Small to mid-sized business owners often partner with other businesses to develop strategic relationships for growth, profitability, and additional market share opportunities. This relationship is referred to as a joint venture. A joint venture is a business arrangement between two or more businesses to pursue a specific project or a continuing purpose - think NASA and Google’s joint venture to create Google Earth. A joint venture could be its own entity or could be an agreement among the different entities. In either scenario, the partnering businesses are well-advised to enter into a joint venture agreement. When drafting the joint venture agreement, businesses should carefully consider the following issues:
Scope of the business or project: The joint venture agreement should be careful to specifically define the scope of the project. The scope can be limited to the performance of certain activities or can be broad to encompass a wide range of projects. Further, the joint venture agreement should address corporate opportunity issues (i.e., Can a party to the joint venture agreement engage in activities that the joint venture has decided not to pursue?).
Contributions: A joint venture agreement should detail the contributions of each party to the agreement. This will help ensure that the parties’ expectations are aligned.
Management: A joint venture agreement should address how decisions will be made on behalf of the joint venture. The agreement should address whether one or many individuals are given the authority to manage the day-to-day operations of the joint venture. If management decisions are devised by a group, the joint venture agreement should consider tie-breaking mechanisms.
Asset and Liability Allocation: In order to help avoid disputes at the dissolution of the joint venture, the joint venture agreement should specify the ownership of assets that a party brings into the joint venture as well as allocation of revenue generated, assets developed or liabilities incurred by the joint venture.
Confidentiality and non-compete provisions: If the parties to the joint venture intend to exchange confidential information or the subject matter of the joint venture should remain confidential, then provisions related to the non-disclosure of such information should be included in the joint venture agreement. Similarly, the parties should consider provisions related to the prohibition that the parties use confidential information to the detriment of the joint venture or the other party.
Exit options: Even with the good intentions of the well-drafted joint venture agreement, disputes may arise between the parties. The joint venture agreement should be careful to establish dispute resolution mechanisms at the onset of the relationship so that the resolution of the dispute does not become the focus of the dispute.
Please contract Parker McCay’s Corporate Department to discuss how these and other considerations could impact your business interest when entering into a joint venture.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.