Joint Venture Agreement
The joint venture agreement plays an important role in the formation and implementation of the joint venture. The joint venture agreement legally creates the joint venture and identifies the major rights, duties, and obligations of the participants of the joint venture. A well-drafted joint venture agreement is the key platform to managing differences that will invariably occur between the joint venture participants during the life of the joint venture.
The joint venture agreement identifies:
- the project or object of the joint venture
- the contribution, role and involvement of each co-venturer
- the term or duration for which the joint venture will exist
- the provisions for management and performance of joint venture obligations
- allocation of revenues and expenses from the project
Purpose of the Joint Venture
The purpose and scope of the joint venture should be clearly stated. Because the participants in a joint venture often have their own businesses that are in a business that is related to, and sometimes competitive with, the joint venture, it is important that the scope be sufficiently detailed to avoid future disputes that one of the ventures is putting its own interests ahead of those of the joint venture.
Contributions of each Participant
The contributions of each of the joint venture participants must be spelled out clearly. Not only does the joint venture need to provide for the initial funding obligations of the participants, it should also address how future funding needs will be met. Is there a mechanism for making calls for additional capital? What if one participant fails to meet its funding obligations? Is its participation reduced or terminated? Does it lose its say in the management?
In a commercial joint venture, the parties often make non-cash contributions. One participant may provide technology; another, its distribution network; another may provide office space, staffing or facilities; another may provide the use of an established brand name or trademark. In each case, the financial arrangement must also be specified. Is the participant's contribution made without payment of any sort, is it transferred at the participant's cost or is it simply at arms' length pricing, perhaps with a grant of exclusivity.
Duration of the Joint Venture
How long will the joint venture continue? Some joint ventures are organized for a discrete project, such as the construction of a resort hotel, and are intended to end upon the completion of the project. Other joint ventures, such as one formed to bid on the concession rights at an airport, may have a specific term of years concurrent with the original concession contract, but with provisions to extend the joint venture if one or more of the parties wants to bid for renewal of concession contract. Others may be completely open ended.
Whether or not the joint venture has a fixed term, there are events that may call for an early termination of the joint venture. Bankruptcy or insolvency of one of the participants is almost always treated as a termination of the joint venture. A material breach of the joint venture agreement by one participant usually gives other participants the right to terminate, perhaps after a cure period.
If the joint venture is an open-ended one, there also needs to be some mechanism for one party to end its participation. Ending the joint venture may simply mean a dissolution and winding up of the entity or it may mean that the business continues without the departing participant.
Management of the Joint Venture
The parties must also agree on how both day-to-day and long term management decisions will be made. Will one party have a greater say or will the rights and duties be evenly distributed? Will there be a single manager or a managing committee? If one party has the authority to manage the business, what restrictions are imposed on the manager?
Allocation of Revenues and Expenses from the Project
The parties also need to carefully spell out the allocation of revenues and expenses and profits and losses. Will members bear their own expenses or will they be reimbursed by the joint venture? Will revenues and expenses and profits and losses be allocated in accordance with capital contributions, percentage interests or in another manner?