Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Companies and individuals often seek to expand or develop new products or services nationally or internationally through a joint venture with one or more other parties, enabling all parties to use their respective resources, assets, knowledge and skills to develop an existing or create a new business.
The parties wishing to enter into a joint venture have a number of choices of structure available to them. However, the 3 most common structures used are a corporate joint venture, a joint venture partnership and a contractual joint venture. The choice of structure depends on the circumstances and bargaining power of the respective parties.
During each phase of the joint venture, it is important for the parties to keep focussed on their key reasons for entering into the joint venture and to continually re-assess the merits of and opportunities for the joint venture in terms of the proposed deal that has been struck.
It is important to bear in mind that significant legal or practical changes to a joint venture or requests for the same, after it has commenced, can unsettle and lead to distrust between the parties and even result in the collapse of a transaction. Equally, clear and well thought-out joint venture agreements can help make a joint venture run smoothly from start to finish. Therefore, it is important to be clear as to the reasons for the transaction, identify potential risks and contact your professional advisers at an early stage.
In this article, we provide an overview of each of the 3 most common joint venture structures. If you would like more details in relation to any of the joint venture structures or would like to discuss a potential or existing joint venture, please contact us by telephone or by email at enquiries@orrlitchfield.com
The key features of a limited company are that it has a statutory framework, separate legal personality from the joint venture parties, limited liability, flexibility in relation to its structure, financing and tax planning, and greater publicity.
Statutory framework – The Companies Act 2006 is the primary piece of legislation in relation to limited companies. It contains a number of mandatory provisions, which the parties will not be able to override in contractual documentation. In particular, the parties will not be able to place any obligations on the joint venture company (“JVC”) itself, which could be viewed as fettering its statutory powers.
Agreement mechanism – The shareholders in a JVC will usually set out the primary terms of their arrangements in a formal shareholders agreement. It is likely that there will be a series of ancillary agreements and documents.
Separate legal personality – This is usually viewed as one of the key advantages of a limited company. It allows, for example, (a) assets to be owned by the JVC rather than any of the parties, (b) a separation between ownership and management, (c) the JVC to conduct business and enter into contracts in its own name, and (d) the parties to transfer their interests in the joint venture to other existing joint venture parties or third parties.
Tax – As a JVC has separate legal personality from its owners, it is in general terms not tax transparent. There are some potential tax disadvantages of separate legal personality, including being charged tax on transfers of assets into and out of the joint venture and, depending on the relative proportions of the parties’ interests in the joint venture, restrictions on setting off losses of the JVC against profits of the parties.
Limited liability – Another key advantage of limited companies is that the liability of the shareholders is limited to the amount unpaid, if any, on the shares held by them. The shareholders will therefore only be liable for the company’s debts (over and above their equity investments) to the extent that they provide guarantees or are responsible for the company trading while insolvent.
Flexibility - The separate legal personality of the company provides flexibility in raising finance, allowing the JVC to enter into loans in its own name and to provide security over its own assets. For example, JVCs can grant security in the form of a floating charge, whilst contractual joint ventures and most forms of partnership joint venture (excluding limited liability partnerships) cannot. Separate legal personality may also allow flexibility in tax planning (for example, by allowing the parties to decide when distribution of profits to them will be most tax-effective). There is also inherent flexibility in a company structure, allowing different classes and types of shares to be issued to parties who contribute different resources to the joint venture.
Publicity - Companies are required to file constitutional documents, annual accounts and annual returns with the registrar of companies, which will then become publicly available. However, most parties consider the costs and publicity associated with the statutory regime to not be a disadvantage in adopting the corporate structure.
The key features of a partnership are that it has a limited statutory framework, no separate legal personality from the joint venture parties, unlimited liability for the joint venture parties, limited flexibility in relation to structure, financing and tax planning, and little publicity.
Statutory framework – Standard general partnerships have a limited statutory framework. The Partnership Act 1890 is the primary piece of legislation in relation to general partnerships. Even if the parties do not explicitly state that they are forming a partnership, a partnership will be deemed to have been established if the parties ‘carry on a business in common with a view to profit’.
Agreement mechanism – The partners will usually set out the terms of their partnership in a formal partnership agreement. The partnership agreement will not be able to override the fundamental mandatory principles set out in the Partnership Act 1890 (for example, as to joint liability of the partners for partnership debts) but may override other non-mandatory provisions (for example, those which would otherwise apply to the dissolution or termination of the partnership). The parties will not be limited by statutory restrictions on decision-making processes and will have wide discretion as to how to protect minority participants in the partnership. It is likely that there will be a series of ancillary agreements and documents.
No separate legal personality – Since a partnership is not a separate legal entity, it will not be able to hold assets in its own name. Assets may be held by one or more of the partners on trust for the partnership or by a nominee company in which each partner owns shares. As such, there may be problems with continuity if the joint venture is intended to continue for a long time and it may be difficult to plan for the possibility of exits or transfers of partnership interests.
Tax – A partnership is tax transparent and, as such, partners will be directly taxed on their respective shares of the joint venture’s profits or losses and are likely to be taxed on any transfers of assets to or from the partnership. This may be an advantage to a joint venture partner who wishes to use up the losses of a start-up joint venture to offset any profits or gains in other areas, or offset joint venture profits or capital gains against losses generated by other activities.
Unlimited liability – Under the Partnership Act 1890, each partner is deemed to be an agent of the other partners and any acts carried out by him in the usual course of the partnership’s business will bind the partnership and the other partners (unless the partner is unauthorised and the person he is dealing with knows he is unauthorised). Each partner will have unlimited liability on a joint basis for the debts and obligations of the partnership and on a joint and several basis for the wrongful acts and omissions of the other partners while he is a partner. Unlimited liability is usually seen as a key disadvantage of the partnership structure.
Limited flexibility – Partnerships do not provide the same flexibility as companies in raising finance and tax planning. The partnership will not be able to create security over its assets or delay the distribution of profits to the partners for tax purposes. Moreover, a partnership may be difficult to manage because, in the absence of a separate entity and management board, each of the joint venture partners may need to become actively involved in the day-to-day management of the partnership.
Limited publicity – Unlike limited companies, partnerships are not required to publicly file documentation relating to the partnership. Neither the partnership agreement (if any) nor the partnership's financial information is required to be publicly disclosed, except in very limited circumstances. Partnerships are, however, required to publish changes in composition of the partnership in the London or Edinburgh Gazette (as appropriate).
The key features of a contractual joint venture are that it has no direct statutory framework, no separate legal personality from the joint venture parties, unlimited liability for the joint venture parties, greater flexibility in relation to structure, and little publicity.
Statutory framework – A contractual joint venture is established purely by agreement without any direct statutory framework applying to it. The parties need to set out all the terms of the joint venture and their proposed relationship in the contract between them. One clear advantage is that the parties can mould the agreement to meet their specific commercial objectives. However, it is important that every eventuality is set out in the agreement. This is because if an important term is omitted, there is no statutory default or regulatory regime to fall back on
Agreement mechanism – The parties to a contractual joint venture will usually enter into a formal principal contract (often called a co-operation, collaboration or consortium agreement) setting out the primary terms of their arrangements. It is likely that there will be a series of ancillary agreements and documents.
No separate legal personality – All assets will be owned by the respective parties and the joint venture agreement should set out in detail the terms on which such assets are to be used for the benefit of the joint venture, the responsibilities of each party, the management structure and the financial terms of the joint venture, such as working capital, profits and losses, drawings and the realisation of assets. It should also specify the extent to which the parties are free to act as agents for each other and the terms of any indemnities.
Tax – Contractual joint ventures are tax transparent. Each party will be liable for tax on its share of the joint venture’s profits and losses. A disadvantage of this is that it is not possible for the parties to save tax by accumulating income within the joint venture and deferring profit distribution.
Unlimited liability – There will be no statutory limits on the liability of the parties for debts incurred in connection with the joint venture. However, there are also no statutory provisions which will make the parties liable for each other’s acts and omissions (as there are in relation to partnerships).
Limited flexibility – A contractual joint venture may be cheaper and simpler to establish than a separate company and will not be subject to the administrative requirements associated with limited companies. However, the joint venture will not be able to conduct business and enter into contracts in its own name.
Limited publicity – There are unlikely to be any direct publicity requirements.
In addition to the 3 most common joint venture structures referred to above, there are a number of other possible structures, which mix the characteristics of limited companies and partnerships. These include limited partnerships, limited liability partnerships, European Economic Interest Groupings, European public limited liability companies, and unlimited companies.
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If you would like more information or would like to discuss a potential or existing matter, please contact us by telephone or by email at enquiries@orrlitchfield.com
