Joint ventures: 5 things to consider when setting up a new business

One of the major strengths of joint ventures is that they allow two or more parties to collaborate; bringing their different experiences and ideas to the business. But - where there are two or more parties working together, disputes can unfortunately arise.

Having a clear understanding of the blueprint for any joint venture will significantly reduce the likelihood of a future dispute and the best time to discuss and agree such things is at the outset of any joint venture. With this in mind, we have listed 5 things we would suggest agreeing before any joint venture commences.

1.    Structure

Joint ventures can be conducted using companies or other corporate vehicles (such as LLPs), but it is also possible for each party to have a direct contractual relationship with each other. The best option will depend on the type of business activity to be carried out.

2.    Ownership

If the joint venture is to be conducted through a company, the parties should agree how many shares will be owned and what rights each share should have (voting, dividend or director appointment rights etc).

Generally founders will resist allowing shares to be freely transferrable, as they will not wish to find themselves in business with an unknown third party as a result of a transfer by another shareholder. Common compromises involve giving the remaining shareholders a right of first refusal before any transfer takes place or permitting individual shareholders to transfer shares to their spouse or children. 

If one joint venture party decides to leave the business, it is common to compel that party to sell their shares to the other shareholders. Depending on the situation, it may instead be more appropriate for the company to be wound up.

3.     Operation of the Business

The roles and responsibilities of each party should be agreed at the outset of the joint venture. For company based joint ventures, it is common for each party to nominate directors to sit on the board, so the operation of director meetings and things like quorum and notice requirements should be agreed. 

In addition, parties will often agree a list of key actions (changing a company’s articles, amending share rights or taking key business decisions) that can only be taken with their unanimous consent. This will serve to protect the interests of any minority shareholders, but a note of caution – the longer the list, the higher the risk that a deadlock situation can arise.

4.     What if things go wrong?

If there is a fundamental disagreement about the business, the joint venture can find itself in a deadlock. This is particularly relevant to companies with equal shareholders, as each shareholder can block the other - thus preventing the joint venture the from operating properly. It is sensible to plan for this situation and agree a solution if this should happen. This could involve one party buying the other out or even winding up the joint venture.

5.     Documentation

We recommend that a joint venture agreement (sometimes called a shareholders agreement) is entered into at the outset of any such business venture.  A document of this nature will set out the blueprint for the business and will provide certainty to each party. The process of negotiating the agreement will also prompt discussions (and hopefully solutions) on any points of disagreement at an early stage - hopefully providing a more stable foundation for the business to be built upon.

Samuel Milne is a corporate associate at Charles Russell Speechlys LLP. If you have any questions about the contents of this article or would like to obtain advice on setting up a joint venture business, please contact Samuel on Samuel.milne@crsblaw.com or 01483 252 525.