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Joint Ventures Can Provide an Attractive Solution

Joint Ventures Can Provide an Attractive Solution

SML Perspectives
(December 05, 2013)

In today's economy, companies are increasingly looking at different business structures to bring new ideas, technology and products to the market. One constructive solution is a joint venture arrangement, in which businesses or individuals combine their resources, expertise and skills for a specific project, while diffusing the risk, liabilities and costs. Joint ventures are generally structured through the formation of a separate entity for the project or one or more contracts between the parties.

Joint venture arrangements have many benefits to potential partners. The parties may each gain (1) new supply and distribution opportunities, (2) entry to new domestic and/or international markets, (3) a reduction in expenses and costs for project, and (4) access to partner's assets (i.e., intellectual property, manufacturing capabilities, etc.). For smaller companies, there are additional benefits such as a source of capital, improved credibility in the market, and the ability to compete with larger businesses. Parties must weigh the benefits against the disadvantages of the arrangement. The drawbacks include lack of total control over the new enterprise and possible issues regarding each party's flexibility and participation and commitment of time and resources to the project.

In evaluating the arrangement, the potential partners should first negotiate and execute a confidentiality/nondisclosure agreement. This agreement will secure privacy and protection for the exchange of their confidential information during the due diligence phase and the negotiation of any joint venture agreement(s) between the parties.

During the due diligence phase, the parties will typically exchange, among other items, corporate information, financial records, asset and liability information, and sales/marketing information. Each party should closely consider the costs and benefits of entering into a business arrangement with the other party and what issues and concerns should be addressed in the business structure.

In forming a joint venture, most companies choose to form a separate entity for the arrangement rather than entering into one or more contracts. With a separate joint venture entity, the parties can limit their liability and also detach the operations and assets of the new line of business from each party's existing business. Companies should assess a variety of business structures (i.e. merger or acquisition of other company, independent contractor arrangement, etc.) in pursuing a new development opportunity, but joint venture arrangements can potentially offer many benefits and advantages.

Joint Venture Matters and Provisions to Consider: Although drafting and negotiating the terms of the arrangement are specific to the type of project and relationship between the parties, the following provisions provide some general information to consider -

  • Choice of Entity (separate JV entity) – usually a corporation or limited liability company; consider liability, tax and management perspectives for partners.
  • Purpose(s) for Venture – to avoid future misunderstandings, agree at the outset on the scope and description of the project; if necessary, provisions may be mutually modified later.
  • Term – consider if perpetual or set duration is desirable; with defined term, the parties keep each other on task with certain milestones and deadlines.
  • Termination; Remedies – termination is a highly negotiated provision in any agreement, but is invaluable at the outset for the parties to address what events will constitute breaches and if and how these instances can be cured; further, the parties can settle on appropriate remedies for defaults.
  • Management; Voting Rights – establish the management and approval processes (i.e. equal/unequal voting rights, day to day operations, etc.)
  • Capital Contributions/Profit Participation – establish each party's contribution to start-up resources (i.e., cash, fixed assets, intellectual property, services) and how the parties will share any profits of the venture.
  • Representations – include standard warranties regarding parties, assets and liabilities (i.e. authorizations, conflicts, compliance with laws, intellectual property, contracts, etc.).
  • Restrictive Covenants – negotiate noncompetition and nonsolicitation provisions for use during and after joint venture.
  • Restrictions on Transfer – restrict parties' ability to transfer or sell their interest.
  • Events of Sale – consider if certain events (i.e. bankruptcy, change of control, etc.) create a right for the joint venture and/or other party to purchase such partner's interest in the venture and the process for such purchase.
  • Deadlock/Dispute Resolution – how will the parties resolve a matter that results in an impasse?
  • Ownership of Developments – after termination/expiration of venture, who will own any products/developments arising from the project?
  • Related Agreements – service, licensing, manufacturing, distribution, etc.

This information should not be interpreted as legal advice with regard to specific situations.

W. Alexander Audilet
T (336) 378-5438
F (336) 378-5400
Associated Attorneys

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