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Joint Ventures: laying the foundations

25 Jun 2018

Establishing a joint venture could give you access to resources, capacity, technical expertise and new distribution channels. An exciting prospect, certainly, but thorough research and serious consideration are essential before any decision to commit.  Investor or an entrepreneur, having an understanding of what you are trying to achieve at an early stage is imperative.

A joint venture represents both a monetary and personal investment in a business relationship, and the parties need to be on the same page in respect of the commercial and financial objectives. Abigail Owen, Corporate Partner at DMH Stallard LLP, highlights some of the basics you should think about:

1. Have you carried out due diligence on the other party?

Whether you are very familiar with the other party or not at all, you should make enquiries and obtain information and evidence to understand their liabilities and commitments, financial standing, ability to perform the arrangements anticipated and business structure.  Financial, legal and commercial due diligence should be undertaken to satisfy yourself in that regard, and make sure your consideration is based on current not just historic information.

2. What shares should each party own?

Shareholdings are usually divided relative to the contribution by each party to the transaction (for example, whether that is a financial contribution and/or the provision of a services or facilities contribution). The more shares that one party holds can increase their control on voting for shareholder decisions. If there is not a 50:50 split between the parties, then you should think about minority and majority protection being documented in the joint venture agreement.

3. How is the joint venture going to be managed?

If you are the company with the business acumen for this venture and the other party is providing the majority of the capital investment, then they may not need or want to be too involved in the day-to-day running of the business, simply limiting their decision-making capacity to material matters only. You should agree from the outset how the joint venture is going to be managed, who has what responsibility and each party’s role.

4. What is my return on this joint venture?

This will very much depend on the nature of your contribution. If you put in cash consideration in exchange for shares, then you may draw dividends subject to the joint venture meeting the accountancy and legal requirements and having sufficient distributable reserves. However, if you provided a shareholder’s loan to fund the joint venture, you may be expecting interest and repayments and the timing of this relative to any dividend payments will need to be agreed.

5. What structure works best for us?

A limited company is the most commonly used vehicle for a joint venture which can help to limit the liability of both parties. Other structures, such as an LLP, a co-operation agreement or a simple contractual agreement, can be used if appropriate and/or more suitable for the parties’ organisation and tax structure.

 

For advice on setting up a joint venture or any other corporate matter, please contact Abigail Owen on 01293-558573 or by email at abigail.owen@dmhstallard.com

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