Joint ventures (JVs) can give companies a strategic edge in the marketplace. A joint venture allows two or more parties to contribute capital, assets, services and/or intellectual property to the venture while sharing in the costs and benefits of the arrangement.
Key considerations that companies should consider when structuring their next joint venture transaction include:
No Two Joint Ventures Are Alike.
- The structure of a JV depends on its purpose, the goals and identities of the parties and the assets involved.
- JVs must also consider the tax, accounting and intellectual property issues.
- The final structure of the JV may be 50/50 joint ownership or the creation of a separate entity with the two parties, neither of whom controls the entity outright.
Purpose And Type Should Guide The Creation Of A Joint Venture.
- At formation, the parties need to determine the purpose of the joint venture (e.g., is it broad or narrow in scope?). This depends largely on how the parties view this entity: as a true operating company, or as an entity that only exists to fulfill a specific objective of the parties.
- The structure can allow the joint venture to be organized as an entity that would provide for limited liability for the parties.
Funding Triggers And Failure Remedies Should Be Clear.
- Triggers may include the closing of the joint venture transaction, a pre-agreed schedule, the funding of approved budgets, the funding of transactions not contemplated by such budgets (including acquisitions of intellectual property), the occurrence of development or other milestones, or the determination of the governing board of the joint venture.
- Remedies for failure to fund are highly negotiated, and may include a forfeiture of equity, loss of voting rights, loss of economic rights, loss of board rights, loss of call options or ability to “opt into” assets, specific performance with a penalty fee. or the termination of the joint venture.
Governance Is Critical Since Parties May Be Vying For Control.
- Typically, the members of the governing board of the joint venture are designated by each of the parties in equal proportions, but this is not required if one party is supposed to have outsized control. Equal designation rights could create a deadlock at the board if the parties are unable to agree on the correct course of action and the potential for frustration of the purpose of the joint venture.
- In certain instances where the joint venture is intended to be more independent, the parties may prefer to limit matters requiring board and equity holder approval and ceding more control to the management team, in which case the consent required for selecting the management team is critical.
Know Who Is Required To Do What To Achieve The Objective Of The Joint Venture.
- These may be general (e.g., commercially reasonable efforts), or the obligations of a party to the joint venture may be detailed in a services agreement where one party agrees to provide certain services to the joint venture (which may or may not be performed for a fee).
- Consider whether the joint venture will hire its own employees, second employees from the parties, or share employees with a party (and who is responsible for determining which employees should be engaged from a party).
- If employees are shared, determine the most efficient way to track an employee’s activities in order to properly allocate costs and ensure that intellectual property created is being assigned to the appropriate entity.
- Consider whether to include a non-compete for either party and whether the non-compete should endure following a termination of the joint venture arrangement.
Though we’ve endeavored to set forth several issues to consider when structuring a joint venture, the list above is not exhaustive. Each joint venture is unique, with a variety of different structures and challenges depending on the parties, the assets and the competitive landscape.