UK: Joint Ventures - A Perfect Partnership?

Last Updated: 14 July 2008
Article by Catherine Feechan

Given the risks in developing a new business in today's tough market place, a joint venture ("JV") can be an excellent way to attempt to break into new markets, launch new products or access new skills and technology.

But, before embarking on any joint venture, it is worth bearing in mind that whether it is hugely successful or a complete failure, there is always plenty of scope for relationship breakdown. JV's have "built in" instabilities because both partners are entering into the relationship from a position of weakness. Clearly if a lucrative market opportunity is identified then most companies would prefer to keep it to themselves and maximise profits but in a joint venture situation both parties lack a vital component that would allow them to go it alone. For example, one company may have the contacts and infrastructure to allow access to certain markets whereas the other has a suitable product, or one side may have a technically innovative product but no cash to get it to market whereas their partner is cash rich. In each case, the commercial drivers are different, but in every case when two parties embark on a joint venture each of them has its own agenda which does not precisely match that of its partner. Inevitably this means that at some point the interests of the parties diverge and therefore it is vital to ensure that at the outset proper steps have been taken to protect both parties.

So what issues need to be addressed to minimise the likelihood and impact of disputes?

  1. Business Plan

    Make sure a business plan is prepared with clear objectives and ensure both parties are committed to delivery of specific items within clear timescales.

  2. Management

    Agree how the day to day running of the operation will be managed and address the practicalities of who does what and who contributes what to the new JV.

  3. Key Issues

    It is vital to make sure that agreement is reached on a list of issues that require the consent of both parties prior to any action being taken.

  4. Dispute Resolution

    Make sure that a dispute resolution procedure is agreed and that if no solution can be reached that you provide either for one party to buy out the other or if that is not appropriate for the venture to be wound up.

  5. Exit

    Make sure a clear exit strategy is agreed either for sale of the JV within a specific timescale or its winding up once the Project is completed.

  6. Valuation

    Clearly in an exit or a dispute situation, it is necessary to agree valuation of the shares in the JV company. Again, it is important to agree at the outset how such a valuation will be conducted. Making the results of such a valuation binding can avoid the stress of a lengthy court action.

It is vital to have a shareholders agreement reflecting what the parties agree on these issues. Entering into such an agreement at the outset of the project can save a great deal of time and money. It is a lot simpler to agree matters when both parties are in a co-operative frame of mind, whereas waiting until a difference of opinion has arisen is a recipe for disaster and needless expense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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