Joint Venture

What is a joint venture?

A joint venture (JV) is a collaborative business arrangement involving two or more parties. The term covers a range of legal and commercial structures which allow independent businesses to combine for a shared objective. The objective may be relatively short-term such as the completion of a specified project, or it could be a continuing shared enterprise. JVs feature prominently in the Irish business landscape.

What are the benefits and challenges of joint ventures?

JVs allow parties to combine their expertise and resources to access new markets.

The advantages often prove enticing for joint venture parties, but an assessment of the challenges associated with a JV is critical to its success. While parties may have complementary resources and a common desire to work together their objectives and time horizons may not be aligned. Parties should take care to align their incentives and objectives clearly at the start. Whatever structure parties choose for their joint venture, the governing documents should address dispute resolution and potential exit routes. Legal complexity may arise if a JV takes an elaborate corporate structure. Equally, a simple 50/50 joint venture may give rise to deadlocks requiring solutions which can be legally complex and commercially unsatisfactory.

What structures are available and what are their advantages?

The term JV does not take a specific legal form. The parties are free to choose the structure that best suits their needs. The parties will agree the rules governing their JV which will dictate, among other things:

• How decisions are made in the JV
• How the enterprise risks are shared, and
• How returns are to be allocated

The JV structure chosen will dictate how these rules are implemented as well as having tax and compliance implications.

The most common JV structure in Ireland is the equity JV where the parties form a new company, often a limited liability company, to carry out the JV activities. The parties become shareholders in the new company and the commercially agreed terms of the JV will be reflected in the company’s constitution and / or a shareholders’ agreement. The equity JV structure allows the liabilities of the JV to remain separate from those of the founders and may facilitate a relatively smooth exit through a share sale. Incorporating an additional Irish company however comes with tax, governance and compliance obligations which the parties and the JV company must adhere to.

A joint venture may alternatively be governed by a contract or series of contracts between the parties. Implementing a JV through contract has the advantage of securing a direct legal interest in the JV assets for the founders, which may be desirable for tax or regulatory reasons. Parties may also choose to pursue a JV as a partnership. Although this structure would remove certain compliance requirements, choosing to operate a JV as a partnership may come with certain disadvantages. The parties might risk joint liabilitiy for each other’s wrongful acts. However, the Limited Partnerships Act 1907 provides for partnerships of limited liability. The Partnership Act 1890 provides a set of default rules for partnerships, which might not be suitable so they should be carefully considered or changed through a partnership agreement.

Legal and regulatory requirements for joint ventures

A JV’s legal form may come with associated legal obligations. The establishment of a limited partnership will necessitate filing Forms LP1 and LP3 in the CRO. A limited liability company will be subject to regular reporting and governance requirements. Certain issues must be considered regardless of the legal form chosen. A JV may constitute a merger for the purposes of the Competition Act 2002 where it “perform[s] on a lasting basis, all the functions of an autonomous economic entity”. In certain circumstances, it may be necessary to notify a JV to the Irish Competition and Consumer Protection Commission (CCPC) or the European Commission before putting it into effect.

Operating a joint venture

The practical operation of a JV will be governed by its foundational documents, be they a company constitution and shareholders’ agreement, a partnership agreement or a simple contract. At the outset of negotiating these documents it is advisable to create detailed heads of terms which can be developed into a considered allocation of responsibilities and risks, plus a clear decision-making system with an escalating dispute resolution process.

In a multi-party JV, or a two-party JV with majority and minority contributors, majority rule will usually be agreed with some form of minority protection. In a 50/50 JV however, the parties must give considerable thought to the potential for deadlock. There are lots of options to break a deadlock which can be provided for in a JV’s foundational documents. It is generally wise to establish an escalating system. Initially, a JV may provide that disputes are referred to senior management of each of the parties for amicable resolution. Unresolved disputes may then proceed to mediation or arbitration and ultimately a mechanism can be in place to dissolve the JV.

Ending a joint venture

Parties that succeed in a JV often commit thought to exit strategies at the outset of negotiations and reflect this in a business plan. A joint venture may be envisaged as a one-off project or as a continuing concern but in either case parties may agree at the outset to provide for a mechanism for sale to a third party or an inter-party buy-out. It may also be prudent to include procedures for dissolving the joint venture where disputes simply cannot be resolved.

If you would like to learn more about creating a Joint Venture please contact a member of our corporate or corporate governance team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.