A joint venture agreement sets out the parties' rights and obligations in relation to a joint venture. It explains who will contribute what, how decisions will be made, and how profits and liabilities will be shared.
Nature of the relationship
One of the most important functions of the joint venture agreement is to explain the nature of the relationship between the joint venturers.
One aspect of this is whether the parties owe fiduciary obligations to one another, or whether theirs is merely a contractual relationship where the parties remain at arms length.
This is an important distinction. Disputes often arise where the parties do not agree upfront on how the relationship is supposed to function.
For example, say one party learns of an opportunity that could be pursued by the venture. Should that party be obliged to bring that opportunity to the attention of the other(s)? Or should it be able to pursue the opportunity independently of the venture and its joint venture partners?
Dealing with this in your joint venture agreement will minimise the potential for disputes later.
Sharing of profits, risks and liability
An important consideration, particularly in terms of the structure of the venture, is how profits, risks and liability will be shared.
For example, is it the intention that the profits and liabilities will be divided according to the parties' ownership interests? Or will the liability of some parties be capped, with other parties having unlimited liability?
The most common structures for a joint venture are:
- unincorporated joint venture - where the parties enter into a contractual relationship that explains how profits, risks and liability will be shared;
- incorporated joint venture - where the parties incorporate a new company to operate the venture, and the parties become shareholders in that company;
- partnership - where the parties are jointly and severally liable to third parties for the acts of the partnership (and this can sometimes be inferred, particularly for unincorporated joint ventures that do not have a joint venture agreement); and
- limited partnership - a partnership where the liability of at least one of the partners is limited, while the liability of others is unlimited.
If you do not have a joint venture agreement, the law may decide how risks and liability will be shared. The risk is that the law may operate in a way that is different to what you have in mind.
The parties' contributions
The joint venture agreement will explain who will contribute what to the venture. This is to ensure that each party understands what they will be committing to the venture, and also to ensure that they are bound by that commitment.
A party's commitment does not have to be limited to cash. It might commit other assets (such as premises, equipment or intellectual property), resources or anything else of value.
Most joint ventures will produce intellectual property that is of potential value to each of the joint venture parties. This can range from things like customer lists or information about specific business opportunities, to rights in software code or new pieces of technology.
To avoid the risk of one party attempting to take advantage of the venture's intellectual property for its own gain, the joint venture agreement should explain who will own any new intellectual property created by the venture, and the extent to which the parties may use that property outside the venture.
The agreement will also contain protections to safeguard any existing intellectual property - so that valuable intellectual property developed by one party is not lost to the venture or other joint venture parties.
Joint venture agreements will explain who will manage the venture and take care of its day-to-day operations. It will also usually specify different levels of approval for different types of decision.
For example, in an incorporated joint venture, some decisions might be left to the CEO or managing director, whereas others might require the unanimous approval of the owners of the venture.
The agreement will normally contain a list of the different types of decision, specifying (for each) what types of approval is required.
Examples of the types of decision normally covered are:
- borrowing money or entering into contracts above a certain value;
- buying a new business, or selling a substantial part of the existing business;
- issuing new shares or units in the venture; and
- terminating the employment of senior staff members.
Depending on the nature of the venture, the agreement will contain a range of other provisions, including:
- when and how interests in the venture can be sold;
- how disagreements will be resolved;
- exit provisions, such as tag along and drag along provisions;
- restraints and non-competition clauses;
- clauses explaining the extent to which the venturers will be entitled to receive information about the venture, such as financial information.
In many ways, venture agreements cover similar territory to shareholders agreements, even where the venture is not an incorporated one. This is because they both deal with a situation where parties are pooling their resources in pursuit of a common objective. In some cases, a shareholders agreement will be used as the joint venture agreement. Where the venture is not structured as an incorporated one, it will deal with most of the issues covered by a shareholders agreement. It may just deal with them in a slightly different way.