19 FAQs people ask about joint ventures.
The term joint venture is most commonly used to describe an arrangement where two (or more) businesses create a separate joint venture business. But any kind of collaboration with another company could be described as a joint venture.
Joint ventures generally involve some sharing of resources and risks.
A common and flexible solution is to form a separate limited company for the joint venture. Among other advantages, this allows you to insulate yourself from liability should the joint venture become insolvent, because your liability as a shareholder is limited to the amount you have agreed to pay for your shares. However, this is not always the best solution.
If you will be transferring significant assets into the joint venture, forming a separate company can have unwanted tax consequences (see 11). An alternative can be to form a partnership or a limited liability partnership. An appropriate partnership structure may minimise potential tax liabilities.
If you do not require management involvement in the joint venture, it may be best to use contractual arrangements rather than to create a separate joint venture entity. For example, an inventor could simply license their intellectual property rights in their invention to another business to exploit.
Normally, you will be looking for a partner with complementary strengths. For example, you might want to find a company with a distribution network through which you can market your product or with financial resources to invest in developing your intellectual property, such as an invention, a copyright work such as a film or book or a design.
As well as your own requirements, think about what your partner will be hoping to get from the venture. You will need to be able to agree objectives that suit both of you. You will also need to reach agreement on a whole range of other issues (see 4).
Bear in mind that, sooner or later, the joint venture may come to an end. This can make it difficult to collaborate with a competitor or with a business that is likely to compete with you in the future.
Issues to be considered include:
All the key issues need to be covered by appropriate agreements (see 10).
In general, no.
However, a joint venture may raise competition issues, if, for example, the joint venture will have a significant market share. In circumstances such as this, the joint venture may be subject to review by the Competition and Markets Authority and it can be a good idea to seek guidance from the outset.
Competition law aims to prevent collaborations that reduce competition. In most cases, this only applies if you and your joint venture partner have a combined market share of more than 25%.
Some forms of collaboration are strictly prohibited in any circumstances, for example, agreements to fix prices or to share markets. On the other hand, there are some limited exceptions that can, for example, allow collaboration on research and development.
Competition law is complex. If in any doubt, take legal advice.
In general, and to the extent that the agreement is directly necessary to the joint venture, collaborators in a joint venture can agree not to compete with it. This does not, however, cover agreements that include elements such as price fixing or sharing markets.
As with other aspects of competition law, take advice if you are in any doubt.
Normally, each party signs a confidentiality agreement. This requires them not to disclose any of your confidential information they learn in the course of negotiations, nor use it to your detriment.
It can also be a good idea to sign a memorandum of understanding at an early stage in the negotiations. This represents a commitment to the deal and agreement in principle on the main points.
Due diligence will include checking your joint venture partner’s legal status, that they have the right to enter the joint venture, that they own assets they will be putting into the joint venture and so on.
More broadly, due diligence aims to ensure any agreements (see 10) you enter into are valid and to minimise risk of future legal problems.
If you are forming a new joint venture company, a shareholders’ agreement and the new company’s articles of association are crucial.
Points that may be covered in these or in separate agreements include:
The transfer of assets may be subject to stamp duty and capital gains tax liability if the asset has increased in value since it was originally acquired.
It may be possible to structure the transaction in a way that reduces the tax consequences, for example, by giving the joint venture the right to use the assets rather than transferring ownership.
This is a complex area. If you will be transferring assets of any significant value, take specialist tax advice.
It depends on how the employees are transferred and what their existing employment contracts say.
Employees could continue to be employed by you, but be seconded to the venture. Employees may be able to claim constructive unfair dismissal if, for example, they are required to relocate and do not wish to do so.
Alternatively, a business — including the employees working in it — might be transferred into the joint venture. The employees’ existing contractual rights will be protected. Again, employees might be able to claim unfair dismissal depending upon the circumstances of transfer. The Transfer of Undertakings (Protection of Employees) Regulations, which are designed to protect employees if the business they work in is acquired by a new owner, must be considered at all times and specialist employment advice should be taken.
Thirdly, an employee could be offered the opportunity to resign and take up a new job with the joint venture. Depending on the ownership of the joint venture, some of the employee’s rights (such as continuous service) under the existing employment contract might be protected.
As with most employment matters, you can minimise the likelihood of any dispute by discussing and negotiating your plans with the employees involved.
A joint venture may need to use intellectual property owned by one or more of the collaborators setting up the joint venture, such as brands, inventions, database rights, designs or copyright works such as plans, blueprints, manuals, etc.
Usually you would grant (or sell) the joint venture a licence to use your intellectual property. The licence will specify what rights and restrictions there are, for example, if the joint venture is only allowed to use your intellectual property within a certain territory. A licence, as opposed to a sale, may be more suitable to protect the ownership of intellectual property if the joint venture is not successful.
You will also need to ensure there is clear agreement on the ownership of any new intellectual property created by the joint venture. Care needs to be taken over what will happen if the joint venture modifies your intellectual property, for example, by developing an improved version of a patented product. Otherwise, over time you could lose ownership of the modified intellectual property to the joint venture.
There may be various indicators that guide you in valuing your contribution, for example, the replacement cost of assets you contribute, but, ultimately, it is a matter for negotiation.
Your degree of control depends on what has been agreed. When a new joint venture company is formed, it is common practice for the shareholders’ agreement to include clauses relating to each party’s rights to appoint directors, how decisions will be taken and so on. A similar agreement can be put in place if the joint venture is structured in some other way, such as a partnership.
Often joint venture partners want deadlock, with each having the right to veto the actions of the joint venture. You will need to agree how you will escape from the deadlock if it goes on too long. For example, you might decide you will wind the joint venture up if there is a deadlock or that one party will buy the other out at a fair price.
You will usually want to receive the same sort of information as you do within your own company: management accounts; copies of board briefings; minutes of board meetings; and so on.
If you or one of your colleagues is a director of the joint venture company, you would normally have easy access to the information you require. In any case, your rights to information should be specified in the shareholders’ agreement.
Profits from joint venture companies are commonly distributed through dividends. Of course, the ability of the joint venture to pay dividends will depend on its cash flow position. Depending on the circumstances, there may also be other more tax-effective ways of realising part of the value of your investment in the joint venture.
Where a joint venture is structured as a partnership, profits are automatically shared between the partners as specified in the partnership agreement. The partnership agreement should also specify what cash payments partners can take from the partnership.
If there is no separate joint venture entity, there will be no need to ‘take’ profits from the joint venture – the profits will in any case arise within your (or your joint venture partner’s) business.
Usually, one partner will buy out the other. The key is to plan for the termination of the joint venture from the outset. For example, the original agreement can include provisions that allow you to force your partner either to sell you their stake or to purchase your stake from you.
If the joint venture that becomes insolvent is a limited company, you will not normally be liable as a shareholder, because your liability for its debts is limited to the amount you have agreed to pay for your shares in the joint venture company. You will, however, be liable if you have personally guaranteed the joint venture company’s debts. If the joint venture is structured as a partnership, your liability will depend on exactly how this has been done.
Even where you are not liable, there can be indirect effects on your business. For example, your image may be affected if you are associated with the joint venture.