Joint ventures may take different forms. It may comprise a contractual arrangement. The most common form involves the formation of a new company with shareholdings for the participators. There is invariably a joint venture / shareholders agreement which sets out the terms and conditions of their arrangement.
Joint ventures range from a short-term arrangement relating to a particular tender and project to a permanent business. The venture may be, for example, for a particular subsidiary purpose such as the supply of components or parts to the joint venture parties for the purpose of their business.
A full function joint venture is a standalone business. It may be based on new technology and inputs contributed by the participators. A joint venture may involve the full-scale merger of existing businesses.A full-function joint venture can trade by itself and will usually have its own employees, facilities, assets, funding, et cetera.
A limited function joint venture may carry out specific functions under the control of its shareholders. They may be research or development functions. They may be the development of a new product, source or input.
A joint venture company, as a separate legal entity can own and deal in its own assets and can sue and enter contractd in its own right. The ability for the joint venturer shareholders to limit liability in respect of losses of the joint venture, is a significant reason for choosing a company format.
The legal relationship of the participants will usually be governed by the Constitution /Memorandum and Articles of Association of the Company and by a separate shareholders or Joint Venture Agreement. The Joint Venture Agreement will specify how the parties are to capitalise the company and what guarantees and assurances are to be made to third parties.
The agreement will set out the detailed arrangements in relation to the control and management of the joint venture. It will cover the division of powers between the board, management and shareholder and how control is exercised.
Directors are usually nominated to the board, by each of the participants. Directors are generally be obliged to act in good faith in the interests of the company. The Companies Act has modified the rules in relation to director’s conflicts of interest, in a way which facilitates joint ventures.
Types of Company I
A corporate joint venture uses a company or an equivalent corporate vehicle in another jurisdiction to hold the assets and to trade. Most joint ventures take a corporate form.The company may be formed in Ireland or abroad. It may be a public company or much more commonly a private company. It may be limited or unlimited.
A PLC may offer shares to the public and is subject to a higher level of corporate compliance. It is rarely appropriate or required for a joint venture.
A limited company is the most common corporate vehicle in Ireland. The private company in the UK is the equivalent. Shareholders have the benefit of limited liability up to the amount of their nominal share capital amount, and any share premium agreed on their issue.
Types of Company II
Private unlimited companies have much of the same characteristics of a private company save that the members are liable to contribute to any shortfall in the event of insolvent winding up. Formerly, there was the advantage of an exemption from filing accounts. This exemption has been made restricted by the Companies (Accounting) Act 2017.
Corporate entities may be established in all EU countries and in most jurisdictions worldwide. Jurisdictions offer variants on the type of corporate vehicle available. EU law and international practice provide for broadly similar features in company law worldwide.
Corporations are regulated and are incorporated state-by-state in the United States. Many corporations are formed in Delaware, which seeks to have an attractive corporate regulatory regime.
Two Corporate Corporate JVs
There may be two new formed joint venture companies who are parties pooling agreement. There may be an identical mirror image board of directors with common management. There may be common accounting mechanisms.
There may be profit-sharing arrangements on a pre-agreed basis. There may be cross-shareholdings in the operating subsidiaries with each promoter having shares in two or more joint venture companies.
The promoters may wish to have a single identity for management and operational purposes while maintaining two separate entities for taxation and other legal reasons. Such arrangements are generally driven by taxation considerations.
Contractual Joint Ventures I
Contractual joint ventures are based on a contract or cooperation agreement between the parties without the formation of a joint venture company or another vehicle. They may involve the sharing of costs and resources and the consequent income and gains.
The parties will wish to ensure that the arrangement does not constitute a partnership, where at all possible. Common law jurisdictions’ partnership laws provide as a matter of law that the sharing of profits and losses is deemed a partnership regardless of designation by the parties.
An unincorporated venture may be appropriate where the parties cooperate on a once-off project on the basis of shared costs and outputs. This may arise in the context of
- research and development or equivalent technical cooperation;
- a bidding agreement in the context of a tender for a project;
- the exploration for and / or development of resources.
An agreement may be entered under which each specialises in the production or development of particular products or inputs and agrees to supply them to the other.
Contractual Joint Ventures II
An unincorporated joint venture may be termed a project agreement, consortium agreement, bidding agreement etc. It seeks to allow parties to spread the risk and benefits of a project, particularly one undertaken abroad. It may permit the participation of local parties in another jurisdiction.
An effect of the contractual joint venture is that the parties may be jointly and severally liable to third parties. This may arise by partnership law or by the terms of the contracts which they enter. They may need to provide for proportionate contributions in respect of liabilities amongst themselves. However, if one party becomes insolvent, the other parties remain fully liable for their obligations, as regards the external third counterparties and creditors.
In some cases, there may be a cooperation or project venture agreement which is unincorporated, but which uses a corporate vehicle which provides services or acts as a nominee/ front or representative as regards third parties. There may be a vehicle for raising project finance.
The partnership structure is infrequently adopted as the legal structure for a business venture by companies. The parties may be satisfied to conduct their joint venture through partnership.Partnership may be appropriate where it is desirable that parties have common direct interest in the underlying assets of the venture and direct unlimited liability to third parties is acceptable.
If an arrangement is in substance a partnership, then it is deemed to be such, and the Partnership Act applies irrespective of the attempted designation otherwise. Partnership law carries a number of distinct disadvantages for joint venturers. In particular, each party is liable for the obligations entered by the other in the course of the partnership.
Partnerships offer simplicity. The formalities required in terms of filing are minimum. There is considerable flexibility. Partnerships have tax transparency. They are not a separate entity which is taxable. This may be effective in eliminating an intermediate level of taxation. Taxation legislation generally relieves dividends, payments and interest to other corporates or those in whom there is a certain minimum level of shareholding.
No public filings are required, which is in contrast to the position with a company. This can be useful in terms of confidentiality. The scope for avoiding filing has been narrowed significantly by the 2017 Companies Act.
Limited Liability Partnerships
Limited partnership structures exist in the UK and in most European civil law jurisdictions. No such general structure exists in Ireland. In some jurisdictions, in particular, in the United States, limited partnerships are commonly used. The limited partners tend to be in the nature of investors or sleeping partners while the general partner is responsible for the business. The general partner is commonly itself a corporate.
LLPs have become wide spread in the UK in recent years. An LLP is an entity with a legal identity separate from its members. It has capacity to do anything a person can do. Every member of an LLP is representative or “agent”, but they will not bind the LLP where they are not authorised by it to act and a third party is aware of the lack of authority. As a separate legal entity, the LLP’s members are not liable for the debts and obligations of the LLP to third parties.
LLPs like companies are subject to certain formalities in relation to how they carry on their business. They are required to file account with Companies House. An LLP must have at least two members. New members can only be admitted with the agreement of existing members. The law sets out the “default” rules in relation to management of an LLP. The parties are free to agree alternative mechanisms.
An LLP is taxed as a partnership under UK law, notwithstanding the fact that it is a separate legal entity. The individual members are therefore taxed in their own names directly for their proportion of profits. There is therefore a single level of taxation only.
The advantage of an LLP is that it combines separate legal entity limited liability for its members with the tax status of a partnership. This makes them attractive vehicles for certain types of joint ventures that would formally have chosen the partnership mechanism.
Ireland lacks a modern limited partnership structure. The older limited liability partnership structure is provided for by the Limited Partnership Act 1907. This Act still has the force of law in the United Kingdom and the Republic of Ireland.
The general partner has unlimited liability whereas limited partners have limited liability. The general partner may be a corporate entity. The limited partner has no authority to bind the firm. He must not take part in the management of the firm. If he does so, he loses the benefit of limited liability.
Limited partnerships are limited to 20 members. Limited partnership particulars must be registered with the Companies Registrations Office. Unless otherwise agreed, no new limited or general partners may be introduced without the consent of the limited partnership.
Limited partners have the advantage that there is no double layer of taxation. Any profits accrued proportionately to them directly. Several of the tax advantages which were formerly available to limited partners have been limited by legislation.
European Economic Interest Groups are formed under EU. They provide a European legal basis to carry out economic activity through in common. They are in effect subject to certain limitations, which limit their use as joint venture vehicles.
A European company can be formed under European Union Legislation. It is known as Societas Europea. It has not yet emerged as a proper form of joint venture structure. Reforms have been proposed at European Union level which may improve take up on the use of the SE.
The REIT, or Real Estate Investment Trust enables qualifying companies and groups to elect to be treated as REIT. The effect of becoming an REIT is that subject of certain conditions, the company will be exempt from corporation tax on profit and gains. It is not usually suitable as a joint venture vehicle.
In order to qualify for the REIT tax regime, a REIT must:
- be resident in Ireland and not resident elsewhere
- be incorporated under the Irish Companies Acts
- be a listed quoted company which is traded on a main Stock Exchange in an EU Member State
- not be a close company (subject to certain ‘good shareholder’ exceptions)
- derive at least 75% of its profits from the carrying on of a property rental business*
- the business must consist of at least three properties, no one of which must be more than 40% of the total
- maintain a 1.25:1 ratio of income to financing costs
- hold at least 75% of its assets, by market value, in its property rental business
- maintain a loan to value ratio of not more than 50%, and
- distribute at least 85% of its income by way of dividend to its shareholders (income does not include capital gains).
Research and Development /Collaborations.
Parties may agree to collaborate in research and development or to exchange or share technical knowledge in a particular field. There will not generally be a trade so that there is usually little risk of designation as a partnership.
Collaboration agreements are commonly formed by way of a contractual arrangement. There may be a corporate entity formed for some limited purposes.
The range of research and collaboration agreements are broad. In some cases, one or a number of developed companies and businesses may sponsor a program, perhaps led by a college or university, and receive the right to participate in the fruits of or receive a financial return and other benefits of the research.
Parties may pool existing know-how for research and development purposes. They may agree to share the costs and benefits of the program. In some cases, they may agree for the future joint protection or exploitation of the intended product of the research. A company may collaborate with another in its field on the basis of obtaining rights of first refusal on future research projects together with rights to exploit the fruits of the research.
The collaboration agreement should deal with key matters including
- the scope and purpose of the project;
- the relative responsibilities and obligations of the parties;
- the time frames;
- the contribution of know-how and technology;
- confidentiality and disclosure;
- the management structure including the contractual arrangements for decision making;
- funding arrangements and contributions.
- ownership of the fruits of the results;
- liabilities of parties to third parties and employees;
- termination; either early or on completion;
- dispute resolution and arbitration;
The relevant competition law block exemption should be complied with, in the absence of a competition law analysis.
Joint Operating Agreements
Joint operating agreements are common in the oil and gas industry internationally. They provide for exploration, development, exploitation and production of the resources concerned. In common with other joint venture and collaboration agreements, they should deal with
- the identity of the parties;
- appointment and powers of the operator;
- management and reporting;
- finance budgets and funding;
- management and approval procedures;
- pre-emption rights;
- abandonment costs;
- clean up and environmental issues.
Development agreements may be entered between businesses which trade in the same sector, in relation to particular projects such as the development of a major new product. The parties may thereby spread risks and share costs where a substantial expenditure is involved.
The parties should agree on the level of contribution and the inputs and obligations of each party. The cost of development, testing, manufacture, marketing etc., and revenues are shared in agreed proportions. In some cases, the parties may agree to share the revenue rather than the profit. This reduces the risk of a designation as a partnership.
The following matters may be negotiated and reflected in the agreement;
- the mutual obligations of each party in respect of the development program;
- work schedules, designs, project roadmap;
- responsibility for funding, employment cost, materials, facilities.
- the contribution of funds and other resources.
- management of the program and decision making,
- sharing of costs, losses and benefits
- responsibility for product liability,
- licensing of technologies;
- future licencing arrangements,
- liability to third parties.
The agreements should be compatible with the relevant EU block exemption.
A co-operation agreement is an arrangement under which participants agree to associate as independent contractors. The rights and duties of the participants arise from the agreement and associated arrangements. The agreement will specify the scope of the venture, its obligations and the commitment of the parties.
Unlike the case with partnership, participants in a purely contractual arrangement are not necessarily responsible for the liabilities and obligations of the other parties to the joint venture. Each participant will be exposed to liabilities and claims which arise from his own activity which is assumed or for which it is vicariously liable under the joint venture arrangement.
A co-operation agreement may be suitable where the parties wish to avoid the formalities of integration of a corporate structure or partnership and the integration of the tax accounting and regulatory requirements which come with them. It may be appropriate in relation to property development, tenders for construction contracts, exploration and development projects and other projects where participants make different contributions.
Short-Term Single Purpose Ventures
A company may be formed for the purpose of a single project, such as a building or engineering works project or the provision of particular services. It may subcontract elements of the business to subcontractors.
A JVC may the means by which two or more parties acquire an existing business or company with a view to dividing its assets, business and liabilities in due course.
A strategic alliance is a loose arrangement which may lack any separate identity. It may be little more than a cooperation agreement or understanding, possibly on a project-by-project basis. Others may be more formal and have standing arrangements. In each case, the position is determined by the contracts between the parties.
There may be a mechanism for management or regulatory structure. There may be cross representation on each other’s boards. There may be stand-still arrangements which seek to limit subsequent disposals and acquisitions.