Negotiating the value of your input to a Joint Venture

We are often approached by people wanting to go into a “Joint Venture” with other party(s) so as to maximise the benefit of their combined skills.  At first glance the synergies are generally obvious and some sort of joint endeavour usually makes commercial sense.

When asked for more information about the exact nature of the proposed “Joint Venture” it becomes clear that they either don’t really know what structure they would like, or don’t understand the issues involved in choosing the most appropriate Joint Venture vehicle.

The information in this article is based on our experience in assisting clients to negotiate and document various different types of Joint Ventures.

What can you provide to the Joint Venture?

Before looking at the types of Joint Venture vehicles that are possible, it would seem appropriate to look at the inputs that each party may provide. The participants may be able to provide any combination of:

•  Capital;
•  Business development;
•  Existing clients;
•  Intangibles such as data;
•  Industry expertise;
•  Intellectual property (various kinds);
•  Land;
•  Management;
•  Specific industry requirements; or
•  Technical expertise.

Note that this list is by no means exhaustive.

Quantum of inputs

Once you have defined the inputs it’s worth considering the quantum of these inputs.  Put simply, does the Joint Venture require a participant to provide a monthly draw down of capital, or is a lump sum required?

If one participant is contributing labour, how long do they have to provide this labour before being paid a salary, or being entitled to dividends? Can the amount of labour be quantified?

If the input is in the form of intellectual property can it be licensed to the Joint Venture?  What you as a Joint Venture participant will provide greatly influences the extent to which you share in the outputs of the Joint Venture.

Capitalisation

Certain Joint Ventures require large amount of capital.  When this is the case it’s usual for participants to consider the issue of dilution that further capital raising may have on their percentage of the equity in the Joint Venture.  Alternatively if the Joint Venture is funded by loans from the participants, what are the parties liability to advance further funds?

Outputs of the Joint Venture

Assuming that the combined results of the inputs does in fact produce some outputs, it is necessary to consider ownership of these outputs.

The aim of any sort of Joint Venture is to create some sort of output.  The form of this output can vary depending on the type of Joint Venture and the industry that it operates in.  For example the aim of a mining Joint Venture may be to produce a certain type of commodity, whereas a software Joint Venture may be aimed purely at client and revenue generation.

Equity participation and intangible assets

In considering the outputs of a Joint Venture, ownership of the resultant equity needs to be considered.  This is usually valued in an informal manner and “cash is always king”, unless one participant is able to contribute a unique and special skill that is necessarily scarce or valuable.  Ownership of other intangible assets such as the various forms of intellectual property should also be considered particularly in terms of whether any licensing issues arise.

Control of the Joint Venture – the Management Agreement

In considering the issues that arise because of differing levels of inputs and ownership of outputs, the day to day operation of the Joint Venture needs to be considered carefully.  Consider the following practical issues relating to the operation and control of the Joint Venture:

• How is the Joint Venture managed on a day to day basis?
• Is there a separate Manager appointed?
• What authority does the Manager have to bind the Joint Venture?
• Is the Manager an Equity Participant?
• What financial controls are in place?
• How are funds expended?
• Who does the manager report to?
• Are the actions of the Manager approved  in advance?
• Must the Manager submit a budget or program?

Term

It’s common for Joint Ventures to include a “Sunset Clause” if they are formed for a specific project.  The issue of limiting the term may need to be considered to protect the interests of the participants.  Limiting the scope or purpose of the Joint Venture vehicle is also common.

Rights to terminate

Termination always gives rise to interesting discussion because of the effect on the non-breaching Joint-Venturer.  Participants should consider what rights and obligations give rise to the right to terminate and whether there should be any genuine pre-estimate of damages in the form of a liquid sum on the occurrence of a termination event.

Effect of termination

If the Joint Venture is terminated for any of the pre-agreed reasons, the effect of termination needs to be closely considered, in light of the equity in the Joint Venture and ownership of the intangible property.

What form should the Joint Venture vehicle be in?

There are numerous types of entity that can be loosely classed as Joint Ventures.  See the following article on our website entitled “What is a Joint Venture”? for an explanation of the legal distinctions.

Limitation of liability

Another important factor is the extent to which  legal liability may need to be limited for the Joint Venture participants.

Tax Implications

Clearly one important decision in determining the appropriate Joint Venture structure is the different tax positions and opportunity for distribution of losses or profits that the different structures present.

Once you have fully considered the issues associated with the extent of your inputs to a Joint Venture, then you are best placed to negotiate more favourable involvement in the outputs.

Further information

Dundas Lawyers has negotiated and documented most type of Joint Ventures for its clients.  To ascertain how Dundas Lawyers can assist you to maximise the benefits of participation in a Joint Venture while limiting your risk, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

---

Related insights about joint ventures