Legal templates

Joint Venture Agreements

A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. 

The term “joint venture” is commonly used but its meaning is not precise. The term “joint venture” generally refers to undertakings that may or may not use incorporated structures, and, rely on a contract to govern the relationship of the parties.

When two or more parties join forces for the purpose of one specific business venture it is called a joint venture. The parties can be individuals or companies. Joint ventures are different from other business structures as they are designed to be transient as distinct from an ongoing arrangement such as a partnership. A good joint venture agreement will govern and protect the rights of each party and their capital. Joint venture agreements often seek to exclude the operation of laws which relate specifically to partnerships. This is because partnerships can be deemed to exist. Including provisions in the agreement which expressly negative this intention can be crucial in avoiding the imputation of a partnership arrangement where none was intended.

The term “joint venture” refers to the purpose of the relationship and not to a type of legal entity. A joint venture may be a corporation (incorporated joint venture), a partnership, trust or other legal structure.

Joint ventures are formed by the parties entering into an agreement that specifies their mutual responsibilities and goals in a project. A written contract is crucial. All joint ventures also involve certain rights and duties. Some joint ventures are begun by creating a new company. Such an enterprise is called an incorporated joint venture.

A Joint Venture Agreement sets out the contractual arrangements between the parties. As such, it documents the roles, responsibilities and obligations of each party and because the control of operations is likely to be an important contributing factor to the success of the joint venture, the management structures and decision

Unincorporated Joint Ventures

An unincorporated joint venture will usually have the following features:

1. The parties co-operate in order to pursue a particular business enterprise for a limited period rather than a series of such enterprises for an indefinite period;
2. Each party owns an interest in the assets of the business activity;
3. Each party will usually contribute funds for the purposes of the joint venture, and will be entitled to deal with a share of the product of the joint venture, in proportion to its joint venture interest;
4. No party is an agent or partner of the other participants;
5. The liability of the parties to third parties is several rather than joint;
6. The management of the business activity is conducted by one of the joint venture parties, a jointly owned company or, a committee;
7. The parties agree that the relationship between them is that of joint venturers and not a partnership.

Advantages of unincorporated Joint Ventures

1. The ability of each party to finance its participation in the joint venture in the manner most convenient to it. This is particularly useful where the respective participants have different levels of assets and financial sophistication;
2. The possibility of offsetting losses against the assessable income of each party;
3. The flexibility for each party to treat its interest in the joint venture assets in accordance with its preferred accounting procedure;
4. The absence of the need to agree on a common dividend policy as in the case of an incorporated joint venture; and
5. The ability of each party to separately take and dispose of the product produced by the joint venture.

Incorporated Joint Ventures

In some situations it is desirable to create a company for the specific purpose of conducting the joint venture on behalf of the joint venture partners. An incorporated joint venture will usually be constituted by the creating of a new company in which the joint venturers are shareholders and have an agreement governing the relationship between them.

Advantages of Incorporated Joint Ventures:

A corporate vehicle for an incorporated joint venture offers the following advantages to the participants:

1. The parties will usually understand and be familiar with the operation of a company;
2. A company is easier to administer because accounting will be simpler and security for borrowing can be taken easily by way of charges;
3. A company provides the best opportunity for limiting the liability of the joint venture. Even if the parties have to provide guarantees in addition to their capital contribution, those guarantees can be limited to specific amounts;
4. A transfer of a participant’s interest will involve a transfer of shares;
5. A corporate vehicle has an easily recognised management structure based on the board of directors;
6. Companies have the ability to pay franked dividends to shareholders; and other tax advantages such as the ability for tax losses incurred by companies to be carried forward.

Your client should have its Intellectual Property protected where possible or have other protection strategies in place such as confidentiality agreements and non disclosure agreements. This should be done before detailed discussions with potential partners and disclosure of trade secrets and know-how. Maintain confidentiality arrangements with all parties.

Always be aware of who your client is. This is particularly important when asked to create an incorporated joint venture. If you are asked to act for the newly incorporated joint venture company remember to enter into a new fee agreement and costs disclosure and check for any conflict of interest.