How to get it right when you enter into a JV

A joint venture (JV) is a commercial arrangement between two or more parties for the purpose of executing a particular business or project and can take many forms. The reasons people look to establish a JV can also be varied, from seeking to share risk, utilise particular areas of expertise, raise finances or to enter new markets.

While they can be extremely beneficial, there are some key considerations that must not be overlooked when weighing up whether to enter into a JV arrangement.

Preliminary considerations

As JV discussions often start informally, it is always important to take a step back before advancing to check that each party clearly understands the objectives of all the other parties, as well as the objective of the JV itself. This may sound obvious, but it is crucial that careful consideration is given to ensure that the parties are aligned on outcomes and expectations.

The viability of a JV is usually under constant review and captured in the evolving drafts of the business plan during the negotiation phase. It is important to link the viability back to the objectives of the parties and the consequences certain events or actions might have on the JV. For example, what would happen if one party fails to provide a service to the JV? Would it be possible to bring in another party to perform the service, or does the JV instantly become unviable? This dynamic is important in ensuring a balance to the JV and keeping the parties true to the spirit of the partnership.

Parties are likely to be sharing sensitive information and should ensure they have adequately protected themselves in the event the JV negotiations break down. The parties may also be inclined to put in place an exclusivity agreement while negotiations are ongoing. Furthermore, as with any transaction, each party should carry out suitable due diligence, such as financial, in respect of the project and of the other parties involved.

Key provisions

When the parties look to flesh out the terms of the JV, areas that require specific consideration (often those that take the most negotiation) include:

• Details around funding: What funding is required (initial day one funding and ongoing funding requirements)? Are there caps on funding? Who is to provide the funding and in what proportions? Will there be external debt?
• Profits and losses split: How will profits and losses be shared between the parties?
• Decision making, deadlocks & disputes: How are decisions made (day-to-day decisions vs strategic decisions, for example) around funding? Who ultimately controls this process and what happens if the parties cannot agree? How will a deadlock be resolved (does the status quo prevail, is an expert determination appropriate, could it lead to a buy-out or termination)?
• Defaults details: What constitutes a default? What are the consequences of an event of default?
• Transfer remits: Can the parties transfer their interests? What happens on the change of control of one of the parties? How are interests valued? Are any particular transfer mechanisms appropriate (for example, pre-emption rights, “drag-along” and/or “tag-along” rights)?
• Terms of the agreement: Is it a fixed term or will it continue indefinitely? What is the planned exit from the JV? What issues or actions would lead to an early termination?

A successful JV relies on a large amount of trust between the parties. The parties cannot cater for every eventuality but should work through the above points to understand the factors at play that could, if not considered and addressed from the outset, lead to distrust and disputes.

Karl Bradford is principal director in the corporate real estate team at Foot Anstey