Joint Venture Agreements – Key Drafting Issues
The most important provisions in a JV are:
(1) clearly defined business goals;
(2) the level of ownership and management of each joint venture in the enterprise;
(3) contribution of capital and property rights to assets / distribution of profits and losses;
(4) A dispute resolution mechanism to avoid management problems that could lead to a deadlock or litigation.
(5) termination / liquidation of the JV and the buyout provisions;
(6) confidentiality; and
(1) Clearly defined business goals. The agreement must first set out the purpose of the joint venture, usually a common business interest or a joint investment. For example, paragraph 1 might read: “1.1 Business purpose The joint venture has the following business purpose:” and then describe the business purpose. This paragraph should also specify the duration of the agreement.
(2) Participation level and management functions of the individual joint venture companies. Next, the agreement should set out the roles, responsibilities of the management, and the degree of involvement of each joint venture. This provision is contractually enforceable and must therefore be clearly worded to precisely define the roles, duties, rights and obligations of the parties. In the case of a new company or an investment, representation on the board of directors of the joint venture or on the board of directors of the other party or on a similar governing body is usually provided for.
(3) Contribution of capital and property rights / distribution of profits and losses. The agreement should next describe the capital contributions and other resources that each party will provide to the company, as well as the method and percentage of profit and loss participation for the company. Who is primarily responsible for losses and how and when are the profits split? As a rule, the parties often share their profits proportionately according to their respective holdings. However, in cases where a company makes more money, this company may be given priority in distributing profits.
(4) A dispute mechanism. The agreements should set out the terms of an internal mechanism for settling disputes between the joint ventures. This mechanism is required to avoid management issues that could lead to a deadlock or litigation. During the existence of the joint venture, no party would benefit from judging claims externally through litigation or arbitration. This provision could create a body staffed by senior managers from each partner company and responsible for hearing and settling disputes.
(5) Termination of Joint Venture / Buyout Scheme. Joint ventures should not last forever. The parties often set a termination date to which the contractual arrangements end or one party buys the other party’s interest. It may be difficult to negotiate provisions for acquisitions in advance as parties may not be able to accurately predict the value of the strategic alliance or joint venture at the time of acquisition. One solution is that the valuation is based on sales or profits at the time of the buy-out or that an external evaluator determines the valuation. Alternatively, the parties may issue a “shotgun” or “auction” rule whereby one party initiates the process by proposing to buy the other party at a particular rating and the other party agrees to buy at that price or to sell or start an auction suggesting to buy at a higher rating.
(6) Confidentiality / Intellectual Property. Parties to a strategic alliance or joint venture should carefully consider how to allocate, control, and protect confidential information and other intellectual property that contributes to or develops in their business relationship. The parties may provide that all employees and advisors who have access to confidential information must enter into a separate, stand-alone confidentiality and non-disclosure agreement. The parties should also consider how to allocate new intellectual property that arises in the course of the relationship. In a classic joint venture in which the new intellectual property becomes the property of the new company, the parties should consider who owns the new intellectual property in the event of a later dissolution of the company
(7) Compensation. Finally, there must be a provision for compensation for a joint venture contract to compensate the Manager and its directors, officers, employees and agents, as well as any person acting as Director, officer, partner, or at the request of the Joint Venture was, trustee, employee or representative of another company, partnership, joint venture, trust or other entity against liability. Most importantly, this provision covers the costs of such a director or employee for the defense of a third party litigation, including attorneys’ fees, judgments, fines and amounts actually and reasonably incurred by such compensated party in connection with the defense or agreement , Action or proceeding where such Indemnified Person has acted in good faith or in a manner reasonably considered by the Indemnified Person to be in the best interests of the Joint Undertaking or otherwise; provided that the behavior of the person compensated is not grossly negligent or intentional or wanton.