Focus On: Entering and Exiting Joint Ventures
24 June 2022
Joint ventures can be advantageous for business owners seeking to grow their business. At its core, the idea and ultimate benefit of a joint venture is that two cooperating entities may be able to explore and obtain new opportunities previously unattainable to the individual entities alone.
Expansion of operations by way of a joint venture may offer access to efficiencies such as economies of scale and returns to scale. Many joint ventures are entered into with a desire to share exposure to risk or to increase purchasing power through collective investment. It is for this reason that a business may wish to utilise a joint venture in order to expand nationally or internationally and in doing so, afford itself access to previously inaccessible regions or markets.
Whatever the reason, it is imperative that a detailed plan is in place that ensures maximisation of benefit and provides future-proofing against potential risks and issues. Joint ventures are not designed to last indefinitely and as such, any initial agreement entered into should consider lifetime cooperation as well as the business’s exit plan. Joint venture agreements can often be complex, and regardless of how big or small the businesses involved are, can lead to serious disagreements between respective business owners and stakeholders. A properly drafted joint venture agreement can mitigate against and help to resolve unwanted and detrimental conflict.
There are various options available when starting a joint venture. A joint venture may be structurally incorporated (i.e., a limited liability company or limited liability partnership) or unincorporated (i.e., a partnership or collaboration agreement). Furthermore, the type of joint venture may be limited and specific, such as can be found in a project-based joint venture which focuses on individual production and output facilities, or a full-function joint venture which encompasses open-ended sharing of resources and markets.
These structures have various advantages and disadvantages. For example, a limited liability company will be a separate legal entity entirely which enjoys the benefit of risk limitation, but which also must adhere to greater responsibilities under the Companies Act 2006. A collaboration agreement, on the other hand, does not create a separate legal entity and both parties will control their own assets and resources. It is important for a business and its owners to consider which of these structures are most appropriate for them before entering into the joint venture.
MKB Law can advise on all aspects of joint ventures and will tailor an agreement that offers the best possible protection for your business’ commercial interests. Our Corporate team can assist with the drafting of bespoke articles of association and shareholder agreements, detailed heads of terms, dispute resolution procedures and outlining of the rights and obligations of members. We can also assist with dispute resolution and the termination of an existing joint venture agreement. Please contact us to discuss further.