In this second instalment in our joint ventures series, we're now diving deeper into the various forms that such joint ventures can take.
What forms can a joint venture take?
Choosing the right structure is key to ensuring your joint venture operates smoothly. Joint ventures can take several different forms – each with its own advantages and potential challenges.
Below are three of the most common joint venture structures we encounter in the clean energy sector.
1. Private company limited by shares
The most widely used structure for joint ventures in the sector is a private company limited by shares, which is frequently referred to as a special purpose vehicle (SPV). With an SPV, the joint venture parties will be shareholders of the SPV itself and appoint a board of directors to manage day-to-day operations, usually making decisions based on a majority vote.
Advantages
- Limited liability – parties are liable only to the amount of their unpaid share capital.
- Perpetual succession – the SPV will generally be unaffected by changes in the parties.
- Commonly used form – this familiarity is particularly helpful for raising debt/project finance.
- Separate legal personality – the SPV can contract in its own name, hire staff, and own assets.
Considerations
- Administrative burden – the SPV comes with a degree of administrative burden, such as Companies House filings and accounting requirements. It is important that joint venture partners factor in, or procure, the resource to comply with such requirements.
- Companies Act requirements – the SPV and the directors of the SPV will be subject to the Companies Act 2006, including strict rules on distributions and directors' duties, with the latter requiring directors to, among other things, act in the best interests of members as a whole.
- Publicity – the SPV's constitutional documents (such as its articles of association) are public, although joint venture parties often seek to maintain confidentiality through a separate shareholders' agreement, which isn't required to be filed at Companies House, governing certain sensitive matters like funding obligations and shareholder consents.
2. Limited liability partnership
Another common structure for joint ventures in the clean energy sector is a Limited Liability Partnership (LLP). An LLP is often used in landowner and developer joint ventures where landowners receive 'priority profits' from the LLP itself.
Advantages
- Limited liability – the liability of parties is limited to the amount contributed to the LLP.
- Perpetual succession – the LLP will generally be unaffected by changes in the parties.
- Separate legal personality – the LLP can contract in its own name, hire staff, and own assets.
- Flexibility – an LLP is not subject to the same restrictions as an SPV on its ability to return profits and so offers greater flexibility in how returns to parties can be structured.
- Publicity – though the LLP members' details are publicly available, the partnership agreement remains a private document, which offers confidentiality.
Considerations
- Administrative burden – LLPs do come with similar administrative burdens to an SPV.
- Security and Financing – lenders in project finance usually expect projects to be structured using an SPV. Accordingly, care ought to be taken to discuss lender security when an LLP is used for a project that will require debt financing.
- Tax – most LLPs are taxed in quite a different manner from an SPV. While for certain tax purposes (e.g. VAT) LLPs are seen as an entity in themselves, for other taxes, principally taxes on income and capital gains, they are usually treated as 'look through' with the members of the LLP being taxable in profits in line with their entitlement to profits.
3. Contractual joint venture
Unlike an SPV and an LLP, a contractual joint venture does not require the formation of a new entity to undertake the joint venture and, instead, relies on contractual provisions applying between the joint venture parties. This structure is perfect for ventures where parties want to maintain full control or ownership over their respective assets/employees and to avoid transferring them into a new entity.
Advantages
- Simplicity – the joint venture parties simply enter into a contract to govern their joint venture.
- No new entity – the joint venture parties do not need to set up a new body corporate and so avoid the cost and administrative burden associated.
- Publicity – the joint venture agreement will not be public.
Considerations
- No new entity – not forming a new entity is a double-edged sword, as there will be no joint venture entity to contract in its own name, hire staff, own assets, or raise funds (including project/debt finance).
- No limited liability – the joint venture parties will be responsible for the contracts they enter into.
- Unintended liability – there exists the potential to unintentionally become liable for the actions of the other joint venture partner.
Understanding the different structures available for joint ventures will help you choose the one that best fits your business goals, risk tolerance, and desired level of control.
Our first article in this series focuses on the top ten considerations of entering into a joint venture in this sector and in our next article, we'll explore how to structure agreements for your joint venture.
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.
