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Business Law


JOINT VENTURES FOR BUSINESSES

Summary

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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