Digital, Commerce and Creative 101: Joint Ventures

What is a joint venture?

The term “joint venture” does not have any specific definition in English law; it is simply a term used to describe a commercial arrangement between two or more parties who agree to collaborate in order to achieve a common goal.

It is a broad term which covers a variety of business arrangements which may be for a finite period of time (e.g. for a specific project) or indefinite.

Why enter into a joint venture?

As the term joint venture is so broad, the reasons for entering into one are numerous – typically, these include parties wishing to:

• benefit from skills or technology possessed by business partners;
• develop new products or services, or enter into new markets; or
• share the commercial risks associated with, for example, taking on a particular project or entering into a new market.

How is a joint venture managed and structured?

How the commercial arrangement is managed and structured varies from one joint venture to the next and will be dependent on many factors, including:

• the nature and size of the parties involved;
• where the parties are located and where any project or transaction will take place (e.g. if there is a cross-border element);
• the objectives of the parties involved (e.g. whether the joint venture is to deliver a specific project or whether it is to be an open-ended arrangement);
• whether the parties intend to create a new product and/or new intellectual property which could have capital value going forwards from which all parties would expect to benefit;
• any regulatory issues, including competition law considerations; and
• tax considerations.

Parties intending to enter into a joint venture should consider the above and decide an appropriate form of joint venture or joint venture ‘vehicle’ – these are varying but, generally speaking, fall into one of the following categories:

• a purely contractual joint venture;
• a limited liability company;
• a limited liability partnership (“LLP”);
• a partnership or limited partnership.

Each of these vehicles have their own benefits and points to consider which are briefly set out below.

Note that for the purposes of this article, we have assumed that the vehicle will be governed by English law; where that is not the case, you may wish to seek local counsel.

Purely contractual joint venture

Where the parties involved in the joint venture agree to collaborate as independent contractors under the terms of a contract (often called a consortium agreement, a collaboration agreement or a co-operation agreement).

Benefits

• Simplicity – this is the simplest form of joint venture: parties remain as independent contractors, rather than shareholders in a company or partners in a legal partnership. This is beneficial where the parties do not want the formality, bureaucracy or additional cost involved in operating through a separate entity.
• Flexibility – the rights and obligations of the parties are set out in the relevant agreement (and the applicable governing law): this can be quick to set up, while the implications of termination (whether unilateral or mutual) ought to be straightforward.

Points to consider

• Liability and losses – the parties in a purely contractual joint venture are not legally ‘partners’ so will not have a statutory responsibility for the acts or omissions of the others, while there won’t be any separate joint venture entity for which the parties will take responsibility. However, how the agreement is drafted will of course be very important, so as for example to spell out (a) that no party is authorised to make any binding commitment on behalf of any other party and (b) each party’s obligations to contribute towards costs or liabilities which may be incurred by the parties in the aggregate in following an agreed course and taking agreed steps.
• Unintentional partnerships – joint ventures, by their nature, involve collaboration between the parties. Given the legal definition of a partnership under English law (as to which see below) there is a risk that the relationship between the parties may be held to be a legal ‘partnership’, despite their intentions. This is a question of fact and law so agreements documenting a contractual joint venture should be drafted carefully to address that risk.
• Tax – broadly speaking, a purely contractual joint venture should not have any effect on the taxation of the parties to it as there is no merger of businesses: each party will be required to make its own returns in respect of its own revenues and costs earned and incurred in connection with its involvement in the joint venture.
  Limited liability company
  Where the parties set up and jointly own a separate joint venture company (“JVC”) which can own assets, sue and be sued, and contract independently.

Limited liability company

Where the parties set up and jointly own a separate joint venture company (“JVC”) which can own assets, sue and be sued, and contract independently.

Benefits

• Limited liability – the liability of the parties carrying on business through a JVC is, on the face of it, limited to the amount each party contributes by way of share capital.
• Familiarity – limited liability companies are universally recognised structures and governed by established laws and regulations.
• Flexibility – JVCs offer flexibility; for example, the parties can tailor share rights to reflect the differences between the parties in terms of size, bargaining-power or contributions.

Points to consider

• Publicity, reporting and compliance – limited liability companies are subject to a comprehensive legislative framework which includes a variety of reporting and compliance obligations (which will vary considerably depending on the jurisdiction of the JVC itself). The administrative burden can be time-consuming and the reporting requirements mean that information about the company may be publicly accessible.
• Division of roles and responsibilities – unless the JVC is intended to be a “full function” entity with its own infrastructure and personnel, the JVC will rely on its shareholders for the provision of a range of services and perhaps for the licences of key IP and the parties will need to agree on who is doing what and on what commercial terms. These considerations also apply to other joint venture vehicles.
• Limits to the benefits of limited liability – while the parties will have limited liability as shareholders in the JVC, in practice the parties may be required to support the JVC in its dealings with third parties through guarantees and other assurances, as well as by making unsecured loans to the JVC.
• Tax – there is a potential for ‘double-taxation’ – i.e. the JVC being subject to tax, as well as the individual parties when they take profits out of the JVC or realise their investments. In addition, the parties will need take account of “transfer pricing” issues as regards their dealings with the JVC.

Limited liability partnership (“LLP”)

Where the parties set up and register an LLP, which can own assets, sue and be sued, and contract independently.

Benefits

• Limited liability – an LLP is a separate legal entity so the LLP itself (and not the parties who make up its membership) is liable to third parties it contracts with.
• Flexibility – as with JVCs, LLPs offer flexibility in terms of how the joint venture is managed. In addition, because LLPs are not subject to tax on their profits and individual members are liable to tax on their share of those profits, LLPs offer even greater flexibility. The members of an LLP have complete flexibility in agreeing how the LLPs profits/losses are shared between them.

Points to consider

• Publicity – as with limited liability companies, LLPs are subject to public reporting obligations.
• Membership and defining roles – each party would be a member of the LLP: while there are regulations which set out default provisions for managing an LLP, the members are free to agree these as they wish and to change those from time to time. This offers flexibility but the roles of members are less familiar than the well-defined roles of directors and shareholders in limited liability companies.
• Limits to the benefits of limited liability – as with JVCs, the limited liability status of an LLP’s members may be undermined to some extent through the members being required to support the LLP in its dealings with third parties through guarantees and other assurances, as well as by making unsecured loans to the LLP and leaving undrawn profits in the LLP to aid cashflow.
• Tax – generally speaking, members of an LLP are taxed in the same manner as members of a partnership (even though it is a separate legal entity).

Partnership or limited partnership

The parties agree to enter into a legal partnership which is subject to specific legal rules and regulations. A partnership is defined (under the Partnership Act 1890) as a “relationship which subsists between persons carrying on a business in common with a view of profit”.

Benefits

• Flexibility – the rights and obligations of the parties are set out in the relevant agreement (and any the applicable governing law): this can be quick to set up (and dismantle). Parties have complete flexibility in agreeing how profits / losses are shared.
• Tax – parties in a partnership are taxed directly; there is no joint assessment or joint liability for corporation tax on the profits of a partnership. In addition, a partnership which carries on a business and which has revenues exceeding the relevant annual threshold will be required to register for VAT.

Points to consider

• Liability – in partnerships, each partner’s liability is unlimited: each partner is an agent of the other partners for the purposes of the joint venture and each partner is jointly and severally liable without limit for the acts and omissions of the partners as a whole.
• Limited partnerships – creating a limited partnership is possible: one partner must be a ‘general partner’ with unlimited liability but the other partners would have their liability limited to a specified maximum amount. This option is rare so if this is something you are considering please contact a member of our team for more information.
• No separate legal status – a partnership does not create a legal ‘vehicle’ which can own assets, sue and be sued, and contract independently of its members.

Conclusion

The scope of joint ventures is incredibly broad – there is no ‘one size fits all’ and considerations should be made around how it should be structured and the roles of the parties, as well as around taxation and accounting.

If you would like to discuss establishing a joint venture or any other strategic alliance, please contact a member of our team.