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Joint Ventures refer to business projects undertaken cooperatively by two or more parties where each contributes different skills and resources and shares in the results of the endeavor. Unlike straight financings where one party’s contribution is limited to money, joint ventures usually include active participation by all parties. For example, one party might contribute technology and product development expertise while the other manages product manufacturing and marketing and provides the financing to get the product to market. Joint ventures can be structured as contractual arrangements between two or more parties or as specialized partnerships. Corporations and limited liability companies can also be used to implement joint ventures, with special contractual arrangements among the owners. Extensive negotiation to determine the precise roles of each party is commonplace. The most promising joint ventures are those where the contributions of the parties compliment one another and the parties duties and expectations have been thoughtfully and thoroughly documented. An example of complimentary parties who might make good joint venture partners might be an early stage company with a promising medical device in development that needs regulatory clearance and an established device distributor who has funds to back the venture through the regulatory approval process and sales people to distribute the product once it is marketable. The issues commonly addressed in joint venture negotiations include the nature, scope and timing of each party’s contributions, form and tax consequences of the venture, technology and intellectual property rights, limits on the scope of the joint venture’s activities, management and decision making authority, reporting obligations, ownership and allocation of profits and losses. Some of the matters typically considered in each of those items are discussed below: · Nature, scope, and timing of contributions. What resources will the joint venture need to succeed and how and when will they be made available? Contributions routinely include cash but other resources are also possible contributions. If one party has a facility or other asset available, such as computer capacity, the asset or use of the asset might be a contribution. Specialized capabilities or personnel might also be contributed. For example, a manufacturer might join up with a distributor to create a joint venture to develop products the first party will manufacture and the other party will distribute. · Form and tax consequences of the venture. Will venture be operated as a series of contractual obligations between separate parties or will their be a company established to conduct the venture’s business? If a company is established what form will it take? Will it be a corporation, partnership, a limited liability company or something else? Whatever the choices, both parties will want the structure to be tax efficient. · Technology and intellectual property rights. Knowledge, know-how and even patent rights are frequently contributed to joint ventures. Intellectual property is almost always developed by the joint venture as a consequence of its activities. In each case, the rights of the joint venture company and the joint venture partners in this intellectual property must be clearly delineated. · Limits on the joint venture’s activities. Joint ventures are typically focused on a specific task and limited in the scope of the activities in which they may engage. This gives the venture direction and protects each of the venture partners from having the joint venture cannibalize other business operations. For example, a video game developer may be willing to joint venture with a European distributor to develop and market a new game conceptualized by the distributor but only if the joint venture is limited to developing games of a certain limited description. The distributor may be willing to provide its distribution capability only if it gets a royalty on sales of the product outside of Europe. · Management and decision making authority. How will the joint venture be managed and who will make major decisions in the future? Will company be essentially independent when it comes to operational decisions or will the joint venture partners be consulted? Often, the party who contributes the critical expertise or capability to a given venture function will negotiate for control or input into decisions that fall within their domain. Balancing the parties’ interests with those of the joint venture in a way that promotes an efficient operation is critical. · Reporting obligations. What kind of financial and progress reports will each of the parties receive? How often will they be delivered and what kind of information will they contain? Will the joint venture’s financial results be audited? How will access to proprietary information that has competitive ramifications be restricted? · Ownership and allocation of profits and losses. How will the profits and losses of the venture be allocated among the joint venture parties? Will one party receive a royalty from sales of the venture’s product? Are there other payments, preferences or rights distributions that need to be documented? In addition to all of these matters, joint venture agreements also frequently spell out in detail what happens to the assets, inventions, inventory and personnel of the joint venture if operations cease. These termination agreements also typically spell out what the parties’ responsibilities are to one another after the termination. For example, if the intellectual property and license rights to continue to pursue one or more activity of the joint venture after termination, the other party may be entitled to receive royalties or other payments if the continuing party succeeds. The party receiving the payments may be prohibited from competing in the market for a period of time or both parties may be free from constraints and permitted to use the intellectual property generated by the joint venture. The agreements between the joint venture partners will determine their relationship during and after the life of the joint venture. See: Licensing, Off Balance Sheet Finanacing. |