A joint venture agreement (JVA) is an agreement between two or more parties setting out the terms in connection with the management of, and their relationship in relation to, a certain project (the JV).
Such a JV is often structured by way of, a newly formed company which has been or is to be incorporated to act as the entity carrying out/operating the project on a day-to-day basis (JVC), with the parties taking an interest (usual by way of equity, i.e. shares) in that JVC.
A joint venture agreement can be a very detailed or relatively simple document, depending on the intent of the parties, however we have identified below some key considerations to be aware of from the outset ahead of documenting a JV:
Identity/aims of the parties
At the inception of any JV, it is important to consider who the parties are and their commercial aims, which may not always be similar or aligned. A financial investor (i.e. one that will be 'silent' in terms of operation of the business) will most likely have differing commercial intentions to those of a management investor, who takes a day-to-day role in the management/operation of the JVC .These intentions can heavily influence the JVA provisions/mechanisms required by each of the parties.
Contributions of the parties
It is also important to be aware of what each party is contributing to the JVC - e.g. intellectual property, products, management, financing etc. This will not only influence the bargaining position of each party (and their potential shareholding - i.e. will there be a majority shareholder in the JVC ?) but will also dictate what rights will be important to each party when drafting the JVA. You must also be clear about what value is being attributed to non-cash contributions.
Management of the JVC
Usually a JVC will have a board of directors ("Board") which includes nominees represented by the shareholders. It may be that the Board devolves certain powers to executives, such as the CEO, CFO and/or the COO. It is also usual for certain decisions, including those that would have a material effect on the commercial/financial position of the JVC , to be reserved for consent by way of Board or shareholder approval by unanimous or a high percentage threshold decision ("negative controls") to prevent the majority shareholder using its rights to pass shareholder resolutions which could be detrimental on a minority shareholder. These all need to be considered so that once the JVA is completed, the JVC can operate effectively but with the parties having clarity on the decision-making matrix of the JVC . Conflicts of interest and related party transactions
Potential conflicts of interest/related party transaction issues should also be considered. Transactions between related parties (in summary, a party who is closely connected to a shareholder/director/officer of the JVC ) and the JVC are common, particularly where a party to the JVC (or its affiliate) are in a position to provide certain goods/services to the JVC , however it must be considered whether, in order to maintain good corporate governance, some restriction on the conflicted party is triggered in such a scenario to ensure the 'arm's length' nature of such transactions and avoid the potential for any shareholder (as the conflicted party) benefitting disproportionately from the JVC 's commercial arrangements.
A JV will produce intellectual property that is of potentially significant value and it may be that each party also contributes (by way of licence or otherwise) certain aspects of its own intellectual property to the JVC to assist its operations. It is therefore important that the JVA is prescriptive in relation to the ownership of intellectual property rights between the parties (and the JVC ). This is particularly relevant where the JVC may be developing the rights of one of the parties, making it important that there is a clear understanding of which entity owns any 'enhancements'.
Other key considerations
A JVA not only considers the initial management/operational structure of a JVC , but should seek to entrench provisions that govern the future relationship between the parties (as shareholders) and their interests in the JVC . Therefore it is important to consider the present and the future when considering a JVA, including (among others) the following key matters:
- use of funds and financing of the JVC ;
- access to information (including financial information);
- transfer/sale of shares in the JV and exit mechanisms (including transfer/sale restrictions, drag-along rights and tag-along rights);
- reserved matters (matters reserved for a specified percentage threshold or unanimous board/shareholder approval);
- dispute resolution mechanisms (dispute escalation, arbitration etc.);
- restrictive covenants on shareholders;
- deadlocked decision-making scenarios; and
- termination and liquidation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.