Joint Ventures

CORPORATE/COMMERICAL

Joint Ventures

Ciara Seymour summarises the key considerations in establishing a joint venture or other strategic partnership, including possible vehicles and legal structures.

Joint Ventures Joint ventures have become an important strategic option for many businesses as they give access to more skills, greater critical mass and more financial resources than the parties might enjoy on their own. Equally important, particularly in the cross-border context, are changing business conditions and markets (largely as a result of changes in political conditions, deregulation and technological developments) which provide opportunities for companies to enter into joint ventures as part of their strategic planning in relation to particular industries or markets.

The term 'joint venture' is an umbrella term which describes the commercial arrangement between two or more economically independent entities.

In practice, the legal form of a joint venture is likely to be determined by a number of factors including the nature and size of enterprise, the anticipated length of the venture, the identity and location of the venturers and the commercial and financial objectives of the participants.

Joint Venture Vehicles

Four basic legal structures are commonly used for a joint venture:

• a limited liability company;
• a limited liability partnership;
• a partnership (or limited partnership); or
• a purely contractual co-operation agreement.

Broadly, the four forms reflect varying degrees of integration of the interests of the parties. The corporate structure typically involves the vesting of all trading activities, assets and liabilities relating to the joint venture operation in a single vehicle. Alternatively, where the association is purely contractual, there may well be no pooling of assets used by the participants in the joint venture and no general sharing of revenues and costs.

For most business joint ventures, the limited liability company is likely to prove the most appropriate vehicle. However, for smaller operations, for projects of a specific duration (in particular in the construction and exploration field) and for technical and professional enterprises, non-corporate arrangements, such as the establishment of a partnership or the entering into of a co-operation agreement, are often used. For ventures in which a number of individuals actively participate, the limited liability partnership may be an appropriate vehicle.

Corporate Vehicles

The advantages of using a corporate vehicle are:

• a company is a universally recognised medium and gives a strong identity for dealings with third parties;
• it allows for a management and employee structure to be put in place;
• the participants have the benefit of a limited liability and the flexibility to raise finance; and
• the company will survive as the same entity despite a change in its share ownership.

Documentation

Joint venture transactions call for clear well drafted documentation. Basic legal documents for establishing a joint venture are likely to be:

• a joint venture/shareholders' agreement; and
• the memorandum and articles of association of the joint venture company.

The purpose of a shareholders' agreement will be to establish the basic rights and obligations of the parties and to ensure the company and its business are established and run in accordance with the participants' objectives. A further purpose is to prescribe, as far as possible, for what will happen if difficulties occur.

In the case of non-corporate joint venture structures, the basic objectives of any formal arrangement between the participants will be substantially similar to that of a shareholders' agreement with essential differences reflecting where appropriate the absence of a separate legal vehicle and the fact that the joint venture may relate to a project of finite duration.

Conclusion

The rationale and perceived advantages of particular joint ventures vary from case to case. However, whatever the advantages for the individual participant, a joint venture inevitably involves a sacrifice of the control and flexibility which it might otherwise have enjoyed had it undertaken a business or project independently, and exposure to the tensions which are an inherent part of a joint venture relationship.

Against this background, the challenge involved in planning and documenting a joint venture is to help create a structure which not only meets the technical, operational, financial, accounting, regulatory, legal and tax requirements of the venture but also encapsulates the underlying commercial objectives of the individual participants.

Ciara is an Associate in the firm's Corporate Department specialising in projects and project financing.

Ciara can be contacted at ciara.seymour@lestrangeandbrett.com

Quote: Important strategic option