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JOINT VENTURES FOR BUSINESSES
In this article, we give you a basic understanding of how
partnering can be used to develop a relationship between
businesses.
The legal relationship when partnering is called a joint
venture.
We cover –
- What are Joint Ventures?
- Why are Joint Ventures becoming popular for business
partnering?
- Examples of joint ventures for businesses
- Specific frameworks for Joint Ventures for businesses
- Are you interesting in documenting a joint venture? Here’s
how!
- Conclusion
What are Joint Ventures?
When two people come together to make money, they can be
joint venturers!
They can also be partners in a partnership, shareholders in
a company or unit holders in a unit trust. These are all
kinds of legal relationships that can be formed when two
people come together to make money.
Justice Tobias has stated that legally, a joint venture is -
… an association of persons for the purpose of a particular
commercial undertaking with a view to mutual profit with
each participant usually, but not necessarily, contributing
money, property or skill.
Source: Thompson v White [2006] NSWCA 350 – NSW Court of
Appeal
What makes joint ventures a special kind of legal
relationship?
Joint ventures have this framework:
- people (who have something to contribute)
- joint venture project
- specific contributions by each joint venturer
- profit share
- expiry or termination
The specifics of this framework must be written down in a
joint venture agreement, which is signed.
Why are Joint Ventures becoming popular for business
partnering?
Partnering is very popular with business management gurus
and coaches because it provides a get to know you
opportunity where specific resources are committed to a
business opportunity but without committing to a business
merger or takeover.
Partnering like personal relationships, can continue and
grow, can be broken off or can lead to a full merger.
Partnering is very attractive to a business that has the
management resources and the money to take advantage of a
business opportunity but lacks a detailed knowledge or
experience in the area where the business opportunity
exists. Instead of wasting its resources and money and time
to build up the necessary knowledge and experience, the
business decides to partner with another business which does
have the knowledge and experience, but does not have the
management resources and money to take advantage of the
business opportunity.
Business joint ventures are a perfect tool to be used for
partnering!
Examples of joint ventures for businesses
- a tourist resort might partner with an airline to develop
‘fly and stay’ packages to offer to the traveller. The
packages can be enhanced by preferred airfares and
promotions such as ‘stay one extra night free’. This joint
venture will be successful if bookings increase as a result
of the packages.
- a product manufacturer might partner with a local product
manufacturer in different area, state or country in which
the product manufacturer does not have a presence, as
opposed to setting up in that place without local knowledge.
The product manufacturer will increase sales without
increasing expenses and the local product manufacturer will
benefit by adding more product lines and from sales without
having to develop the product lines themselves. The
partnering relationship could involve the local product
manufacturer supplying the product manufacturer with some
its own product lines. This kind of partnering works well
for food and health products.
- a property developer might partner with a land owner, a
financier and a property investor to develop a commercial
property. The property developer provides the expertise in
design and construction, approvals and project management to
the venture and shares the financial risks and development
profit with the owner and the financier; the land owner
contributes rather than sells the land to the venture and
shares in the development profit; the financier provides the
finance and also shares in the development profit; and
finally the property investor has a new development which
they purchase at a pre-agreed price, and have ample time to
raise the funds needed for the purchase.
Specific frameworks for Joint Ventures for businesses
Frameworks for joint ventures are very flexible. These are
some of the flexibilities that exist in the frameworks:
- people (who have something to contribute)
‘People’ can be individuals, companies or trusts - they can
all be joint venturers. Two or more joint venturers are
possible – the number of joint venturers is not limited.
Only people who agree to profit share can be joint
venturers. Each joint venturer has a ‘share’ in the joint
venture. A joint venture can either be unincorporated, which
is to say, the ‘people’ carry on the joint venture in their
names, or incorporated, which is to say, the ‘people’ form a
company or company/trust which is the ‘umbrella’ under which
the joint venture is carried on.
- joint venture project
Joint venture projects are specific, to cover a particular
project and/or continue for a definite period of time. This
specificity is one point of distinction between a joint
venture project and a partnership. To illustrate - a travel
package or number of packages might be developed and sold; a
product manufacturer will joint venture some of its product
lines; a property developer will develop one or a number of
properties for one investor. If the relationship is to be
more general, or starts as a joint venture and becomes more
general, then the joint venture will be transformed into a
merger or takeover of the businesses. For some businesses,
forming a joint venture is the first step along the road in
a relationship, and at the end of the road, a full merger or
takeover takes place.
- specific contributions by each joint venturer
Joint Venturers must contribute to a joint venture. The
specific contribution might be money, it might be skills or
product knowledge, and it might be a property or a product.
A joint venturer might make more than one kind of
contribution. Charging an agreed price or fee for a
contribution is a sale or fee for service arrangement, and
is not normally considered to be a contribution to a joint
venture.
- profit share
The objective of the joint venture is to make a profit to be
shared between the joint venturers. For this reason, a joint
venture is not an agency agreement, a distribution agreement
or a services agreement where a commission or fee is
charged. A joint venturer is still entitled to charge
expenses and fees for carrying on the joint venture, on a
pre-agreed basis. But each joint venturer must contribute
something they do not charge for, often in the form of time
and effort, and leave a profit to be shared. The way in
which the profit is to be shared need not be equal – it can
be shared in any proportion.
- expiry or termination
All joint ventures have expiry dates. An expiry date might
be an agreed period of time, or it might be when the joint
venture project comes to an end for some other reason. A
joint venture for a travel package or for a product might
have a one year expiry date, at the end of which it might be
reviewed and either continued for another period or end. A
joint venture for a property will end when the property
development or project is completed. If a joint venturer
does not make their agreed contribution or for some reason
the joint venture project cannot continue then it must be
terminated before the expiry date. The right to terminate
will be for the ‘innocent’ person to initiate if the other
is in default, but if the problem is outside of the hands of
the joint venturers, then the termination can be mutual.
The framework must be put in writing, in the form of a joint
venture agreement. If a company is formed, the joint venture
agreement is often called a shareholder’s agreement. If a
company/trust is formed, the joint venture agreement is
often called a unit holder’s/shareholder’s agreement.
Are you interesting in documenting a joint venture? Here’s
how!
Documenting a joint venture starts with a Heads of Agreement
which the joint venturers have agreed. A Heads of Agreement
will contain the framework of a joint venture, namely the
people, the joint venture project, the specific
contributions by each joint venturer, profit share and
expiry or termination. These parts can be used as headings
for brainstorming a joint venture.
The Heads of Agreement can be a series of emails, or be a
discussion paper, minutes of meeting, etc. The Heads do not
need to be initialled or signed, but can be. Heads of
Agreement are often endorsed as being draft or subject to
contract to indicate that a formal legal document is
required before the joint venture is legally binding.
A joint venture must be in writing and be signed by the
joint venturers to become legally binding. Drafting a formal
joint venture agreement is where Cordato Partners is at your
service!
Conclusion
Joint ventures are a fine way to do business partnering!
As Justice Kirby said in the Bridge Oil Case:
... A joint venture is a particular and increasingly
familiar form of relationship between business parties,
corporations or individuals … the main features of [such
joint ventures] are typically defined in a written agreement
[where] the parties … contemplate a harmonious and
cooperative relationship of mutual advantage…
Source: Australian Oil & Gas Corporation Ltd v Bridge Oil
Ltd (1995) 14 AMPLABull 60 NSW Court of Appeal
For a guide to joint ventures for real estate – coupled with
vendor finance strategies go to
www.vendorfinancelawyer.com.au / joint ventures for real
estate.
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