What is Joint Venture Agreement
In the United States, a joint venture agreement is used when two or more parties, whether business entities, business owners, investors or entrepreneurs, desire to form a joint venture. A joint venture may take various forms, but it is always established on the basis of a commercial collaboration in which two or more entities or individuals pool their efforts and exchange resources with a view to mutually gain from achieving a project, while at the same time remaining independent.
The joint venture can be a contractual arrangement between two or more joint venture partners, or it can be created by establishing a joint venture entity
Regardless of how the venture partners decide to form the joint venture, the relationship between them should always be governed by a definitive joint venture agreement outlining the essential terms of the overall relationship. In addition to the joint venture agreement, the partners may enter into other contracts regarding specific parts of the joint venture. For example, the joint venture may enter into a licensing agreement with one of the partners pursuant to which the partner grants access to its intellectual property rights to the joint venture.
However, to avoid common mistakes and pitfalls, the joint venture partners must address preliminary matters such as their duties and responsibilities with respect to the joint venture in a joint venture agreement. First, the partners can start by executing a term sheet or a memorandum of understanding that sets out the general terms. Any of these documents create a structure for the business and legal issues involved and can help the partners to organize themselves and examine the basic components of their relationship including the management, income and profits or allocation of risk, among others. They ensure that the partners discuss and agree to all the relevant issues before executing a joint venture agreement.
After the partners reach a common understanding, all the business and legal issues surrounding their partnership are set out in a joint venture agreement signed by the partners. The law governing a joint venture agreement and applicable rules arise primarily under the law of the U.S. state that governs the partners’ contractual arrangement as well as U.S. federal law.
In a joint venture agreement, the following matters should be dealt with comprehensively:
- Scope and Purpose. The joint venture agreement should include the activities the partners intend to engage in and any issues regarding corporate opportunity or intellectual property.
- Form of the Joint Venture. The joint venture agreement should identify whether the joint venture is a separate legal entity such as a partnership, limited liability company (LLC), corporation or a contractual joint venture.
- Ownership Structure. The joint venture agreement should include the ownership structure and the percentage ownership of the partners.
- Management Board. The voting process, notice requirements, when and how often the management board meets, quorum for valid meetings are among the matters that should be included in the joint venture agreement.
- Governance. The structure of the board of directors or the managing board or management committee of the joint venture should be specified in the joint venture agreement. In this respect, the agreement should consider the extent of authority given to managers, a standard to measure performance of management, and the authority to retain or remove managers, among others.
- Allocation of Risks and Reward. The joint venture agreement should specify who gets what, where, when and why. It should cover dividend distributions, capital calls and allocations of losses.
While joint ventures can be successful and highly profitable, more than 50% of all joint ventures fail. The common mistake partners make is failing to provide in their joint venture agreement for adequate management, governance and allocation of risks and rewards.
We successfully plan and prepare joint venture agreements in our corporate law in Florida services. Contact us, your business attorney in Florida to help you plan and execute a joint venture agreement.