Building Blocks - Issue 17 - June 2014

Joint venture agreements: getting the basics right

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Shelly Davidson, Advisory Enterprise Risk Management, Calgary

Joint venture (JV) agreements take on a variety of forms, but they’re usually formed for the same reason — a commercial collaboration. Multiple unrelated parties pool resources with the intent of mutual gain. This pooling, exchanging or integration of resources is ultimately to leverage the expertise of the group as a whole, while at the same time remaining independent from one another.

It’s believed the term joint venture was created to cater to business purposes by combining resources and skills to leverage operations. These assisted operations ideally run efficiently while penetrating new markets. In this light, the JV was developed as a business concept rather than a legal one.

The most important factor in preparing for a JV is to ensure clarity between the parties involved. Collaboratively developing an agreement for a JV is founded on clarity of intent, and it’s important for all parties to know exactly who’s involved. The participants need to consider the implications of the scope of the JV, and the language of the agreement needs to specify the activities the JV expressly intends to do and those it will refrain from doing. The parties must understand how conflicts could arise with their non-JV businesses and how there could be potential conflicts if multiple partners are engaged in a variety of other JVs with other partners. The intent of these projects is no longer just to get the job accomplished — it’s to compete in the most strategic manner.

Each party’s non-compete and confidentiality obligations must also be stated clearly. Technological advancements and other intellectual property — either developed solely and applied or developed jointly and granted for use — are just one example of the cascading details that can start to compound in the inter-corporate arrangement.

Due diligence should be completed before the JV is effective. The level of due diligence required is no less rigorous for JVs than for acquisitions, and in many cases it should be even more thorough to fully understand the nuances of how the co-venturers will work together. Corporate culture or philosophical views may be important aspects of how the parties will work together, and no amount of papered-review in due diligence will address that.

The overall form of a JV should take issues that may affect it into consideration. Examples include tax structures, limited liability, regulatory, banking, labour and employment, benefits, intellectual property ownership and party consents (typically third-party). There are a host of other issues to consider, the big one being the exit strategy.

JVs can benefit all parties involved — if the groundwork is properly laid.