How to Protect Your Business in a Joint Venture

Joint ventures are a common way for businesses to collaborate on a specific project or market without merging entirely. They are also a common source of disputes. The document you sign before the collaboration starts determines how those disputes are resolved, and whether the JV survives them.

What Is a Joint Venture?

A joint venture is a commercial arrangement where two or more businesses combine resources, capital, expertise, relationships, technology, for a defined purpose. It can be structured as:

• A contractual JV, a contract between the parties defining how they will work together, without creating a separate legal entity
• A corporate JV, a new company (JV company) owned by the parties in agreed proportions
• A partnership, less common in commercial JVs due to unlimited liability implications

The structure matters. A corporate JV creates a separate legal entity with its own governance, its own liabilities, and its own tax position. A contractual JV is more flexible but offers less certainty and no limitation of liability through the JV vehicle.

The Key Issues to Agree Before You Start

• Governance and decision-making. Who makes decisions, and how? In a 50:50 JV, deadlock is a genuine risk. The JV agreement must provide for deadlock resolution, whether through escalation to senior management, a casting vote, a buy-out mechanism, or dissolution.
• Capital contributions. What is each party contributing, cash, assets, IP, people, and on what terms? Are contributions equal? If one party contributes more, does that affect the equity split or the profit share?
• Profit and loss sharing. How are profits distributed? Is it pro rata to equity, or on some other basis? What happens to losses, are they shared equally, or do they follow equity proportions?
• Exclusivity and non-compete. During the JV, are the parties free to compete independently in the same market? If the JV is in a specific territory or sector, are the parties restricted from operating independently in that space? What about after the JV ends?
• IP ownership. What IP is each party contributing to the JV? Is it licensed in or assigned? Who owns IP created by the JV, the JV vehicle, or the contributing parties? What happens to that IP when the JV ends?
• Exit provisions. How does a party exit the JV? Can they sell their interest to a third party? Do the other parties have pre-emption rights? What triggers a right to exit, deadlock, failure to contribute, insolvency of a party?
• Termination. What brings the JV to an end, completion of the project, a fixed term, agreement, or the occurrence of specific events? What happens to assets and liabilities on termination?

The Importance of Proper Documentation

Businesses enter JVs on a handshake more often than they should. The aligned interests and good faith that exist at the start of a collaboration do not always survive commercial pressure, missed targets, or changes in the parties' wider businesses.

A properly drafted JV agreement that addresses all of the above, before you start, costs a fraction of the cost of a JV dispute. Do not begin a JV without one.

Bonsai Law structures and documents joint ventures for ambitious businesses across the UK. Speak to us before you start, the agreement is the cheapest insurance you will buy.