By Jamie Johnson
What is a joint venture?
A joint venture (JV) is an arrangement between at least two actors who are trying to work together to realise a common business aim.
Why do JVs exist?
There are three main reasons why JVs exist: to ensure that each actor gets expertise from the other, to share the risks of the project and to expand into new markets.
JVs allow each actor to benefit from the other’s financial, technical, market and employee expertise. This higher degree of information makes it more likely that a particular project will be successful.
JVs are also helpful for projects which are associated with a great deal of risk. An actor puts less of its capital at stake when it spreads the costs with someone else.
Finally, JVs can help firms expand into new markets. This is because each actor benefits from any distribution networks that the other may have.
How is a JV structured?
There are three main JV structures: a limited liability partnership, a limited company and a contractual venture.
A limited liability partnership (LLP) is the most popular form of a JV for a business. This involves the creation of a separate entity with limited liability. Limited liability means that there is a limit on how far the actors are responsible for the losses of the JV. There are public filing requirements for these firms. This means that the LLP needs to give a confirmation statement (an overview of the LLP’s structure) and annual accounts to Companies House.
A limited company is also a separate entity with limited liability. This will also have public filings. The difference between this and an LLP is mainly on how liability is limited. In a limited company, liability is limited by the value of each actor’s shares. In an LLP, it is agreed between the actors.
A contractual venture does not involve the creation of a separate legal entity but rather an agreement between the parties. This does not have limited liability but also does not require public filings.
What are the relevant considerations for choosing to create an LLP for a JV?
The parties may choose to form an LLP for a JV for two reasons. Firstly, it involves limited liability. Thus, the possible losses from a venture will not be too high. Secondly, the legislative framework surrounding these agreements is not too rigid. Therefore, there is a bit more flexibility in structuring the operations.
The parties might avoid the creation of an LLP for two reasons. Firstly, the public filing requirements might involve each actor having to provide information it does not wish to. Each business would find out potentially sensitive information about the other. Secondly, limited liability might not occur in practice. In reality, a JV will usually have a poor credit rating and may struggle to raise finance. To get around this, each actor might provide guarantees to lenders, which means that they would effectively have unlimited liability.
What are the relevant considerations for choosing to create a limited company for a JV?
The parties may choose to form a limited company for two reasons. Firstly, there is a much more established legislative framework around limited partnerships than there is around LLPs. This means that parties have greater clarity on structuring the company. Secondly, this form of a company allows for share incentive schemes for employees. This is where employees can own shares and receive dividends as a reward for good performance.
The parties may choose to avoid creating a limited company for two reasons. Firstly, this structure involves double taxation. This disadvantage is a primary driver behind why LLPs are more popular than limited companies. The basis for this double taxation is that there is a tax on a JV company and an additional tax when each actor takes profits out of the company. Secondly, due to the sizeable statutory background, actors might find that there is less flexibility in structuring the JV.
What are the relevant considerations for choosing to create a contractual venture?
The main advantage of a contractual venture is that this form of JV is very flexible. It is easy to set it up and to terminate it. Thus, the exit options for each firm are very clear.
The parties may choose to avoid this form of JV for two reasons. Firstly, there is no distinct legal identity for a contractual venture. This means it is unclear what each party can do within its power if there are any issues with the JV. Secondly, there is unlimited liability for the contractual venture. Thus, there could be a significant risk for each party.
What are the general issues that JV participants should be wary of?
There are four main issues that JV participants should be wary of: minority protection, deadlock, termination and intellectual property (IP) issues.
In terms of minority protection issues, there is often a stipulation in the JV agreement over how decisions are made for the JV. There could be unanimity requirements, special majority requirements or vetoes on decision-making. Often, these sorts of protections will apply to specific decisions that the parties think are of importance. In the cases where an actor believes it will be in the minority, these provisions allow it to exert some control over the JV.
Deadlock issues are most pressing for JVs with two actors involved who both have a 50% stake. Often, deadlock is reached because the two parties decide on the opposite decision. Therefore, the JV agreement will set out how to deal with those deadlocks. This could be through the chair of the board having a casting vote or through an external arbitrator.
The main termination issues are around whether or not any circumstances would automatically end the JV. For instance, if the JV lost regulatory approval. In addition, there are often agreements on what happens to the assets of the JV upon its termination.
IP issues are salient where one actor has to contribute IP rights to the JV. In these cases, there will be an arrangement on what happens to the IP rights when the JV uses them. In some cases, the rights are conferred onto the other JV party. There will also be an agreement on what happens to the IP rights after the JV ends.
May 2020: Renault pulled out of a China joint venture and gave control of the Wuhan plant to Dongfeng. Previously, they had a joint venture with Dongfeng but the joint venture was losing money. This was partly because the Chinese market is slowing and partly because Renault has particularly struggled with COVID-19.
December 2019: Bloomsbury publishing made a joint venture with China Youth Publishing Group (CYPG), which is a state-owned company. This is important for Bloomsbury to get access to the Chinese market. This is part of its overall strategy as a business. Bloomsbury has a 50% stake in the joint venture, which is based in Beijing.
November 2019: Ahmed Seddiqi & Sons made a joint venture with WatchBox. Seddiqi makes luxury watches and WatchBox is an e-commerce service for luxury pre-owned watches. This joint venture means that there is a retail outlet in Dubai for both firms. Both businesses will therefore be able to tap into the Middle Eastern market.