Are you seeking to develop and grow your business?
Perhaps there are certain roadblocks or barriers preventing your business from moving to the next stage. In this article we explore how a joint venture might work as a mechanism in assisting businesses to achieve their growth goals.
What is a Joint Venture?
It’s not a legal term of art but can be defined as:
An arrangement between two or more parties who pool their resources and/or existing know-how and collaborate in completing a project or carrying on a business activity with a view to achieving a particular objective.
A fundamental feature of a joint venture is collaboration between the participants. Each participant is bringing something to the party, whether that is know-how, skilled employees, assets (for example, intellectual property or infrastructure) or simply funding.
Why would a company consider a joint venture?
There are many features of joint ventures which make them attractive to businesses. These include the following:
Types of Joint Ventures
There are two main categories of joint ventures:
The key features of each can be summarised as follows:
A separate legal entity is created. Typically, in Ireland this entity will be a private company limited by shares. The joint venture participants hold shares in the joint venture entity in the agreed proportions and the arrangements and legal relations between the parties will be governed by a Shareholders’ Agreement and Constitution. Other legal documents such as an asset transfer agreement, subscription or loan agreements may also be required at the outset. This will depend on what initial funding and/or assets each participant shall contribute to the joint venture and how the joint venture is to operate its business once established.
No separate entity is created. The terms of the joint venture arrangement are simply documented in a commercial contract. Examples include the following:
There are several factors which should be considered when choosing which type of joint venture to proceed with.
An Incorporated Joint Venture would be more appropriate in the following circumstances.
An Unincorporated Joint Venture might be more appropriate in the following circumstances.
Key to Success?
Carefully constructed joint ventures can be very successful and there are a number of these which are well known globally. Examples include Sony Ericsson, or Google and NASA collaborating to develop Google Earth. Ideally joint ventures are born out of a relationship of trust and confidence, where both parties are equally committed and jointly motivated to act in the best interests of the joint venture.
There are of course certain inherent risks with entering a joint venture arrangement. There is always the risk that one party may seek to act opportunistically in its own self-interest. The degree of each partner’s reliance on the other’s skills can change significantly over time, sometimes eliminating the need for a shared management joint venture or indeed for any venture at all. The learning process can naturally weaken the desire of companies to retain their joint venture arrangements. The frustrations in sharing power may no longer be balanced by the view that despite such difficulties the venture is worthwhile.
These risks can however be managed and reduced. It is important that they are considered at the outset and carefully addressed in the relevant shareholders’ or joint venture agreement. The following are examples of protections that are typically incorporated into a joint agreement:
At LK Shields Solicitors LLP we regularly advise clients on the structuring and establishment of joint ventures. Joint ventures are becoming increasingly significant as a form of strategic business alliance and growth. We expect this trend to continue as more companies consider them as a means of leveraging their expertise and resources and to achieve business goals. If you are interested in learning more about how a joint venture might work for your business, please do not hesitate to contact Seanna Mulrean at firstname.lastname@example.org.
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