Market competition is what makes us better. It is the motor that pushes businesses to invest in quality and to focus on providing the best possible service for consumers. However, competing alone may not be always the answer. There are different kinds of businesses or companies whose joint efforts can result in effective and very successful synergies. In this context, when two or more entities desire to engage in a mutually beneficial commercial collaboration, they may enter into a joint venture.
In a joint venture, the parties involved pool, exchange, integrate, and bring together their collective resources to pursue a common goal while remaining independent. Considering this independence and the fact that the members of the joint venture are usually subject to unlimited liability, like in a partnership, it is of fundamental importance to formalize the joint venture by means of the execution of a well-drafted agreement.
What are the advantages of a Joint Venture?
The joint venture allows the participants to create effective synergies, to combine their mutual skills to develop new products, strategies, services, and more. The joint venture can be a way to access a new market where one of the participants has experience, knowledge, and connections. Additionally, unlike more complex transactions, which can entail more capital and risk exposure, in a joint venture, the parties share the costs, profits, and losses of their enterprise while maintaining their independent business operations.
What are the risks associated with a Joint Venture?
While a joint venture offers opportunities to the parties involves, it can also limit each party's ability to pursue other corporate opportunities independently. The participants of a joint venture operate as partners. This means that they are equally liable for any consequence derived from their joint endeavor. Additionally, the parties to a joint venture exchange confidential and sensitive information, create joint intellectual property and make mutual contributions. Accordingly, before moving forward, the parties to a joint venture should engage in a due diligence investigation to evaluate the pros and cons.
Like we already mentioned, the parties to a joint venture enter into a mutually collaborative commercial relationship that involves sharing strategic assets, at least temporarily, while keeping each their independence. To achieve this, it is very important that before the execution of the Joint Venture Agreement the parties enter into preliminary agreements. The idea is, to use those agreements to define the terms upon which the joint venture will be negotiated and what happens if the parties decide to walk away from the deal. As part of the negotiation, it is also common to enter into confidentiality agreements to protect proprietary information and to prevent any misuse of that information in the future. Finally, it is worth saying that while these preliminary agreements are intended to keep a good-faith negotiation process, the language of these agreements should make clear that no parties are yet obligated until a final and firm written agreement is fully executed defining all terms of the joint venture.
Key Provisions of the Joint Venture Agreement
Once the parties agree to enter into a Joint Venture, it is necessary to draft the agreement to define the terms of the Joint Venture, the duration, the scope, among others. Here is a list of the most common provisions included in a Joint Venture Agreement.
1. The Joint Venture Structure
Like it was mentioned before when it comes to a joint venture the common rule is that each party is equally responsible for the costs and profits of the endeavor. However, it does not mean that the parties cannot structure an agreement that addresses their mutual concerns related to liability. Accordingly, the parties can agree to enter into a partnership or to incorporate an entity to conduct their joint venture.
2. Scope and Purpose
Since each party to a joint venture keeps its independence, it is very important to define the scope of business or activities that will cover the joint venture as well as the purpose for entering into the joint venture. This is especially important to avoid later allegations of breach of contract, unfair competition, bad faith, among others.
3. Parties and Contributions
Again, to protect each party's independence, assets and businesses, it is important to define with detail who are the contracting parties and whether any affiliates, associates, or other entities related to the joint venturers will be bind by the agreement. Additionally, it is necessary to define what is the contribution of each party, whether it is cash, labor, intangible assets, financial resource, or any other. If any party is making non-monetary contributions, such contributions should be properly valued.
Joint ventures are more commonly entered into by companies instead of individuals. For that reason, it is very important to define who will be in charge of handle the day-to-day activities of the joint venture, the process to make the most important decisions, usually, those involving assets of great value, and the scope of the authority granted to the managers. Additionally, it may be necessary to include provisions related to the fiduciary duties of managers or other subordinates. This may be a good place to include any necessary provisions related to employment agreements and their none existence.
5. Business Plan and Budget
The participant of a joint venture come together to get involved in new business opportunities. Accordingly, making it obligatory to structure and agree to a business plan and a budget is not only necessary but appropriate to achieve the purpose of the transaction and to protect the parties from potential liabilities. This provision should consider the creation, delivery, and timely approval of a strategic budget containing projected expenses and contributions.
6. Distributions and Dividends
Some joint ventures are entered into to access a new market and get involved in commercial operations, others are created to develop a product or service before deciding how it will be commercialized. Accordingly, it is important to determine how and when distributions will be made, and whether the parties are entitled to a certain dividend or not.
7. Transfers of Interests
In contrast to parties of other kinds of agreements, joint venturers usually select their business partners considering their specific and strategic characteristics. Accordingly, it is important to address whether the parties to the agreement are allowed to sell their interest in the joint venture and leave. Here parties usually include restrictions on how and when venturers can sell their interest.
8. Conflicts, Corporate Opportunities, and Competition
We said before that joint venturers should define the scope and purpose of the joint venture so that they keep their independence to conduct operations in other businesses. Using the same logic, it is important to include a provision that considers how the parties will handle conflicts of interest, new corporate opportunities, and possible scenarios of competition.
Considering the temporary character of the joint venture transaction, it is very important that the parties are bind to a duty of confidentiality that allows them to protect the proprietary information that is exchanged in furtherance of the joint venture purposes. Additionally, this provision can define which information cannot be disclosed with third-parties, the procedures to protect or handle the information after the joint venture ends, and the remedies if a party inadvertently discloses proprietary information.
10. Intellectual Property Ownership
It is likely that from the joint venture result trademarks, works of authorship, patents, and other forms of intellectual property. Accordingly, it is important to define who will be the owner of said assets, what will happen with those assets after the joint venture ends, and what will happen with any derivative products created or developed after the joint venture cease to exist.
11. Dispute Resolution
In case the parties to a joint venture cannot agree on material terms, it is preferable to agree beforehand on how to handle conflicts and what mechanism will be used to resolve disputes. Considering the length of time that could take to resolve any business issues in court, the parties may agree to arbitration or other alternative mechanisms of dispute resolution.
It is also fundamental to define what are the facts that will trigger the termination of the joint venture or whether the trigger will be a specific date of the period of time. Additionally, parties should agree to the execution of a closing document resolving all pending issues before walking away.
Finally, if it is necessary to amend the joint venture agreement after execution, it is a best practice to define how, when, and under which circumstances is an amendment valid.
The Law Office of Giselle Ayala Mateus Can Help You!
There are many good reasons to enter into a joint venture with another business or entity. However, before coming to a common understanding as to the terms of the joint venture, it is worth hiring an attorney to help you evaluate the legal risks associated with the transaction, draft an effective preliminary agreement, execute a proper confidentiality agreement, and guide you until the execution of the agreement is completed. For these purposes, the Law Office of Giselle Ayala Mateus is ready to start working with you today! You can call now or schedule a free consultation.
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Document Craft and Draft
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