Points To Consider When Structuring Joint Ventures

Abstracted from: Discretion, Valor, And Joint Ventures

By: Jeffrey Fraum Tellabs, Napierville, IL

Practical Lawyer - Vol. 50, No. 6, Pgs. 11-19

Overview:

Seeks to demystify the use of joint ventures by illustrating how they differ from other project structures, and when they do or do not make sense. Highlights critical features requiring careful negotiation and draftsmanship.

One size fits few.

A joint venture requires participants to commit to a commercial project over a duration in which their individual interests could diverge from those of the venture. Typically, joint ventures make sense (as compared to other forms of business relationship structures such as licenses or purchases) only when strategic considerations rather than purely fiscal ones so dictate. To illustrate, attorney Jeffrey Fraum notes that one of the principal justifications for a joint venture is the need to rely on an established local participant in a foreign market. In such a case, the other party should carefully vet the local partner's credentials, experience, stability, and history in other cooperative business arrangements.

Assembling the deal points.

Counsel preparing a joint-venture agreement ought to consider a range of issues to avoid deadlock when conducting and winding up the joint business. Territorial or market-based competition between the joint venture and its constituents may also raise issues, so the parties should clearly establish the parameters of the joint venture's business and clear any necessary antitrust hurdles these parameters may impose. A venture must take some legal form­whether a corporation, LLC, or general or limited partnership­and each choice presents operational and tax concerns. Local law may demand specific elements of local control, which in turn may affect how the parties structure the governance controls. Where one party will control the governing structure, such as the board of directors, the author urges drafters to consider which transactions will require supermajority approval and whether, in individual instances, the supermajority vote must be unanimous. Sometimes parties wish to designate particular management roles in the joint venture for their own employees. In any event, the joint-venture agreement should cover initial and follow-on capitalization, allocation of individual and joint intellectual property rights, and related indemnities.

Never enter without an exit.

The author views a good and clear exit strategy as key to a successful joint venture, with procedures such as arbitration specified for resolving deadlocks between the venture partners in running the business. The agreement should specify what events trigger a party's right to end the joint venture, for example: the business's failure to thrive for internal or external reasons, a breach of the agreement, or the insolvency or change in control of a venture partner. When a termination event occurs, the agreement should describe exit mechanics, such as valuation of the joint venture's interests, and should indicate whether control will command a premium. The parties may wish to specify whether one participant will have a call on the other's interest or a put on its own and, if the parties cannot freely sell their venture interests, who will determine the option price. The resolution of all these issues, the author observes, will affect the parties unequally, depending on their financial position at the relevant time.

Abstracted from Practical Lawyer, published by ALI-ABA Committee on Continuing Professional Education, 4025 Chestnut Street, Philadelphia, PA 19104-3099.

Return to Library of Business Information