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How to Set Up a Joint Venture

Posted by David Cammack on September 5, 2016

If you’re considering setting up a Joint Venture and want to make sure you cover all your bases, with a sound legal footing, then this guide is for you.

Joint Venture – the definition

Technically, the term ‘Joint Venture’ isn’t used in English Law. However, it’s widely used in the corporate and business world to mean a commercial co-operation between two, or more, separate entities, for example, Business A and Business B sharing their technical expertise to realise a specific project together. They can also be known as a “JV”.

business people hand shake partnership teamwork deal cooperation

Joint Ventures – why?

There are many varied reasons for opting to enter a JV. A large project may only be feasible or commercially viable when costs are shared across more than one entity. As in the example above, it may be a case of marrying together different technical skills to collaborate. A Joint Venture can be a worthwhile tool in strategic planning as well as developing roles, relations and output in certain industries and markets.

How to structure a Joint Venture?

As stated previously, a Joint Venture isn’t a term recognised by English Law. Therefore, in order to set one up you can use various different options, some of which include forming a distinct legal entity for the JV:

  • Limited Company,
  • Limited Liability Partnership (or LLP),
  • Partnership, or
  • Consortium or contractual co-operation agreement.

In reality, it is usually most appropriate to establish a corporate structure such as a limited company. This separation allows the combined endeavours of the Joint Venture to do such things as contract as a stand-alone business. You also then have limited liability protection within the joint venture itself.

We’re not all British – does this matter to a Joint Venture?

You need consider if some of the parties to the JV are outside the UK. It is worth taking the time to establish where is the most sensible, profitable, equitable and safe legal jurisdiction to set things up. Within this, each entity needs to consider their own tax liabilities and their impact.

Making it legal – the Joint Venture documentation

Two key documents are essential to tick the legal boxes when using a company as the Joint Venture vehicle: in a JV company, these are the JV Agreement (or Shareholders’ Agreement) and the JV company’s Articles of Association.

These documents are essential for documenting constitutional aspects of the Joint Venture and how it is to operate. Elements that need to be included are:

  • The purpose and raison d’être of the Joint Venture.
  • The management of the JV and how they are appointed/removed.
  • The balance of responsibilities and power across the different entities and their roles within the management structure of the JV company.
  • Finances and funding, asset ownership and contributions.
  • Third party transfers – the terms under which these may happen.
  • Dispute procedures
  • Termination circumstances and procedure, incorporating the practicalities of termination and finances.

If you opt to use a structure other than a limited company for the Joint Venture, then the agreement you need will reflect the basis you are adopting or the fact that there is no separate legal entity.

What else do we need?

Again, it depends somewhat on the specific nature of the JV you’re looking to establish. Depending on your circumstances you may also need:

  • A management agreement,
  • Loan note instruments for the finance the parties might be supplying,
  • Asset transfer agreements,
  • Service and secondment agreements for staff who the parties are recruiting or supplying,
  • Distribution and marketing agreements, and/or
  • Supply of goods and services agreements.

Anything else you need to know about Joint Ventures?

Joint Ventures require advance planning to ensure things operate smoothly and profitably for the future. Cover the following bases before you start and you will more easily achieve success with the JV in the long-run:

1. Employment Rights & Responsibilities

In the setting up of the legal and financial side, don’t forget the people who are going to make the Joint Venture work: the employees. By its very nature you’re likely going to be dealing with at least two different starting points and you will need to give due consideration to TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006). Additionally, Secondment Agreements might be a useful vessel for staffing the new venture via the existing staff of the parties. Specifically when considering the employees of the JV, you should consider their pensions.

2. Share Schemes

Consider if you wish to set up a share incentive scheme in order to spur on the employees of the Joint Venture. The share scheme you use, if any, is largely dependent on the type of venture you’re establishing, who their employer will be and the nature of the key staff who will be operating within the Joint Venture. Here at Legalo, we love share schemes, because they are great to:

  • incentivise your key staff to work harder to develop the business
  • offer tax-efficient rewards to key members of staff; and
  • help retain key members of staff.

3. Intellectual Property

Potentially an area of complication is rights and responsibilities concerning intellectual property (copyright, trade marks, patents, etc). One of the main reasons for operating under a JV might be to make use of certain technology, systems, or assets, which belong to one of the founding ‘parent’ companies. So you will need to consider intellectual property registrations and licences. For further down the line, you need to consider how to deal with the intellectual property that might be produced by the Joint Venture itself, particularly if derived from intellectual property of one or both of the founders.

4. EU & UK Competition Law

Certain restrictions are in place on an EU level (the EU Merger Regulation) and at the national level, so as to ensure competition within markets and industries. What applies to your venture will vary on a case-by-case basis, but it is a valid consideration that you need to explore.

5. Listing Rules (LR)

If your company has a listing on the London Stock Exchange, then you’ll have extra hoops to jump through.

So how do we enter a Joint Venture legally?

Understanding the basics and what you hope to achieve is the first step. Next comes the legal stage. Legalo are experts in commercial law, understanding the process, and facilitating Joint Ventures that protect all parties and establish the most appropriate operations.

So download Legalo’s Joint Venture Agreement Template and customise it to fit your JV.

For more general information about JVs, have a look at Wikipedia’s page on them.

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