Joint Ventures – here’s what you need to know

Joint ventures are a business arrangement between two or more companies with the aim of reaching a specific goal without compromising their legal identities. This allows companies to share resources, knowledge, and risks and are a popular way to increase expansion, often into new markets, industries or jurisdictions.

However, if you are considering entering into a joint venture with another business, there are a few things you should bear in mind. In this article, we will take you through the different options available, what you should consider and possible issues that you may be faced with.

Before entering into a joint venture, it’s important to look at the different options available to you:

1. Equity Joint Venture – This means that both parties would jointly own a newly created entity (limited company), holding shares and contributing to the running of the new business. This option is great for larger expansion or venturing into new industries over a longer-term plan.
2. Contractual Joint Venture – Rather than incorporating a new limited company, both parties will collaborate through a contractual agreement. The agreement will outline each party’s rights and obligations. Here, there may be no pooling of assets used by the parties or general sharing of revenues and costs. This is a great option for smaller projects with limited timeframes, such as single purpose projects, where the parties wish to retain control over their own assets, business and employees.

Each option has its own advantages and disadvantages, and you should take care to ensure that you are choosing the best option for your objectives.

When it comes to making business decisions, such as embarking on a joint venture, it is fundamental that you understand what is involved and if there are certain considerations you need to take on board, such as;

• Do your business objectives align?
• How will the company be funded, both initially and in the future?
• Have you carried out suitable due diligence on the other party?
• Do you have the relevant agreements in place?
• What rights will each party have, for example, to appoint directors?
• Are you and your business protected, should anything go wrong?
• What regulatory consents, approvals and licenses will be required for the formation of the joint venture? Who will be responsible for obtaining these?
• Are minority interests protected?

Although there are a range of benefits to entering into a Joint venture, they can also come with some challenges:

• Cultural Differences: Different corporate cultures can lead to misunderstandings and conflicts, so effective communication and fostering a collaborative environment is crucial.
• Control Issues: Disagreements relating to decision-making authority and management control can be mitigated with clarity on roles and responsibilities.
• Financial Disputes: Capital contributions, profit distribution, or financial management can cause conflicts along the road, so transparency and predefined agreements are essential.
• Employment Issues: It is vital to have a clear agreement as to where employees will come from, who will have responsibility for recruitment, and to understand any Transfer of Undertakings (Protection of Employment) Regulations (TUPE) issues that may apply.

To combat these issues, it is important to ensure that a Shareholders Agreement and Articles of Association for an equity joint venture or Collaboration Agreement for contractual joint venture are drafted to accurately reflect the agreed arrangements for the management and general governance of the joint venture.

Joint ventures can be an impactful strategy for achieving business growth and innovation. However, careful planning, clear agreements, and diligent management are essential to ensure new ventures run smoothly and successfully.

If you require legal advice regarding a joint venture or are looking for an expert to put agreements in place, contact the Commercial Law team at Backhouse and book your free 30-minute consultation.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
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