What Are the Legal Considerations for a Joint Venture?

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Table of Contents

• Benefits of a Joint Venture
• Features of a Joint Venture
• Scope of a Joint Venture
• Joint Venture Vehicles
• Key Takeaways

A joint venture is where businesses or individuals enter into an agreement to work on a project together to achieve a particular goal. The parties exploit a business opportunity with the aim of profit. Even though parties enter a joint venture together, the individual parties bring their own assets and finances. There are some key considerations a participant should factor in before entering a joint venture. This article takes you through the legal considerations for a joint venture.

Benefits of a Joint Venture

Some key advantages to establishing a joint venture include sharing resources and risk (including financial, market and product liability). When you and another business join forces for a specific project, you each bring different skill sets that can allow you to create a new product. Likewise, you can access new markets that may have been difficult on your own. 

Features of a Joint Venture

Each joint venture is different. There are, however, some common characteristics, which include the following:

• joint ventures are usually one-off enterprise projects;
• the parties to a joint venture manage their own finances and can gain tax advantages;
• joint venture parties remain separate legal entities; and
• joint ventures are not a separate legal entity, although parties can create a company vehicle to manage the joint venture.

Notably, joint venture members are not partners in the legal sense. It is often viewed as a partnership. However, the term ‘joint venture’ is appropriate to refer to a joint undertaking or activity carried out through a structure other than a partnership, such as a company, trust, agency or joint ownership.

Scope of a Joint Venture

Parties to a joint venture should clearly define each member’s objectives, roles and expectations. This includes, in detail, what each party will do and where they will each be responsible for meeting targets or completing work. The joint venture agreement should also cover:

• how parties will deal with property;
• how the joint venture will enter contracts; 
• who will own the intellectual property created by the joint venture; and 
• who will be on the management team to guide the project. 

Common considerations in the initial scoping stage include contemplating what type of actions constitute a breach of the joint venture. Likewise, what remedies would the other parties have against the alleged defaulting party? If the parties can not reach a commercially negotiated outcome, you might defer to mediation, arbitration, or another predetermined negotiation process. Further, if the above means cannot resolve the dispute, what avenues will each party have to exit the relationship? 

Another legal consideration is resolving deadlocks. In particular:

• If the joint venture is between two parties, will there be a mechanism to allow one party to buy out the other party’s interest? 
• Suppose a party has a material change in its control (for example, a party being a Company where greater than 50% of its share composition has changed hands). Will that allow the other party to exit the relationship? 
• If the parties have contemplated expanding the joint venture, how will new members be able to accede to the terms and join? 

Joint Venture Vehicles

At its simplest level, a joint venture will require you to establish a separate legal entity. Participants hold investments in the entity, and the entity owns its own assets and can sue and be sued in its own name. Most commonly, a joint venture can either be:

• entities (such as companies); and
• relationships between participants (such as trusts, partnerships or other forms of association).

As a company, the company will own the joint venture’s assets. A company constitution and a shareholders agreement may also set out the rights of the participants. For a trust, one entity holds the assets of the joint venture on behalf of the participants. The participants are entitled to share in the profits of the venture proportionate to their respective holdings.

Finally, it is important to provide certainty about:

• whether the joint venture members will be allowed to encumber their interest in the joint venture; 
• how each member will finance their respective proportion; and 
• how members will share profits, losses, liabilities, and responsibilities. 

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Key Takeaways

There is no particular legal meaning to a joint venture in Australia. It is an association of persons for a particular commercial endeavour. As such, a joint venture can take many forms. Likewise, the legal considerations for a joint venture will depend on the joint venture vehicle used to establish the undertaking or endeavour.

For assistance with your joint venture, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.