Myerson’s manufacturing solicitors explore joint ventures and their benefit for commercial companies. After COVID-19 and Brexit disrupted the global supply chain, the manufacturing industry has faced constant pressure. The manufacturer’s pressure has been heightened by a decline in industrial production, the instability of the UK economy, the current conflict in Ukraine and the increasing price of energy, transportation, and raw materials. A joint venture is a variable agreement that manufacturers can access in periods of crisis and expansion, which allows the manufacturing partners to divide costs, reduce risk and lower capital expenditure. In an international market, a joint venture can assist the expansion of manufacturers into foreign markets whilst theoretically restricting the exposure of each partner to risk.
What is a joint venture?
Within a joint venture arrangement, two or more independent parties enter a commercial agreement to collate resources. A joint venture can be intended for a certain project with time limits or a conventional business pursuit which expands for an indefinite period.
Why enter a joint venture?
- Spread risk– All entities involved in a joint venture arrangement will share a portion of the risk, which means that should the joint venture be unsuccessful, the potential loss is shared between the partners engaged in the joint venture.
- Combine skills and expertise– A joint venture can help parties share their knowledge, expertise, and insight with the other party. Greater resources will help develop a product or service. For example, Siemens Energy and Air Liquid’s joint venture aimed to progress industrial-scale renewable hydrogen electrolysers to tackle climate change. Companies can also implement joint ventures in similar markets, as expert knowledge can be shared among businesses to advance a product or service of mutual benefit.
- Pool resources– Alongside skills and knowledge, a joint venture can permit entities to share employees, technology, equipment, or capital. The collating of manufacturing resources is an important benefit as projects tend to require significant financial investment to support the research, development and machinery used in developing a product.
- Overseas markets– Joint ventures can support entities who want to enter the global market, particularly in countries with limitations regarding trading. In addition to simplifying the process of trading in a foreign country, the parties can benefit from the shared network of connections and potential customers, along with the existing infrastructure of either party.
Vehicles for joint ventures
The preliminary decision the parties need to decide on is the format of the joint venture arrangement. The most popular option is the formation of a new joint venture company. A joint venture company is the most frequently used format for a joint venture as it is a well-practised corporate structure supported by a distinguished body of law in England and Wales.
A joint venture company can be equally owned, or there can be minority and majority owners based on each party’s stake in the joint venture and the agreed commercial terms. Once established, the new company can begin trading; it will also possess all assets (anything created within the project, such as intellectual property) and venture liabilities.
One primary advantage is the ability of entities to limit their risk in respect of the joint venture company. The joint venture company will hold an independent legal personality and is responsible for its debts and tax. However, as the newly established joint venture company will hold no viable credit history, the joint venture partners may be required to offer third-party security or guarantees before any third party grants the joint venture company credit.
The constitution of a joint venture company
The entities of a joint venture can present the joint venture’s aim, time, scope, relationship, and extent of control. The constitution allows for flexibility and certainty so that involved parties can pursue other commercial interests independent of the joint venture. Moreover, if each party is a corporate organisation, a joint venture can benefit from independent tax advice and a tax-efficient approach to expanding profits.
The constitution of the joint venture company is supported by custom articles of association and a shareholders’ agreement that governs the relationship between each joint venture member. Articles of association consist of the specific rules that decide how the company is conducted and are available to the public at the Companies House. A shareholders’ agreement is a private archive that assigns direct responsibilities to each shareholder (typically the joint venture company itself). The constitution oversees matters, including the joint venture company’s primary aims, any decision-making, company funding, confidentiality, access to information, non-compete limitations, transfer of shares and exit procedures from the joint venture.
A written agreement gives parties certainty, as it defines each party’s company obligations and explains how the joint venture business should be conducted.
Alternative joint venture vehicles
If incorporating a company is not appropriate for the joint venture, alternative structures exist, including a collaboration agreement or a form of partnership.
A collaboration agreement is the most basic type of joint venture. It is a contractual disposition by which each entity keeps its capital and earnings, and costs are not collated as the relationship is solely contractual.
There are many types of partnership, such as a simple partnership, a limited partnership, or limited liability partnership. Partnerships can be a happy medium between a joint venture company layout and a collaboration agreement. Partnerships are only an appropriate option in certain situations due to the shortfall of transferable investment in an LLP or the general liability in a partnership that tends to be disagreeable to the commercial parties.
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