In part 1 of this series on commercial collaboration, the head of Virtuoso Legal’s commercial team, Kirsten Toft, examines the method of Joint Ventures (JV).
So, you’re thinking about entering into a project or agreement with another company, and maybe together forming a new company.
But how exactly do you go about it? A joint venture is one option, yes, but there maybe another way to achieve your objectives – namely, a collaboration agreement facilitated by licensing. (The latter will be covered in a forthcoming blog in this series.)
In this series we will look we look at both options; the advantages, potential pitfalls and things you need to consider.
First up? Joint ventures.
What is a joint venture (JV)?
A JV is where two companies merge or form a new company to undertake a certain project.
Often these are overseas projects but they also arise in the UK in certain circumstances, for example, where there needs to be significant backing from a large PLC or other company with the financial muscle and expertise to take a project forward.
How much does a JV cost to set up?
Joint ventures’s are expensive to establish because of all of the steps and formalities that need to be covered off at the preliminary stage.
Both companies need to be clear about management roles, finances, staff, how projects are to be conducted, sales and how things like financial decisions are made.
These are then reflected in shareholders agreements or similar internal documents, such as employment contracts which can be costly to establish in both time and money.
I’ve seen disputes arise over shareholder control, management and finances, so don’t cut corners on this process (no matter how frustrating it can be!)
What’s the main advantage of a joint venture?
The advantage of a JV is that a company is formed, and as such it can be floated off or sold away from the joint parties.
What’s the main disadvantage of a joint venture?
The big disadvantage is that disputes can do arise and when they do, JV’s are complex (and therefore expensive) to unravel.
How do you exit a JV?
It might sound negative (a bit like planning a divorce before you’ve got married!) but it’s important when setting up a joint venture to carefully consider how each party can exit the joint venture and terminate any joint venture agreement.
So, for instance, if and when any of the rights to exit are initiated, have you thought about:
What will happen to the exiting party’s intellectual property rights licensed to the JV company?
Or: what will happen to the intellectual property rights vested in the JV company, whether owned by it or licensed to third parties?
It is important that these things are clear from the outset.
Things to consider when thinking about or entering into a JV:
- A corporate joint venture is an incorporated business in its own right.
- Partnering with another business can be challenging and problems are likely to arise if the objectives are not crystal clear and communicated to everyone from the outset. It is important to consider each party’s strategic and commercial objectives.
- Thorough research and analysis in the early stages is key.
- Whilst negotiations are ongoing it’s a good idea to agree heads of terms or a letter of intent, as well as a well-crafted Non-Disclosure Agreement (NDA), to reflect both parties intentions and facilitate the sharing of information. These should include the following considerations:
- What is the timescale?
- What are the risks involved for the parties?
- What funding will both parties invest into the venture and for how long?
- What physical assets and/or employees will be transferred throughout the term of the joint venture?
- It is often better to create completely new branding for the Joint Venture, right from the outset.
- Crucially, both parties will usually have technology, know-how content or brands that the JV will need to use to develop its business. It needs to be a priority at the formation stage to decide exactly what each party will contribute, and whether the relevant IP should be assigned or licensed to the JV.
- Furtherm,ore, a fundamental issue is who owns the resulting new Intellectual Property and what use can the respective party’s make of it?
- Finally, a shareholders Agreement will also be required to cover off dividends etc.
- Joint Ventures require a like-minded business culture. So, consider how much you know about your potential partner(s) in business; are you a good fit? Ask yourself if you both have the same management styles? This is crucial as both parties will become jointly responsible for finances and management of the company. It is no surprise that this is often an area where disputes arise.
- Tax considerations can be an area of conflict in a JV structure and specialist advice should be taken.
If that all sounds a bit heavy-duty, fear not!
There is another way that could help you achieve your objectives and build things up gradually…
That is licensing and collaboration agreements!
Which will be covered in the second part of this two-blog series.
Companies will (and should) always seek to collaborate and work together.
The shared capacity of two complementary partners can result in some of the most interesting innovation and mutual beneficial business outcomes in the commercial setting.
However it is important that the nature of this collaboration is suitable and proportionate, so that the working relationship can function effectively.
In this way it’s important to select the correct arrangement between the two parties, so that responsibilities and outcomes are clear and that the work can be undertaken without any lingering question marks.
If you’re considering a project with another company, I hope this article has been a helpful starting point.