What Should Be Included in a Joint Venture Agreement?
Do you have a particular project or objective that you want your business to achieve but don’t believe you’ll be able to do it alone? Perhaps you’ve imagined working with another business towards accomplishing this goal in a mutually beneficial way. If so, forming a joint venture may be a suitable option for you. If you decide to create a joint venture with another business, you need to understand the contents of joint venture agreements and the various structures available.
This guide discusses the essential elements of the contract, including the details about the parties, objectives, contribution, and financial arrangements. We also discuss the best practices for negotiating favorable terms and possible regulatory requirements.
What Is a Joint Venture Agreement?
A joint venture agreement is a contract detailing the relevant information in a joint venture, including their rights, interests, responsibilities, and liabilities. Joint ventures are legal and business arrangements where two entities — natural or artificial — form a single enterprise to achieve a particular goal. Natural entities include individuals, whereas artificial entities include corporations and partnerships.
The joint venture allows the entities to combine resources for the project, such as capital, labor, assets, skills, knowledge, and experience. In turn, they share the profits, losses, and risks according to their specified portions.
Different types of joint ventures exist, including the following:
- Functional joint venture: This is a longstanding arrangement where businesses join to benefit from each others’ knowledge, skills, and resources.
- Project-based joint venture: This is a temporary arrangement where businesses join resources towards a specific project.
- Vertical joint venture: This is a joint venture between buyers and suppliers in the same supply chain.
- Horizontal joint venture: This arrangement involves businesses that sell the same or similar products or services to reach new markets through the joint venture.
The type of joint venture you choose depends on the venture’s shared objectives and the parties’ specific interests, which will impact the terms of the contract.
How to Structure a Joint Venture
Although a joint venture often involves two or more businesses with their own legal structures, the joint venture itself is considered a separate legal entity. There are different ways to structure a joint venture in Massachusetts, including:
- Limited liability company (LLC)
- Corporation
- General partnership
- Limited partnership
- Limited liability partnership (LLP)
Each structure has its legal requirements and implications. Hence, it’s best to consult an experienced attorney to help you determine a suitable joint venture model that considers your needs.
What Are the Elements of a Joint Venture Agreement?
Here are eight key elements of a joint venture agreement:
1. Parties and Business Details
The contract must provide details about the parties, including their names and addresses. It must also provide relevant information about the joint venture, including the name, location, or business structure. Remember, joint ventures in Massachusetts can involve individual business owners, partnerships, corporations, and limited liability companies.
2. Objectives and Scope of the Joint Venture
Business owners create joint ventures for various reasons, from expanding market size to completing specific projects, such as construction. The parties must comprehensively discuss the purpose of forming the business relationship and stipulate that in the contract. Since businesses often have varying goals, it’s good practice for the executives or owners to know each other and develop a common objective for the joint venture. The agreement must also clarify exclusions, if any.
3. Contribution and Responsibilities
An integral aspect of the joint venture agreement is the parties’ contributions. In other words, what is each entity bringing to the table? Contributions may include capital, labor, tangible and intangible assets, and skills. Tangible assets are those in physical form, such as buildings, equipment, and inventory. Intangible assets are non-physical properties such as intellectual property.
In addition to each party’s contribution, the joint venture agreement must assign roles, responsibilities, and management duties. Specifying these helps create a functioning joint venture, allowing the parties to hold each other accountable. Parties usually establish teams to handle the usual operations, such as hiring and terminating employees.
4. Financial Arrangements
The joint venture agreement must provide details about sharing profits, risks, and liabilities. Will the profits and losses be distributed equally or according to the percentage of the parties’ ownership interest? Will there be a liability cap for some parties? What about indemnity? Answering these questions can avert disputes and help the parties appreciate the benefits of the arrangement.
5. Governance and Decision-Making
Joint ventures operate as businesses and must be run as such. The agreement must detail the governance structure, including the management and decision-making process. While daily operations may be reserved for specific individuals, significant decisions may be based on votes. Even so, the agreement must detail the voting procedure and the number of votes each party has. Again, the structure of the joint venture impacts its governance. For example, under Massachusetts law, a company set up as a C Corporation must appoint a board of directors, while other legal structures, such as an LLC, do not have this requirement.
6. Protection of Interests
A primary benefit of a joint venture agreement is the protection of interests. For example, where the arrangement involves sharing intellectual properties, trade secrets, and other proprietary information, the contract must stipulate who owns those assets and how they can be used or distributed. If the joint venture will create new intellectual property, the agreement must provide details about its ownership.
Additionally, the contract should contain confidentiality and non-compete clauses for added protection. Confidential clauses require parties to keep certain information private unless legally required. Non-compete clauses prevent parties from engaging in activities that would increase competition for the other for a specified duration.
7. Duration, Exit Procedures, and Termination Conditions
Joint ventures are intended to last only for a specific duration, depending on their purpose. Therefore, the contract must provide clear timelines and renewal terms. For example, the contract may stipulate a date on which the joint venture will terminate with renewal conditions and processes. The termination may also be based on the occurrence of an event, such as the completion of a project. The joint venture agreement may also indicate whether parties can exit before the specified period. If so, it should specify the conditions and procedures for termination, and the implications of such decisions.
8. Dispute Resolution
The joint venture should contain a dispute resolution clause allowing the parties to select a preferable dispute resolution mechanism. The available dispute resolution mechanisms include litigation, arbitration, and mediation. Litigation is the traditional forum where parties settle their disputes in court.
Arbitration involves the appointment of an arbitrator or panel of arbitrators to adjudicate the dispute and make binding arbitral awards. Compared to litigation, arbitration is voluntary, relatively quicker, and less formal, making it suitable for most businesses. This method still has a third-party decision-maker or a panel of decision-makers similar to a judge or a jury and certain procedures the parties must follow, making it more formal than mediation.
Mediation is also voluntary and involves a neutral third party called the mediator. The mediator facilitates the dispute resolution process, encouraging the parties to settle the disputes. Dispute resolution clauses are technical and must be carefully drafted to be enforceable.
Other Important Considerations
Here are two other essential things to consider when establishing a joint venture:
1. Negotiating the Terms of the Joint Venture Agreement
Negotiating favorable terms in a joint venture requires tact and skill, but there are tips to help you succeed. Here are four best practices:
- Identify and prioritize key issues depending on your needs.
- Engage in open communication and listen to your potential partners’ needs. That can help you know them better.
- Balance the interests of parties to maintain relationships.
- Determine your best alternative to a negotiated agreement (BATNA), the most advantageous option you can take if negotiations fail, ahead of time.
2. Legal Compliance and Formalities
Federal and state laws may require parties to complete specific regulatory processes, depending on the facts of the case. For example, if you intend to operate the joint venture as a corporation, you must incorporate the entity and file the necessary paperwork with the tax authorities.
Contact Calabrese Law Associates for Legal Assistance
Calabrese Law Associates provides efficient legal services to business owners in the Greater Boston Area and throughout Massachusetts. Our experienced professionals can help you determine the ideal joint venture structure and prepare a contract to protect your interests. We can also help you negotiate favorable terms and navigate the complex regulatory requirements where the need arises. Contact us now for tailored legal solutions!
This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.
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