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Corporate joint ventures - overviewChoosing the joint venture vehicle
Parties wishing to work together may choose a corporate joint venture, ie the creation of a separate legal entity to operate the joint project. Other expressions, such as structural joint venture or full function joint venture, are also used with slightly different definitions. A joint venture of this type, which is intended to create or change a legal entity, may take the form of:
a limited company
a formal partnership
a different form of legal entity such as a European Economic Interest Grouping, or
some other entity permitted in other jurisdictions
Each has its own legal and financial implications. Some joint ventures are open-ended in duration while others may be special purpose vehicles limited to achieving a specific goal such as the development and sale of a property. Matters that will be considered in deciding on the form of legal entity will depend on the individual circumstances and structure of the parties.
Joint venture companies
Once the parties have decided to use a separate limited company to run the joint venture, they will need to consider such matters as
contribution of staffing and resources and what is expected to be extractable at the end
financial treatment of the joint venture in light of the respective tax and financial positions of the parties
what is to be provided to the joint venture
on what basis, such as licence or transfer
who is to own intellectual property created during the course of the joint venture
what is available to exploit or take out of the joint venture during its lifetime and on termination for whatever reason
It is common to use a newly created company as the joint venture vehicle, but a company with a longer history can be used provided the warranties are adjusted to take account of this.
The operation of corporate joint ventures is commonly governed by a shareholder agreement between the parties to set out the private arrangements for the various management and control issues that are likely to arise. It must work with the articles of association of the joint venture company that deal with formal administrative aspects. The shareholder agreement is a private contract between the parties, whereas the articles are a public document. In contrast to the company's articles of association, the shareholder agreement has greater flexibility to take account of any changes in the relationship or a change of ownership. There may also be ancillary documents dealing with other arm's-length arrangements between the parties and the joint venture company.
Termination of corporate joint ventures
Parties entering into a joint venture are often reluctant to spend significant time and money on the drafting of the shareholder agreement, particularly the detail of the break-up of the joint venture if the joint venturers fall out. There is a spirit of trust and partnership that is essential for the joint venture to get up and running but, like any relationship, it can break down. Time spent at the outset considering the implications can prove worthwhile and cost-effective. The parties will also need to consider what will happen in the end if the joint venture is intended to be time-limited or for a specific project only.
There are often complicated provisions in the shareholder agreement and/or the articles to cater for disputes between the shareholders. These may involve forced share transfers and valuation is a common difficulty. The detail and complexity of these arrangements will depend on the preference of the parties. Some parties will choose to keep the drafting simple and to deal with the situation when it arises. If the relationship is so damaged that it is beyond compromise some will consider the best answer (or threat) to be winding-up of the joint venture company. Some joint venture partners will want to cater for all or most contingencies in the drafting. A 50/50 equal relationship can be set up as a deadlock, with mechanisms for breaking any deadlocked disputes. If the relationship between the parties is unequal then the minority may look for protection of its position, while the majority may be looking to ensure that the minority cannot block any eventual sale or other change of control of the joint venture.
Joint venture articles of association
UK limited companies will require articles of association. Some joint venture partners will prefer to keep these in a fairly standard form, with the detailed arrangements entirely in the shareholders' agreement. Others will want to include key variations such as tailored transfer provisions. Class rights to protect the respective interests of the joint venture shareholders are often created and consequently apparent in the articles. The relationship between the shareholders' agreement and the articles of association has always been a difficult legal concept. Drafting treatment can vary but there is commonly a provision in the shareholders' agreement dealing with the relative priorities of these documents.
In the case of joint ventures before 1 October 2009 the Companies Act 1989 Table A articles will still apply. Since 1 October 2009 the Model Articles under the Companies Act 2006 have applied to new companies in place of Table A. The changes made by the Companies Act 2006 will need to be taken into account in drafting articles and shareholders agreements, such as the ability to entrench some provisions subject to a greater than 75% majority.
Joint ventures and competition law
Competition law is a significant issue in the case of many joint ventures. If the market share of the parties is sufficient, and other criteria are met, UK and/or EU merger control may apply. The risk of merger control applicability may have a functional effect on the legal structure of the relationship, timing or, indeed, whether the joint venture happens at all. If merger clearance is required this will need to be catered for at the outset with pre-conditions and due diligence. Joint ventures that do not fall within the purview of merger control will still be affected by the competition laws relating to anti-competitive agreements and arrangements. Competition law relevant to an actual or potential dominant position will also need to be taken into account. Once the joint venture is in operation the ongoing position will need monitoring to ensure that compliance is maintained.
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