How to Set Up a Joint Venture

If two companies or individuals believe that there are advantages to working together on a targeted business project, they may decide to form a joint venture. For example, if you have a restaurant and your friend has a party supply business that provides servers, chairs, tables, and the like, you may want to form a joint venture for the purpose of full-service event catering.

Joint ventures come in the form of companies, partnerships and contractual agreements. The best structure depends on the nature of the joint venture business and whether the joint venture is being formed for a single project or as a continuing operation.

For example, if you plan to cater only a couple of weddings together during a one month period, then a simple contract is most likely sufficient. But if you plan on marketing your event catering service as a separate business and take on as many clients as possible for as long as the jointly-run business is successful, then you will probably want to form a new company to represent the joint venture.

One of the trickiest aspects of a joint venture is the process of joint decision making in managing the business. If you want your event catering business to focus on small weddings, birthday parties and anniversary celebrations, but your business partner wants to do large outdoor concerts and neighborhood parties, then what seemed like a good idea at the beginning could quickly turn into a nightmare.

For this reason, the first thing you need to do before establishing a joint venture is to make sure that you and your partner have a shared vision for the nature and scope of the business. Then when it comes time to putting together the documents and agreements that lay out the terms of your joint venture, you need to make sure that they clearly state how future decisions will be made, what the parameters will be, and what happens if you simply can’t agree on a major business issue.

If a company is formed to carry out a joint venture, the terms of the business arrangement will be included in the Memorandum and Articles of Association, a Joint Venture Agreement (which is often the same as a Shareholders’ Agreement), and possibly a set of other agreements where the parties agree to perform services, lease assets, license intellectual property and/or loan money to the joint venture company.

Collectively, these agreements and in particular the Joint Venture Agreement must provide for the following:
  • The business objectives of the joint venture and how they can be changed or expanded from time to time.
  • Who the owners, e.g. shareholders, of the joint venture will be and what percentage ownership will they hold.
  • Who the managers, e.g. directors, of the joint venture will be, how they will be elected, and what their powers and responsibilities will be.
  • How deadlocks between the shareholders and/or directors will be resolved.
  • The initial source and method of financing the joint venture (e.g. direct contributions by the owners, loans by the owners, bank financing, etc.) and what happens if additional funds are needed.
  • The assets and services each party will contribute to the business of the joint venture, and whether they will be contributed directly or by service contract, lease and/or license.
  • Whether the joint venture will hire its own employees or the owners will contribute staff based on service contract arrangements.
  • What actions will be restricted unless all or a specific percentage of the joint venture partners agree (such issuing new shares in the joint venture, borrowing money, granting security over the joint venture assets, incurring expenditure in excess of specific amounts, and more).
  • What the term of the joint venture will be, and how it will be wound up once the term expires.
  • The transferability of shares; and what happens if one party wants to sell or transfer their interest in the joint venture.
  • What happens if one of the parties dies, becomes incapacitated, goes bankrupt or otherwise cannot perform the joint venture obligations.
  • Restriction on the parties from competing with the joint venture and obligations to refer business to the joint venture.
  • Confidentiality obligations.

You basically start with a clean slate in deciding on your joint venture business arrangement, as long as you comply with the Companies Acts and other applicable laws in forming and running a company. However, you should carefully think through each of the issues listed above and, whatever you and your partner(s) agree on, spell it out clearly in a joint venture agreement.

For example, you could agree that the only two directors will be yourself and your joint venture partner and if you can’t agree on any issue for longer than 30 days, for example, you could even agree that the joint venture will be dissolved and wound up. Or you could agree to appoint an independent third party to resolve any disputes in managing the business. You could even refer the matters to the shareholders if they are different to the directors.

In addition, your joint venture company can be just a shell to which the two parties lend employees through service arrangements, lease property and machinery, license intellectual property and loan money. Or it can be a fully operational company that has its own employees, assets and financing arrangements, as well as an independent management team (with certain key decisions reserved for the joint venture shareholders).

In other words, when it comes to forming a joint venture it’s up to you and your business associate. Just think and plan carefully in choosing your partner and laying out the terms or your arrangement. What you do in advance may save you a lot of time and money, not to mention headaches, in the future.

For more information on joint ventures, you should also review our articles on shareholders’ agreements.

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