What is a joint venture agreement?
Joint venture agreements are used when two or more parties want to carry out a business activity together. Each of the parties has something that is needed by the others and wants to combine their resources for the particular business activity.
Joint venture agreements usually run for a fixed period over which the parties can do business together in the way described in the agreement. The parties may carry out several joint ventures at once or they may enter into a joint venture for several different purposes at the same time. For example, the parties may agree to build a hotel together, but one party may also want to build a course at the same time and the other will build the hotel.
A joint venture agreement is a contract under which the parties agree to do something together. Often this will be a separate limited liability vehicle, such as a company, government or similar entity which will be funded by the parties. However, in other instances, there may not be a separate vehicle , and the parties will simply act together while continuing their businesses separately. Parties may want to enter into a formal contract for a joint venture even though they are already working together informally because they are uncertain as to the basis of their arrangement with each other.
Each party will be able to profit from the joint venture and, ideally, avoid any liability beyond its contribution to the joint venture. It will be obliged to work with the others and cooperate with them to make the venture successful. It will have certain rights of approval over some aspects, such as the broad strategy for the business or financial matters.
As a general rule, if the parties are going to have a separate entity, the joint venture agreement will detail how that entity will be managed, which parties will have what rights of appointment, how profits will be allocated and how decisions will be taken. The objections of shareholders will be set out and provisions for dispute resolution included.
Essential elements of a joint venture agreement
The essential elements of a joint venture agreement had been further pronounced by the Court of Appeal in Re Cheyne Capital Plc [2008] EWCA Civ 535:
‘where two or more persons, pooling resources with a view to achieving a common commercial goal, enter into a mutually binding agreement setting out their respective objectives and detailing how they intend to accomplish these, there is a joint venture for the purposes of the law’.
There are a number of elements which are fundamental to every joint venture agreement including:
The objective of the parties
The basic purpose of every joint venture should be set out at the commencement of the joint venture agreement. This will not only be helpful for the parties when considering the scope of the agreement but will also be useful to third parties seeking to understand the commercial purpose of the joint venture.
Achievements
The achievements will be based on the overall objective of the joint venture and should be as detailed as possible. Clearly identifying the objectives and the achievement of these objectives within the joint venture agreement, will help the parties manage the progress of the agreement. This will then in turn increase the probability that the overall objective is achieved.
Contributions
All parties to a joint venture make some form of contribution to it. To ensure the joint venture is not undermined by certain parties seeking to renegotiate their contributions to the joint venture, each party should clearly identify what contributions they will make to the joint venture. Contributors to a joint venture agreement can include time, property, ideas and loaning money.
Profits
If a joint venture agreement involves the sharing of profits, this must be clearly set out in writing. All parties must act in good faith and make decisions which benefit the joint venture as a whole. The parties must be able to understand how the profits are to be allocated to ensure they are not misled and the joint venture does not fall apart.
Types of joint venture agreements
There is a multitude of different types of joint venture agreements. The most common forms of joint venture agreements are the following:
1. Equity joint ventures
Equity joint ventures (‘EJV’) are corporate entities formed by shareholders in which each shareholder contributes capital. As the new entity is a separate legal entity in which the shareholders hold shares, EJVs are considered to be for-profit enterprises and are governed by company, business and commercial law.
2. Cost sharing or contractual joint venture
Contractual joint ventures are also known as cost sharing arrangements. These types of joint ventures can take many forms, from less informal and unwritten arrangements to more sophisticated contractual agreements that are memorialized in writing.
Examples of how contractual joint ventures can operate include the following:
Suppliers and purchasers who enter into contracts for exchange pricing terms on the future sale of goods can create a contractual joint venture.
Companies that receive purchases incentives from suppliers enter into arrangements where the incentive amount is shared with business partners.
Businesses with spare capacity or employees who do not have enough work can enter into arrangements to share their resources, without the need to borrow money for special purposes.
Business partners looking to engage in the supply of goods or distribution channels can enter into arrangements with suppliers and distributors.
Businesses in similar fields can enter into agreements for operating together, such as sharing marketing efforts or expertise in order to expand their customer base and reduce costs.
Companies that require financing can consider entering into arrangements with investors who can be shareholders in the company.
3. Limited purpose joint venture
Sometimes a JV launched for a limited purpose, for example, to complete a specific project, is preferable. A limited purpose joint venture (‘LPJV’) may be for a specific, even one-off, project, or for a fixed term. A LPJV should also eventually terminate. It limits liability and protects the shareholders from losing their assets are held in common as if they’re owned by all shareholders.
Advantages of using joint venture agreement PDFs
One of the most substantial benefits of using joint venture agreement PDF templates is the ease of use they present. When you are forming a joint venture, you do not need to worry about finding and hiring a competent contract lawyer, paying him or her a large fee, and waiting for an extended period before receiving the contract. Instead, with our well-formatted templates, you can easily create a contract by downloading our PDFs, filling out some straightforward forms, and obtaining the signatures of involved parties.
Standardization is another key reason to use joint venture agreement PDF templates. These documents are inherently straightforward, and trying to make your own without any outside templates can be a war of attrition where you find yourself constantly attempting to make your own agreements unique from what you have seen before. While it is true that your particular joint venture will likely have specific details that need to be included in the agreement, the general structure is the same every time. This is not a utilitarian push, as every joint venture should have a specific, individual agreement. The point here is that, because the structure is so uniform across different organizations, you save time by avoiding making the agreement process difficult and tiresome on yourself.
When you are forming a joint venture, it is vital that you get the agreement signed as soon as possible. First and foremost, you should immediately have the joint venture agreement signed because what you are doing is legal. You cannot have an oral agreement be treated as though it were legally binding in an official capacity, and plus, how would the involved parties prove that a verbal agreement existed at all? The answer is that they could not, and thus it is critical to get that agreement on paper, in signed form and ready to go.
In addition to the legal import, getting the agreement signed as quickly as possible is often important from a business perspective as well. You do not want to leave your deal open and subject to change from any of the involved parties for longer than necessary. One party might tire of the deal and move on, another might become upset about who is receiving what benefits from your joint venture, or another might simply find a more appealing opportunity and leave. Your ability to make a joint venture successful is often based on how quickly you can get it started. Therefore, it is in your best interest to have an easy and fast way to sign off on these agreements, and that is just what PDF template agreements can provide for you.
How to prepare a joint venture agreement
There is no doubt that there are fundamental steps and specific legal consultation necessary when drafting a Joint Venture Agreement. When drafting a Joint Venture Agreement, it is important to consider certain matters so as to ensure compliance with the requirements of the Act and the intended operation of the proposed venture.
Companies that wish to enter into a Joint Venture Agreement should contact a lawyer to discuss the matter and ensure that all steps are carefully considered and complied with.
The outline of the steps in the draft process and the matters required to be addressed are:
The signing of a confidentiality agreement is common practice when discussing the proposal and is in any event pretentious, unless the proposed business has been market tested and confidentiality has already been given by the market, for example by public announcement. The requirement that strict confidentiality be maintained may however limit the discussion that will take place and could therefore be counter-productive. The aim of the confidentiality agreement is to ensure that confidential information is not exposed to the public or used for any purpose other than for consideration of the proposed venture. While the requirement for confidentiality is understandable, the purpose of the confidentiality agreement being for the consideration of the venture only should be spelt out and care taken that the confidentiality agreement does not themselves impose unnecessary restrictions on the discussions.
Although the parties should have agreed the business issues to be addressed before engaging a lawyer, such matters would include the issue of business planning and funding for the Joint Venture and would include establishing agreement on the form of Joint Venture, forming the Joint Venture legal vehicles, if required, preparing an exit strategy and develop a budget for the ongoing operation of the Joint Venture.
The next stage in the process is to identify the structure for the Joint Venture, although a weekly profitability test may need to be addressed before this can be finally addressed. It will be necessary to establish who the partners in the Joint Venture are , how the financial investment and credit worthiness of the partners will be established, and consideration should be given to the potential forms of vehicle:
The Joint Venture Agreement will need to be structured according to the plan identified above. Key clauses should include:
The best form of Joint Venture will depend on the individual circumstances and an assessment should be carried out of each model and how the joint venture parties will interact within that model.
The most practical way to decide upon the structure is to prepare a draft Joint Venture Agreement which is able to be used for each of the proposed structures should be prepared and the advantages and disadvantages of each then discussed. This will enable the parties to have a good understanding of the Joint Venture and its effect on the parties. Thereafter a more detailed agreement should be prepared.
It is critical to ensure that sufficient agreement and understanding has been reached on the proposed venture corporation agreement as this will form the foundation of the legal agreements, and should the parties subsequently find that they cannot agree on the essential elements of the venture and the Joint Venture Agreement, the entire process would have been in vain.
While a bank may require a Joint Venture Agreement to be in place before funding is advanced, it is much more practical to have an acceptable agreement in draft so that it can be completed to reflect the final negotiations.
While negotiating agreements, without having a financial model in place, is undesirable, as the model would identify the key issues to be addressed, there are likely to be a number of partners and a single model will probably not suit the entire group, and the discussion may well assist in identifying the issues that need to be addressed.
This might not be popular with those who desire to put a lot of effort into the negotiations to achieve an agreement without having to grapple with the financial model, but reality dictates that to some extent a compromise will have to be reached.
Common mistakes to avoid in joint venture agreements
Negotiating and drafting joint venture agreements can be a complex process, involving various legal, financial and business considerations. Here are some frequent errors that businesses make when drafting and negotiating LVOAs:
Not Defining the Scope of the Joint Venture – One of the most critical components of a joint venture agreement is a clear and detailed definition of its purpose. A vague description can lead to disagreements later on.
Failing to Address Liability Issues – Joint ventures often result in shared liability. It’s important to specify each party’s liabilities and how they will be managed.
Lack of Flexibility in the Agreement – Future uncertainty is an inherent aspect of any business relationship. Joint venture agreements should allow for flexibility in adapting to changing circumstances, so that the terms can be modified if necessary.
Unclear Profit-Sharing and Loss-Sharing Provisions – Joint ventures are established for mutual profit. Therefore, it is crucial to clearly define how profits and losses will be distributed among the partners.
Not including an Exit Strategy – Joint ventures are usually for a specific duration or until certain conditions are met. Without a clear exit strategy, resolving disputes or terminating the agreement can become complicated and costly.
Not Consulting Professionals – Legal documents like joint venture agreements require careful drafting and negotiation. Always seek the professional guidance of qualified lawyers and consultants.
Legal aspects of joint venture agreements
Incorporating or merging with a joint venture (JV) partner requires more than just a collective business vision. The legal considerations for a joint venture agreement can help avoid mismanaged legal issues, including group negligence, breach of fiduciary duty, misappropriation of business opportunity, and fraud.
Antitrust Compliance
A joint venture between two or more business entities may raise antitrust issues. Relevant antitrust laws to joint ventures include state law such as California’s Unfair Competition Law or the federal Clayton Antitrust Act (15 U.S.C. § 12 et seq.). These laws focus on price-fixing agreements or conspiracies, allocation of markets among competitors, and other horizontal and vertical restraints that may threaten competition in a market. Be wary that antitrust laws vary between states and federally. It is advisable to obtain legal advice on whether an antitrust violation may occur.
Shareholder Rights
If a JV entity has existing shareholders, there are shareholders rights that may be implemented and should be considered prior to forming a joint venture. A rights plan (poison pill) is a stockholder rights plan that makes a company’s common stock undesirable to acquirers who do not comply with the plan. Many public companies adopt a rights plan in order to protect shareholders and blindside an acquirer who is seeking to take over a company without negotiating it through an agreement. If already implemented before forming a joint venture, a shareholder rights plan could adversely affect the JV entity by making its capital structure difficult to change.
Formation Instruments
There are two formation instruments that could affect the JV entity, which could be the JV entity itself or a new category of investors:
Regulatory Issues
The JV may require certain regulatory body permits or licenses that your group may not have the capacity to obtain. Necessary regulatory approvals of the JV will depend on the industry the JV will operate in. For example, if the JV is in the banking or insurance industry, federal and state regulators will review the transaction agreement or the formation instruments to grant approval (or disapproval) before closing the deal.
Written Agreements
The JV entity’s organization and structure should be addressed in writing prior to discussions about the JV entity’s operations. Written agreements may include:
Contractual Considerations
When negotiating contracts with third parties, the JV group should analyze key contract terms such as: while keeping in mind that even if the parties have zero intention of committing fraud, omission or error clauses are important to protect the JV entity and its partners.
Sources of free joint venture agreement PDF templates
Business owners seeking joint venture agreements are in luck: there are a plethora of free downloadable templates available online. Certain websites cater to specific industries, like the Investor’s Agency joint venture template and the Financier interested in investing in protected language agreement.
But generic templates can be useful for documenting a joint venture. The Business Tools site has generic joint venture agreement templates in both Word format and PDF format . It publishes a simple generic agreement, generic agreement with equity, and an agreement with an intermediary. All templates are available for download at the bottom of each template page.
LawDepot also has free downloadable agreement templates. It offers a basic generic agreement, an investment protection language agreement, and a generic interim agreement. Business owners can edit the templates directly online, and then print the downloadable template. Only templates created with LawDepot’s Drag & Drop Agreement Creator qualify for this offer.