Three fundamentals for a successful joint venture

POSTED BY Andrew Wallace
09 June 2013

posted in Business | Company Law | Joint venture | Shareholders agreement

VIEWED 3654 TIMES

PERMALINK

So you've been looking at doing a joint venture with a business partner you know you can trust. You've done your due diligence and have got clear goals for what you want to get out of it. Now what? Well, whatever the legal structure you ultimately settle on (which will also involve tax and accounting considerations), there are three key areas you need to nail down. Without doing so, the venture is almost certainly destined to become a very costly headache.

Economics: At the most basic level, both parties need to agree on and be comfortable with what they're each contributing to the venture, both at the outset and on an ongoing basis, in whatever form those contributions will take (cash funding, expertise, intellectual property or otherwise). The contributions don't necessarily need to be equal; where they're not, it should be reflected in the returns that each party will earn from the venture relative to one another.

Just as important will be to think about and set out the consequences if one party doesn't pull its weight. For example, if one party is in breach of a funding obligation, should the other party be able to pay the defaulting party's share and obtain a corresponding increase in their share of the return from the venture?

Control: You need to carefully think through and agree how the venture will be controlled, both strategically and at an operational level. If control is in your hands then you need to make sure you have enough freedom to get on and do your job. If you don't have control then to protect your interest you need to make sure that you have a say on major changes to the venture and any major transactions that it may undertake, as well as sufficient information access/audit rights. Another important consideration under this heading is to ensure you have an appropriate process for resolving disputes, which will inevitably arise from time to time. There is no one-size-fits-all solution.

Exit arrangements: When and how should the parties be able to terminate the venture? Depending on the purpose of the venture, a fixed term could be appropriate. Should there be an exit process that applies if there's a deadlock in a decision about a major matter or a breakdown in the relationship? Such a process could, for example, ultimately end up in one party buying the other party out, or the venture being wound up.

Also, you'll have put a lot of work into getting this far, so you'll want to be able to tightly control what the other party can do with their interest in the venture. You may want to make sure that if the other party wants to exit, that they have to first offer their interest to you. If you are going to have these types of arrangements (called pre-emptive rights), they need to be comprehensive; otherwise they can be all too easy to work around.

Trust and compatibility at the outset of a joint venture are of utmost importance, but they're not enough. People change, business dynamics change. Clear agreement on the fundamentals will go a long way towards ensuring a successful outcome.

This article was first published in the Your Law column in the Sunday Star Times on 9 June 2013.

POSTED BY Andrew Wallace
09 June 2013

posted in BusinessCompany LawJoint ventureShareholders agreement

VIEWED 3654 TIMES

PERMALINK

COMMENTS (0) Post a Comment

Authorisation Code:*
To prove you're human, please type the code in the grey box into the white box. The code is case-sensitive. If you can't read the code, click on the grey box to see a new code.

← BACK TO NEWS