David Berry, Partner at law firm Charles Russell Speechlys, addresses some of the key factors to consider when embarking on a joint venture.
When considering a joint venture (JV) it is important first to be clear that it is the best route.
Ask yourself if a looser collaboration might be worth exploring instead of, or as a precursor to, a formal JV. It is important to make sure both parties will benefit from a JV.
Potential JV partners need to have consistent and compatible aims, with similar expectations as to duration and exit. There should also be some mutual dependency; each party should bring something the other lacks.
One danger to be aware of is how this mutual dependency might change over time.
One party may eventually decide they can do the whole thing themselves leaving the other party redundant, having given away their experience and knowledge.
A non-binding memorandum of understanding with heads of terms can help sketch out what the parties expect the key terms to be prior to committing.
A contractually binding non-disclosure or exclusivity arrangement may also be wise to give both parties a period to explore the JV possibilities safe in the knowledge neither will talk to competitors in the meantime.
It is important to conduct a valuation of each party’s contribution going into a JV. If one party brings (IP) intellectual property to the JV, for example, then that needs to be valued and recognised.
While a JV may give rise to implied duties of good faith, you should nevertheless consider including express non-compete restrictions to head off any unfair competition, and to protect the goodwill and enhance the value of the JV business.
Construct a framework
Due diligence on the other party is often wise – if you are dealing with a subsidiary of a larger entity, it may make sense to seek financial and operational performance guarantees from the parent company.
It is right to be positive and aim for success but the JV should be drawn up with clear guidelines on what happens in the event of a dispute or default by one party.
There should be a framework for managing the relationship and that should include internal escalation of disputes up to Director or CEO level and, if necessary, beyond to third-party experts or arbitration bodies.
In addition, that framework should be structured to help minimise the risk of disputes arising in the first place.
This can be achieved by ensuring that the agreement covers the ongoing relationship management providing for transparency on JV business and fiscal information, the frequency of meetings and identification of the relationship managers day-to-day as well as at Board level.
Another issue to consider is the location of the JV business and the law under which the contract is written – a common bone of contention when drawing up international JVs.
English law is likely to be preferable for UK-based entities but where there are concerns about convenience and perceived bias then some parties opt to draw up the agreement in an independent jurisdiction.
To help decide if a joint venture is the right route for your business, download our Dating a Stranger ebook here.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.