When considering a joint venture there are various issues that the parties should iron out at the outset to avoid running into difficulties. We have listed a few of the points that we would expect parties to discuss before entering into a joint venture.

Preliminary points

The parties should consider whether there are any applicable competition rules, regulatory matters, licences and consents that they would need for the proposed transaction.

It follows that the parties should consider whether their objectives are consistent or complementary.

Identifying the structure

The structure of the joint venture should be considered. For example, is the joint venture to be carried out through a separate ‘organisation’ (eg joint venture company) or will it merely be a contractual arrangement between the parties (eg some form of collaboration, joint research and development (‘R&D’), supply, distribution agreement)?

In addition, the parties may wish to consider the form of the venture, such as a company limited by shares, a partnership, a limited liability partnership, to name just a few.

Financing of the joint venture

At the earliest opportunity, parties should consider the proportions and how, if at all, the parties will provide initial finance to the joint venture. How much will be provided from third party sources should also be considered.

We wold expect the parties to have further discussions about financing such as whether they will be requires to provide further finance later. If so, who will decide when and how it is to be put in. The parties should also discuss whether decisions on this can be blocked in the future by any party unwilling to finance its share as well as what will happen if one of the parties defaults.

Tax considerations

The structure and form of the joint venture is likely to affect how the joint venture will be taxed. Some of the points that the parties may wish to consider include:

(1) How the contributions to the joint venture from the parties will be taxed and whether any reliefs are available.

(2) Whether there are restrictions on the capital structure of the structure of the joint venture (eg thin capitalisation rules restricting the amount of debt finance)?

(3) How will payments from the joint venture to the parties be taxed? Can a structure e used to enable profits to be distributed more efficiently? are there withholding taxes etc?

(4) Whether there will be any ongoing supplies between the parties and the joint venture, such that VAT issues may arise. Is it possible or desirable to VAT group the joint venture with one of the other parties?

(5) What will be the tax impact if the joint venture succeeds? Will the parties be able to structure an exit which will avoid or reduce any capital gains tax charge?

(6) What is the tax impact if the joint venture fails? Will the parties obtain a tax deduction or loss if their investment diminishes in value in whole or in part?

Decision making and control

The control structure will impact on the status of the joint venture under a number of merger control regimes, including EU and UK merger controls.

Parties should consider how ownership interests in the joint venture will be held. Precisely what rights (and obligations) do such interest confer?

Contributions by the parties to the joint venture

Parties should consider whether any party will contribute any specific tangible or intangible property to the joint venture.

If there are contributions to the joint venture then how will contributed assets be valued. How will adjustments be made for any shortfall or excess in relation to any contributor’s proportionate funding obligations?

Consideration should be given to whether assets need to be valued under local law (eg if shares are issued in a joint venture company in consideration for the transfer of assets).

Parties should ask whether it is possible for all contributions of assets to be made contemporaneously if regulatory approvals or consents from third parties (including lessors, licensors and lenders) are required for any transfer. If not, should the availability of all or any particular assets be a condition to the establishment of the joint venture?

The parties should consider the effect to the assets or other rights leased by the joint venture if one party subsequently leaves the joint venture.

Intellectual property

The parties should consider who will own any new intellectual property rights developed by the joint venture and to what extent will the parties have access to, or rights over, confidential information, know-how and other intellectual property rights concerning or accruing or belonging to the joint venture itself.

Employment matters

We would expect the parties to consider whether there will be a TUPE transfer either at the outset or on the termination of the joint venture. If so, the employees who work in the undertaking that is the subject of the transfer may have additional legal rights (eg they will have rights in respect of consultation and to have access to certain information). A dismissal for a reason connected to the transfer may lead to an automatic liability for unfair dismissal.

Termination

Consideration should be given as to the duration of the joint venture. Is the joint venture for a fixed term or complete of a specific project, or is it indefinite in duration?

The parties could also agree that the joint venture will automatically terminate in certain circumstances. For example, the loss of any regulatory approval; the loss of destruction of a particular asset; the insolvency of any party or the transfer of any party’s interest.

The information above should not be taken as legal or professional advice. Please contact a member of our team for advice that is tailored to your circumstances.

7 Bell Yard, London WC2A 2JR.

Copyright © Pernerley 2021. All Rights Reserved.