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A joint venture is a commercial enterprise under which two or more persons and/or companies come together for the purpose of conducting a mutual business activity. A joint venture can be formed for a finite or indefinite period of time and may be set up for the purpose of undertaking a specific business activity or it may be run as a going concern.

What are the benefits of operating under a joint venture arrangement?

The primary benefit of a joint venture arrangement is that it allows its constituents to share and leverage their respective resources. The potential for business synergy is limitless, making it a particularly attractive model for small to medium sized businesses that may not have the financial capabilities to undertake major projects. By coming together, such businesses can diversity their activities and enter market segments that were previously out of reach.

Furthermore, joint venture arrangements are particularly attractive because they allow each venturer to:

  • plan their tax separately,
  • apply the income produced by the joint venture as they see fit,
  • dispose of their share in the venture at will, and
  • maintain distinct internal governance structures.

Joint ventures structures

There are three primary structures that may be employed in undertaking a joint venture:

  • Incorporated joint venture structure: involves setting up a new company through which the mutual business activity or project is to be run.
  • Unincorporated joint venture structure: involves each party contributing to the project from the comfort of their pre-existing business model.
  • Management company structure: involves parties utilising a third party management company to co-ordinate the activities of the venture and its receipts.

Documenting a joint venture arrangement

A joint venture does not have to be documents, however, it is prudent to draft a joint venture agreement. Such agreements typically cover:

  • the parties that make up the venture,
  • the scope and nature of the venture,
  • the contribution of each venturer,
  • the liabilities of each venturer,
  • the responsibilities of each venturer,
  • any exclusions and litigations, and
  • the distribution of profits.

The effects of United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1

Since the case of United Dominions Corporation Ltd V Brian Pty Ltd, parties who wish to enter into joint venture arrangements need to be particularly vigilant. The case established that joint venturers stand in a fiduciary relationship vis-a-vee one another. This means that they owe one another a special duty of trust and confidence. Accordingly, upon forming a joint venture, it is not permissible for one or more of the venturers to enter into collateral arrangements or obtain separate advantages under the project without the prior knowledge and informed consent of the other parties.

Avoidance

Entities need to take great care when setting up complex business structures, including joint venture arrangements. They may incur civil or criminal labiality if it is found that they have engagements in tax avoidance or illegal conduct. This may be the case even where the aforesaid was not done intentionally, but arose as a oversight.

Conclusion

Would you like to know more about joint ventures, joint venture agreements or your rights and liabilities arising under the same? Our specialist team of LegalVision lawyers would be happy to assist you with any questions that you may have.

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