Ian Murray, Executive Director- Australian Institute of Export:
From my experience most joint venture partnerships work well, but in saying that, some joint ventures do fail and the cost of failure can be substantial. Unlike an agency or distribution arrangement which can and often are changed due to any number of factors, entry into a joint venture must be viewed as a long term arrangement that benefits both parties.
While it may sound simplistic, the key to any joint venture is to do your homework, ensure that outcomes and investment criteria are clearly understood, really examine the fit and get the right advice.
Doing your homework of course is wide ranging and the due diligence aspects of it are critical, particularly if you are new to a market. But, so too are the more anecdotal aspects and that can simply mean talking to other Australian companies operating in the market that know the key players, their strengths, weaknesses and reputation. If you have been operating through an agent or distributor in a market this may differ a bit but the suggestion that you consult others remains a priority.
Many joint ventures break down simply through a failure of both parties to fully understand the expectations, outcomes and importantly the investment each party is prepared to commit. This needs to be clearly understood, documented and signed off with the appropriate contingencies, otherwise money will come into the equation and failure will loom.
The fit with you and your business partner is critical. Both parties need to have something to offer that complements the arrangement. Size of company is not always important but experience, hunger and mutual respect can be. It is better to have a relationship with somebody who needs you as much as you need them and has the market experience and desire to build a business than somebody who has joint venture arrangements to simply fulfil a regulatory requirement in a particular part of the world.
Finally, get the right advice, independent legal advice or from someone you can trust to look after your best interests. The importance of this cannot be overstated; it is critical. John Kell, Partner at Sydney law firm, Hunt & Hunt outlines some of the key legal issues companies should consider when forming a Joint Venture, including contractual considerations to joint venture operations such as the term of agreement, cost and income sharing, control of the Joint Venture, relationships with third parties and Intellectual Property.
John Kell, Partner- Hunt & Hunt
The meaning of the term joint venture is not precise. Any commercial arrangement between 2 or more parties is in essence a joint venture. Joint ventures can either be incorporated (ie the parties to the joint venture agree to establish a company) or unincorporated.
While an unincorporated joint venture has some of the features of a partnership, there are important differences. These include:
- Whereas a partnership is formed to allow the partners to carry on business together. An unincorporated joint venture is usually established for a particular business enterprise rather than a series of enterprises that together might constitute a business;
- Assets are contributed to the joint venture for the particular enterprise for which it has been established and ownership of an asset will commonly remain with the joint venturer who contributed that asset. In the case of partnership, assets are held by the partnership;
- Joint venturers are not the agent of other joint venturers and are unable to bind them. Partners are bound by the actions of their partners on behalf of the partnership;
- The liability of joint venture parties is several rather than joint. The liability of partners is joint and several.
Important contractual considerations
Regardless of whether a joint venture is incorporated or unincorporated, it is important for the parties to turn their mind to the term of the joint venture. In some circumstances, the term of the joint venture will be determined by the nature of the joint venture (for example, if it was to stage a particular event).
In the case of an incorporated joint venture, the incorporated entity will continue until the joint venturers dispose of their interest(s) or it is wound up. Even so, the parties (shareholders) to an incorporated joint venture will usually want to know that their fellow joint venturers are committed to their joint venture for a minimum period of time. This can be achieved by specifying a period of time when the right to dispose of a joint venturer's interest is not permitted or is controlled in some way.
Contribution and ownership of joint venture assets
The easiest way for parties to contribute assets to a joint venture is for them to contribute cash. In that way, there is certainty about the value of what each joint venturer has contributed.
However, it is also common for parties to make contributions other than cash. For example, one party may have developed intellectual property that they are looking to commercialise with the assistance of others. In another example, one party may have property or land that they wish to develop for a particular purpose again with the assistance of others. Where parties contribute assets other than cash, it is important that all the joint venturers agree on the value of those non-cash contributions so that they can be properly recognised.
Where assets other than cash are contributed to an unincorporated joint venture, the ownership of those assets can be retained by the relevant joint venture party. In the case of an incorporated joint venture, this is not possible as, when contributed, the asset will belong to the incorporated entity. Through a shareholders agreement the parties can address what happens to particular assets if the incorporated entity is wound up.
Cost and income sharing
One of the reasons it is important that the parties agree on the value of the contributions made by each of the joint venturers is to ensure that the costs of the joint venture and income generated by the joint venture are shared between the joint venture parties in proportion to their interest in the joint venture.
Control of joint venture
Control of the joint venture requires agreement between the joint venture parties. In the case of an incorporated joint venture this will be in the form of a shareholders agreement. In the case of an unincorporated joint venture, this can be in the form of joint venture agreement or management agreement. The issues to be addressed in these agreements are similar.
- Membership of the board/management committee – the numbers and manner of appointment, what constitutes a quorum? Should the chair have a casting vote?
- Matters requiring unanimous consent or a special majority;
- Limitation of voting rights in the event of default;
- Calculation of voting rights;
- Procedures for breaking deadlocks;
- How the joint venture is to be managed;
While John has outlined very clearly the most important legal contractual considerations to consider during the formation of a Joint Venture, there are further key considerations which we have not touched upon but should be given due consideration:
- Management of joint venture operations
- Intellectual property
- Financing and encumbrances of joint venturers
- Transfers by joint venturers
The beginning of a Joint Venture might start off with both parties in agreement, however it is important to also reflect on what would happen in the event of a default by either party. While this is not the objective when embarking on a new project it is important to agree upfront the rights of each party in the event of a breach or default of the contract, or if one party wishes to terminate the arrangement prematurely. Yet, this could probably require a follow-up article!
Ian Murray is Executive Director of the Australian Institute of Export. Ian has held senior general management positions with private sector companies including Johnson & Johnson, and has lived and worked in Indonesia, Malaysia, Singapore and Pakistan.
In his role as CEO of the Australian Institute of Export, Ian works with Australian companies of all sizes and across all industry sectors, to develop and grow their business in the international marketplace. As a non-for-profit organisation, AIEx works closely with government and the private sector to drive the development of our Australian resources internationally.
Australian Institute of Export
Tel: + 61 2 8243 7400
John Kell is a Partner at national law firm Hunt & Hunt. He provides a wide range of commercial advice to clients in relation to joint venture arrangements, mergers and acquisitions, contract preparations and negotiations and compliance. John also provides advice to Australian companies doing business overseas, especially in China, and foreign companies entering Australia including set-up, exporting and sourcing goods and materials.
Hunt & Hunt ,