In brief - Document the details, establish a good dialogue and get professional advice
Joint ventures can be highly profitable when structured appropriately to suit the desired commercial outcomes. However, partnering with another business can be complex and problems can arise if you don't do your homework.
What is a joint venture?
The Encyclopaedic Australian Legal Dictionary defines a joint venture as "an association of persons for particular commercial endeavours (for example, the development of land or the exploitation of mineral resources) with a view to mutual profit".
The High Court has said a joint venture connotes "an association of persons for the purposes of a particular trading, commercial, mining or financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill." (See United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10.)
The feature common to joint ventures is that several persons or businesses participate in a single project rather than a continuing business.
A joint venture might be incorporated with a special-purpose company formed by several participants to carry out a single project. Unincorporated joint ventures without careful structuring may be considered to be partnerships, with the result that each joint venturer is an agent of the others and can make contracts binding them.
Joint ventures can be highly profitable when structured appropriately
Businesses of any size can use joint ventures to strengthen long term relationships or to collaborate on short term projects. Joint ventures are used in a number of areas by corporations. These include mining syndicates, research and development agreements, entertainment agreements, property developments, share farming agreements and publishing agreements.
However, partnering with another business can be complex and problems can arise. Notwithstanding this, joint ventures can be highly profitable when structured appropriately to suit the desired commercial outcomes.
It is certainly not a case of one size fits all. There is no such thing as an appropriate "standard form" joint venture agreement. Here are nine essentials you should be aware of.
Nine things to consider when looking at a joint venture arrangement
- Do a background check on your partner. When you commence a joint venture with someone, you are tying your reputation to theirs. The wrong joint venture partner can in a very short time undo years of carefully constructed goodwill. Make sure that you undertake due diligence and check the credentials of the other party.
- Decide on the objectives and respective roles at the start. Objectives and roles should be agreed and documented by both parties before any work starts on the actual joint venture itself. This remains important whether it is a start up joint venture or another in a long line of successful commercial collaborations.
Formalise the agreement. Deal with as many aspects of the relationship as possible in the written agreement to help prevent any misunderstanding once the joint venture is up and running. Key matters that a written agreement should cover are:
- Structure of the joint venture
- Financial contributions you will each make
- Structure and make-up of the management team
- Ownership of intellectual property created by the joint venture
- How liabilities, profits and losses are shared
- Dispute resolution procedure
- Exit strategy
- Clear performance indicators. Establish clear performance indicators for each party to the joint venture. An imbalance in levels of expertise, investment or assets brought into the joint venture by the different partners can lead to conflict even though those issues were known from the start. The best course is to document the contribution required and establish benchmarks to measure each partner's contribution.
- Establish a good dialogue. Sharing information openly, particularly on financial matters, also helps avoid partners becoming suspicious of each other. It's usually a good idea to arrange regular, face to face meetings for all the key people involved in the joint venture.
- Keep up-to-date financial records. Maintain the financial records of the joint venture and auditing in accordance with the relevant legislation, government, corporate guidelines and general good business practice.
Indeed, the courts require a party to a joint venture to keep such books and accounts as would permit the affairs of the joint venture to be assessed with reasonable facility and within a reasonable time. (See Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007).)
- Fiduciary obligations. The question which has most frequently come before the courts in relation to joint ventures is whether the arrangement constitutes a partnership and, if it does not, whether the relationship nonetheless gives rise to fiduciary obligations between the joint venture partners.
The answer in each case depends on an examination of the documents and the relationship between the parties. The actual terms of the agreement may evidence a fiduciary relationship between the parties and, together with the nature of the relationship, will at least determine the extent of any fiduciary relationship between the joint venturers. (See Hospital Products Ltd v United States Surgical Corp (1984) and Kelly v C A & L Bell Commodities Corp Pty Ltd (1989).)
However, a fiduciary relationship may also arise in the course of joint venture negotiations on the basis that trust and confidence underlie the negotiating relationship. (See United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11-12.) This is a significant issue for any joint venture party but is essentially a "legal" matter.
- Obtain legal, accounting and tax advice. Talk to your lawyer, accountant and financial broker. Make sure they understand what you are trying to achieve, how you propose to achieve it and why. Take their advice!
- Cultural clashes. Every organisation operates differently, includes different personalities and is accepting of different conduct. In short, there is potential for significant differences in culture between the joint venture partners. Ignore these issues at your peril. Cultural alignment or at least a recognition and acceptance of cultural differences is critical to the success of any joint venture.
The points highlighted in this brief commentary are only a few of the important details in forming a well-structured joint venture. Each potential joint venture will require careful analysis and a determination of issues critical to the particular transaction.
While a properly structured joint venture will not guarantee success, it will mitigate a number of future potentially detrimental events that may hinder the joint venture’s operation and success.