Joint ventures are set up for many reasons: to carry out a specific project or simply to assist with the growth and continuation of a business.
The parties to a joint venture can be individuals, partnerships, companies, or other organizations or associations. In certain cases, the joint venture can be created through the incorporation of a company that becomes a party to the joint-venture agreement. In other cases, the parties can sign a collaboration agreement.
The parties must think carefully about what they are trying to achieve through the joint venture. Do the parties want to have a period of exclusive negotiation, will they require a confidentiality undertaking, and will they sign a letter of intent to solidify their intention as a preamble for negotiations?
The parties to a joint venture can provide their own funding for the joint venture or use external sources for funding. The parties’ investment can be cash or payment in kind, such as expertise and resources. The parties must agree the percentage in which they will benefit from the joint venture. They must also agree working-capital requirements, any losses, and think about any expansion costs.
The joint venture will have to be thoroughly organized. The parties will agree the composition of the board and how the board will operate and vote.
Another very important consideration is whether the parties will be prohibited from competing with the joint venture at all or just in that particular territory.
Deadlock provisions are essential in a joint-venture agreement. This is when the parties cannot agree on certain voting issues and a decision cannot be taken. The joint-venture agreement must deal with this and set up a procedure to be followed in the event of a deadlock. For example, a voting deadlock at board level can be solved by giving a casting vote to the chairman or by involving an independent expert or arbitrator. The agreement must also establish the duration of the joint venture and how it can be terminated.
In the event of termination, the agreement must deal with the distribution of assets, the discharge of any outstanding contracts, and the liabilities of the joint venture.