If you are looking to establish a joint venture with another party, one of the first steps to take is drafting a joint venture agreement that sets out the purpose, scope, structure, finances, and other details of the new undertaking.
This agreement will be critical to the future workings and, ultimately, the success of your joint venture, so you should take ample time to think it through and ensure that it contains all essential provisions.
To give you a better idea of what to include in your joint venture agreement, we have put together this joint venture checklist.
What Is a Joint Venture Checklist?
A joint venture is a business arrangement in which two or more parties join their resources for the purposes of a common business project or activity. While each party is responsible for all profits, losses, and costs associated with the common undertaking, the joint venture itself is usually a separate entity, independent from the parties and their other business interests, which are not affiliated in any way.
As the name suggests, a joint venture checklist is a list of the main clauses that should be included in a typical joint venture agreement. Of course, no two joint ventures are alike, so you will likely have to modify the agreement to meet your needs and business goals. An experienced business law attorney will be able to provide advice specific to your situation.
What Should Be Included in a Joint Venture Checklist?
Here are the main points to include in a standard joint venture agreement:
Objectives and Purpose of the Joint Venture
First and foremost, you and your business partners must have a clear vision of what you seek to achieve with the new venture and how you plan to accomplish it. That includes the venture’s overarching objective as well as more specific and measurable short- and mid-term goals: Where will the business be based? How is it going to operate on a day-to-day basis?
Be as specific and detailed as possible. While you cannot anticipate every eventuality, this facilitates transparency and open communication from the start and helps all partners get on the same page.
Structure of the Joint Venture
Joint ventures can have various legal structures. Each requires a different joint venture agreement and has different tax, liability, and regulatory consequences.
Equity Joint Venture
In an equity joint venture, the parties set up a joint venture company as a separate legal entity and agree to their respective ownership and equity contributions to the company. The main benefit of this legal structure is that each party’s liability is limited to its equity contribution.
Limited Liability Partnership
Unlike other business entities, a partnership is not a separate legal entity, so all parties have unlimited liability.
If you do not wish to bear that much legal risk, you can opt for an alternative type of partnership, such as a limited partnership or a limited liability partnership. Under these modified partnership arrangements, only the general partners bear unlimited liability. The liabilities of the limited partners are restricted to their respective shares of ownership.
Contractual Joint Venture
Contractual joint ventures are not independent legal entities. Instead, they are based on a contractual arrangement between the parties that details the business parameters. These types of ventures are suitable for one-off projects.
Contributions of the Parties
Your joint venture agreement must specify each party’s initial financial contribution and respective equity shares. Make sure to include non-monetary contributions as well, such as products, management, intellectual property, etc.
Capitalization and Financing
Next, you need to specify how you and your partners plan to continue financing the venture. You should also establish guarantees to ensure continued financing going forward.
In addition to each party’s financial contributions, the joint venture agreement must also specify how the parties will share the liabilities under the guarantee, bond, or indemnities.
Every joint venture agreement must address basic governance issues, including:
- Governing law and jurisdiction
- Governing body
- Ownership structure
- Voting rights
- Management team composition (secretary, board members, executive team members)
- Operations team composition
- Each partner’s operations and accounting responsibilities
Confidentiality and Non-Disclosure
Make sure to clearly set out any confidentiality requirements. Will the parties disclose confidential information during negotiations and later operations, such as sharing or granting access to proprietary technology or other intellectual property? Is there a need for a confidentiality or non-disclosure agreement?
Term and Termination
All joint venture agreements should set out their duration and conditions for termination. Oftentimes, joint ventures are not long-term businesses but rather short-term collaborations with a specific and time-bound goal. All parties should anticipate and prepare for the end of the contractual relationship.
Insurance and Risk Management
Insurance is an essential element to include in any joint venture agreement. All parties must purchase policies that provide coverage reflective of the nature of the business, such as property damage, workers’ compensation, risk insurance, and so forth. Ideally, the agreement should specify what type of insurance will be used and maintained throughout the life of the business venture. Be sure to specify the buyer and maintainer of the respective policies.
Joint ventures are usually limited to a specific project with defined goals and dissolve when the project is complete. That is why you and your partners need a well-thought-out exit strategy in advance. It should set out clear instructions for dissolving the business while avoiding unnecessary costs and losses, protracted discussions, conflicts, legal battles, and a negative impact on customers.
Common joint venture exit strategies include:
- Transfer or sale of the business
- Spinoff of operations
- Employee ownership
How Should a Joint Venture Checklist Be Developed?
You should develop your joint venture checklist together with your business partners, following the advice of an experienced business law attorney. You can use template agreements as a source of inspiration, but never copy-paste them outright. Always modify the provisions based on your unique business needs and goals.
Common Mistakes to Avoid When Developing a Joint Venture Agreement
Here are some common mistakes inexperienced partners make when drafting joint venture agreements:
- Ownership. If your joint venture is a separate legal entity, the agreement must provide for the transfer of all assets, rights, and property the business will require to that entity. Alternatively, you must grant the joint venture entity the right to use such assets in advance. Inexperienced joint venture partners sometimes miss this step.
- Details. Having a detailed joint venture agreement that covers a large number of eventualities is critical to the success of your business. Agreeing on the details at the outset will save you and your partners a lot of time, money, and stress down the line. Do not make the mistake of rushing the agreement and writing it in broad strokes.
- Capital Investment. Detailed provisions as to each partner’s contributions, including both their amount and form — cash, assets, and know-how — can help avoid future conflicts and ensure that the business has the resources it needs.
- Control. Do not go light on the details regarding the business’ management structure and governance procedures. Will partners have equal votes? Will anyone have a casting vote? What happens in the event of a disagreement? The more clarity there is from the outset, the fewer disagreements will arise down the line.
- Termination. Whether your joint venture is for a limited period only or comes to an end naturally, dissolving a business always raises questions regarding the division of capital, profits, assets, ownership, rights, and liabilities. Make sure to include appropriate provisions in the joint venture agreement to minimize the potential for future conflicts.
How Often Should a Joint Venture Be Reviewed and Updated?
Partnerships cannot and do not remain static. You should review and update your joint venture agreement each time the business needs restructuring to reflect changing market conditions, evolving company strategies, and other forces.
A 2021 analysis of 60 global companies and over 2,200 of their partnerships and joint ventures by the Harvard Business Review(1) found a robust correlation between partnership portfolio activity and company return on capital (ROC). Businesses that were more active in restructuring ventures were more likely to meet or exceed their industry’s three-year average ROC.
This finding confirms the researchers’ earlier work, which found that joint ventures with at least one big restructuring were twice as likely to meet their strategic and financial objectives than joint ventures that stayed more or less the same. Furthermore, successfully restructured ventures saw a 10% to 30% improvement in operating and financial performance on average.
The analysis also showed that new joint venture creation was highest in the automotive sector, likely in a bid to respond to emerging market forces like autonomous vehicles, vehicle electrification, and alternative fuels. Industrial businesses were also active and increasingly used joint ventures to develop sustainable materials and build Internet of Things (IoT) machines.
Can a Joint Venture Checklist Be Modified for Various Joint Venture Types or Industries?
Joint venture agreements can be modified for your business, industry, and preferred joint venture structure. A good business lawyer can analyze your needs and draft an agreement that meets both you and your partners’ needs.
If you are in need of an effective, experienced business law lawyer to help you draft your company’s joint venture agreement, contact Montague Law, and we’ll provide you with trustworthy and reliable legal guidance.
(1) Harvard Business Review, Research: Joint Ventures that Keep Evolving Perform Better https://hbr.org/2021/04/research-joint-ventures-that-keep-evolving-perform-better