From funding to termination, here's what you need to consider when creating a joint venture agreement.

Joint ventures are strategic, and each party generally brings something different to the table, as well as having their own commercial objectives to exploit as part of the relationship.

The terms of a joint venture agreement

A joint venture can be set up using a variety of legal structures, and numerous matters need to be considered.

The purpose of the joint venture agreement is to set out the rights and obligations of each party. The terms vary considerably, given the nature of joint ventures, but most agreements will cover provisions such as:

• funding
• minority protection
• restrictions
• board arrangements
• restrictions attaching to share transfers
• deadlock and termination provisions

Joint ventures: key areas

Funding

One of the key initial considerations will of course be how the joint venture is going to be funded. It may be that one or more of the parties to the joint venture will fund it, or a third party will be brought in.

Consideration must also be given to how ongoing working capital requirements will be met. It’s not unusual for these provisions to be included in the joint venture agreement, to ensure clarity.

Restrictions

There are often two types of restrictions contained within a joint venture agreement:

• Restrictions relating to non-competing and non-solicitation. These often apply after the joint venture has terminated, as well as during the existence of it.
• Restrictions relating to the day-to-day conduct of the joint venture. Sometimes these are referred to as minority protection. These vary from business to business, but will cover issues such as amendments to corporate documentation, issuing new shares and selling business assets. They will usually require the consent of the majority of the shareholders, if not all.

Deadlock

These will generally relate to 50:50 joint ventures, though some companies may choose to apply the terms to other situations. The first point is to determine the situations and issues to which the deadlock provisions will apply. Thought needs to be given to how the deadlock process will work, and if the parties cannot resolve the issues themselves, whether a third party would be appointed to assist.

There are various options available to the parties should the deadlock process not resolve the situation. These include terminating the joint venture or forcing a sale of the shares (either to one of the parties or a third party).  

Termination

There are a variety of termination provisions that can be considered. For example, it may be that the joint venture is only for a fixed period, or it may be indefinite but the agreement allows either party to terminate by giving a specified amount of notice.

It could be that the agreement automatically terminates when certain events happen, or allows a non-defaulting party to terminate the arrangement. Whatever the case, it should be made clear with the agreement what happens to assets and liabilities on termination.

There's no one-size-fits-all agreement

These provisions are just a snapshot of what may be included in a joint venture agreement. Its important to remember that there isn’t a ‘typical’ joint venture agreement, as each joint venture is different from the next, and the agreement should reflect the intentions and goals of the parties.

It's also worth noting that more often than not, bespoke articles of association are also adopted at the point of entering into the joint venture. In particular, the articles are likely to cover share rights attaching to each class of shares (if there is more than one), transfer rights and restrictions, drag along and tag along rights, and certain administrative provisions.

About the author

Rita Rajput Clare is a senior associate with Wright Hassall. She specialises in joint ventures, private equity and mergers and acquisitions.