the shares. Pre-emption rights give the shareholders of the company the right to be offered the transfer shares before they are offered to a third party who isn’t already a shareholder of the company. Pre-emption rights are normally contained in the company’s articles of association. The third party who purchases the joint venture shares is usually required to enter into a shareholders’ agreement or deed of adherence to an existing shareholders’ agreement that includes an obligation on the third party to comply with the terms of the joint venture agreement.
Can you dissolve a joint venture?
If the legal structure of the joint venture is a partnership or a limited liability partnership (LLP) then the joint venture can be dissolved by ceasing business. A LLP can be dissolved by selling the interest or by winding-up the LLP by a majority vote of the partners. The dissolution provisions are normally set out in the partnership agreement or LLP agreement.
What’s the difference between a joint venture and a partnership?
A partnership usually establishes a single business enterprise for a broad purpose, whilst a joint venture (whether it is contractual or a separate legal entity such as a partnership) is commonly used for a specific business collaboration or one-off project. The practical differences between a joint venture and partnership are set out below:
|A joint venture exists for a limited period, usually until the project or business activity is completed.||A partnership is usually for an indefinite period.|
|Whilst parties share the burden of cost, profits don’t have to be pooled together and divided between the parties. This means, if two parties establish a joint venture to produce a specific product, the parties can sell the product in their respective separate businesses and keep their separate profits.||In a partnership, the profits are divided according to provisions of the partnership agreement.|
|There is no legislation imposing default terms in the absence of agreed terms in a joint venture. Instead, the courts will infer the terms from how the parties’ have acted.||In the absence of terms in a partnership, legislation will stipulate certain terms between partners concerning aspects like profit and loss distribution. The default position in a partnership is joint and equal liability and joint entitlement to profits.|
What’s the difference between a joint venture and a shareholders’ agreement?
If a joint venture is set up in the legal structure of a company, there can be confusion about the difference between a joint venture and a shareholders’ agreement. A shareholders’ agreement is an agreement between shareholders of a company regulating the relationship between the shareholders, stating their rights and protections, and directing the operation of the company.
The shareholders’ agreement is supplemental to the joint venture agreement and addresses matters such as the right to transfer interests in shares, and manages the operation of the joint venture by detailing the procedure to appoint directors etc. It’s important that the shareholders’ agreement is specific as to how monetary matters and control are dealt with.
What’s the difference between a joint venture and a joint operating agreement?
A joint operating agreement (JOA) is an agreement that governs a joint venture structured as an unincorporated association. JOA’s are particularly common in the oil and gas industry to share costs and risks between oil companies. Any JOA needs to be both industry and location specific.
What’s the difference between a joint venture agreement and a consortium?
A consortium is an association of two or more individuals, companies or organisations who have the objective of participating in a common activity or pooling their resources to achieve a common goal. A consortium is usually formed by an agreement or a memorandum of understanding. A key feature of a consortium is that members retain their separate legal status. Consortiums can be formed to make a tender bid more attractive to a third party.
The difference between a consortium and a joint venture is that a consortium cannot be incorporated as a legal entity. This has two practical implications:
- In a consortium arrangement the members exercise management control. In a joint venture the entity exercises management control.
- A joint venture with the legal entity of a company or partnership has the capacity to enter into contracts. A consortium usually has to set up a special purpose vehicle to enter into contracts.
What’s the difference between a joint venture and a collaboration agreement?
A collaboration agreement is usually entered into by two or more organisations working together to improve their existing technologies or to combine resources. The agreement usually sets out the responsibilities, roles, and rights of parties, whilst also managing the overall project. The key difference between a joint venture and a collaboration is that a joint venture can establish a separate legal entity, whereas a collaboration can’t.
Should joint venture agreements contain warranties?
Representations and warranties are statements of fact made by the parties and warranties provide potential avenues of redress in the event that the joint venture success is adversely affected by an untrue statement made by one party.
Examples of warranties and representations in a joint venture agreement include:
- The parties have the requisite power and authority to enter into the agreement and any other agreement required for the operation of the joint venture.
- Any license and intellectual property granted to the other party, for the purposes of the joint venture doesn’t infringe on any third-party intellectual property rights.
- There is no litigation existing, or pending against the parties, that may adversely affect the joint venture.
Can a non-competition clause be used in a joint venture agreement?
Non-competition clauses are common in joint venture agreements to prevent the parties from engaging in business activities that compete with the joint venture project. Any non-competition clauses should be limited to a specified period, and to a specified geographical location as non-compete clauses must be reasonable and necessary to protect the legitimate interests of the parties in order to be enforceable.
What is ‘reasonable’ will depend on the facts and circumstances of the business of the joint venture. Generally, a clause which prevents a party from conducting competing activity for a period of five years after termination of the joint venture would normally be viewed as unreasonable and therefore unenforceable. However, a clause preventing competing activity for two years after termination is more likely be viewed as reasonable and therefore enforceable.
Should a non-disclosure clause be included in a joint venture agreement?
Non-disclosure or confidentiality clauses can be included in a joint venture agreement. As parties to a joint venture are pooling resources and in some cases granting the other party access to confidential information about their business a confidentiality clause is recommended with penalties for breach. Legal advice should be taken to ensure that confidential information can’t be disclosed to third parties and that there is a duty to inform the other party if there is a breach of confidentiality. The non-disclosure clause should be stated as surviving the termination of the joint venture so the parties are obligated to continue to protect confidential information even after the joint venture has been terminated.
Should intellectual property clauses be used in a joint venture agreement?
Dealing with intellectual property rights are highly desirable in a joint venture agreement. As two parties come together for a joint venture, each party will want to grant the other party access to its resources, including intellectual property. The agreement should therefore specify the exact details of any licenses granted.
Where a joint venture is established to produce intellectual property, the agreement must reflect the parties’ agreement over ownership of the new intellectual property. For example, the joint venture agreement could say:
- The joint venture owns the New IP and sets out how the rights and interests in the New IP will be distributed on termination of the joint venture or
- The parties to the joint venturehold an undivided interest in the New IP or
- Each party to the joint venture has joint ownership of the New IP but the parties are subject to restrictive covenants which prohibit disclosure of it to competitors or
- The New IP is assigned solely to one party and licensed to the joint venture whilst it is in operation.
It’s best to include a provision dealing with intellectual property licensing when one party to the joint venture exits but the joint venture continues in operation.