The More, the Merrier – Would a Joint Venture Agreement Be a Good Solution for Your Business?

04
Nov 2021

Contact: Nina Radin

Contact: Anja Berić

If you have ever drunk a cup of Starbucks coffee while choosing a book in Barnes&Noble bookstore, you have encountered a joint venture without perhaps even knowing it.

Sometimes referred to as a “corporate marriage”, a joint venture agreement is often deemed as a cheaper and more flexible way for companies to achieve their enthusiastic business interests and goals. Although joint ventures are frequent among the companies which desire to expand their resources as simple and practical as possible, there is a variety of pros and cons to consider when deciding whether to enter into this kind of business relationship.

What Is a Joint Venture Agreement?

As Norbert Reithofer, the former CEO of BMW once said:

One doesn’t have to be a large corporation to benefit from the advantages of volume. This can also be achieved through joint ventures

Truly speaking, joint ventures can be a great way to combine the strengths of multiple business partners without the necessity to comply with the overwhelming commitments and burdensome formalities commonly accompanying the formation of the new company.

In short terms, a joint venture (in most cases) represents a contractual arrangement gathering the resources of the several subjects around one business accomplishment. The joint venturers combine their knowledge, resources, assets, and time to achieve a particular goal that they have in common; afterward, they usually share both the profit and the losses arising from the project.

Although not mandatory, this type of venture usually has an “expiration date” – once it is formed, it lasts only until the purpose of the joint venture is completed. However, that does not exclude the possibility of a joint venture outgrowing a single project and becoming a permanent business entity.

Famous Joint Ventures Examples

Sony Ericsson was initially founded as a joint venture between Sony Group Corporation and Ericsson – eventually, the joint venture has been acquired by Sony and is currently a part of Sony Corporation

American video hosting service Vevo has been established as a joint venture between Universal Music Group, Sony Music Entertainment, and EMI (later acquired by a consortium led by Sony Corporation)

Samsung and Spotify have in 2019 announced their strategic partnership – a joint venture which resulted in Spotify being a pre-installed music service provider on the newest Samsung mobile phones

Joint venture agreements are not per se recognized by Serbian law as a legal category. The same is in some other countries, such as for instance, the United States[1] or the United Kingdom[2]. Therefore, there are usually no strict rules for this type of business arrangement, given that joint ventures might appear as various kinds of strategic alliances between subjects, who may be both natural persons and/or legal entities.

Liberty in terms of formality of joint ventures has been repeatedly confirmed in US case law; for example, in case Wittner v. Metzger[3], the Superior Court of New Jersey has stated that the key factor when determining whether joint venture exists is the intention of the participants to voluntarily enter into such a relationship. Furthermore, in Jackson v. Hooper[4] it has been held by the New Jersey Court of Chancery that there is no need for the express contract to establish a joint venture, but the implied decision identified from the conduct of the participants shall suffice.

However, in case joint ventures come to the point they are incorporated as a company, they are subject to national laws regulating legal entities.

Joint Ventures – The Variety of Possibilities

In essence, a joint venture agreement does not call for the mandatory written form – parties can “seal the deal” by a simple handshake. However, as it usually goes with every business relationship, a written agreement can save the parties a lot of trouble in case something goes as unplanned afterward.

Joint venture usually appears as one of the following types:

  • Contractual joint venture – the parties draft the internal agreement which defines the parties’ rights, obligations, and liabilities, which results in parties being bound with the rules of private law;
  • Corporate joint venture – the positions of the parties are comprehensively determined by the agreement which eventually represents the incorporation act of the newly formed company, whereby the joint venture becomes part of public law.

Regarding the main reason for “teaming up”, joint ventures can be, for instance:

  • Personnel-based – parties enter the relationship in order to combine their talent, expertise, and knowledge;
  • Equipment-based – enticing for the companies lacking the technology or supplies necessary for their business accomplishment.

One of the areas in which joint ventures are commonly established is the real estate industry. Considering the challenging financial requirements which need to be met before embarking on the project in this field, the majority of the experts who have extensive experience and knowledge in real estate may lack the necessary financial resources for this kind of venture. Combining the resources with the interested investor often appears as the most convenient way for real estate professionals to accomplish their business goals.

What Makes Joint Venture Agreements Alluring for the Companies?

zajednička ulaganja sa stranim partnerima, ugovor o zajedničkom ulaganju, joint venture agreement

Joint venture agreements are a useful tool for many companies to achieve a particular business goal, while concurrently reducing the expenses and dividing the risks and liabilities inherent to any new business project. Before entering into such an agreement, your company would anyhow need to assess a variety of factors, in order to determine whether such a venture would be a wise business step. Nevertheless, there are a few reasons why it might be.

  • Pooling the resources

Two companies whose main business activities differ but eventually aim for the same goal may see the joint venture as an ideal way of taking the best out of their resources by combining them.

For example, a company that has widely expanded distribution channels but so far did not invest plenty in the production process itself would surely benefit from joining with another company that owns the abundance of the supplies and has developed advantageous manufacturing technologies. By merging their advantages, the two companies might end up completing each other and creating a new, comprehensively functional venture striving for potentially great business success.

  • Entering new markets

A common trigger for a legal entity to establish a joint venture is the urge to enter into a foreign market. For instance, in case your company wants to expand the scope of the product distribution outside its native country, you might form a joint venture with a local distributor from the foreign country who is well familiar with the distribution channels and the local market itself.

  • Cost efficiency

The advantages of combining the multiple companies’ assets pertain to the financial assets, as well. It is obvious that the more individual budgets are involved in the investment, the more each of the joint venturers can reduce the expenses. Additionally, financial risks, in case the joint venture fails to achieve the planned result, significantly decrease.

This may be applicable to the situation where developed technologies are necessary for the achievement of the joint venture project. For example, software development costs may be challengingly high if your company is a single up-and-coming start-up, including the expenses of the initial development, implementation, modifications of the software, fees for the developers, contractors, intellectual property protection expenses, advertising fees… However, if split with another company willing to invest in the new software, the expenses become less of a burden.

ugovor o zajedničkom ulaganju, zajednicko ulaganje, zajednička ulaganja sa stranim partnerima, joint venture ugovori
  • Investing the knowledge

Each of the parties usually has its own industry-oriented expertise which they enter into a joint venture. By merging for the purpose of accomplishing an individual business goal, every participant can benefit from the other’s unique know-how, experience, and talent. In every sense, this type of arrangement creates an opportunity to leverage the strengths of both parties.

  • Alternative for M&A

Results of a 2014 survey conducted by McKinsey & Company witness that among the 1.263 highest executives representing the variety of companies from different industries, 90% of them consider joint venture as the most serious alternative to M&A[5]. Furthermore, the majority of the questioned subjects have graded their experience with joint ventures as positive and expectation-fulfilling. The reasons may be found in the fact that joint ventures often appear as a less expensive and risky, but more flexible manner of the business cooperation between different companies.

  • Flexibility: no strings attached

Joint ventures are by their nature temporary – by determining the time frame of the cooperation upfront, parties ensure that neither of them has to make a long-term commitment. That way, everyone has the opportunity to exit the venture after the completion of a particular project. On the other side, if the first task turns out to be promising, nothing prevents the participants to continue their business arrangement and transform it into a permanent relationship.

What about the disadvantages?

ugovor o zajedničkom ulaganju, zajednicko ulaganje, zajednička ulaganja sa stranim partnerima, joint venture ugovori, ugovor o zajedničkom ulaganju fizičkih lica

Although a joint venture might appear as a great arrangement for any subject who desires assistance “from the outside” to accomplish its business goals, this type of agreement carries certain setbacks which need to be considered before indulging in one.

  • First of all, while evolving the new mutual project, there is rarely much room left for the outside actions of the participants. Therefore, this type of project may interfere with the regular business activities of parties.
  • Parties involved in the joint venture usually do equally share control of the project, but in practice that does not have to be the case when it comes to the use of resources, work activities, and profit. If the key terms of the agreement are not precisely defined upfront, any unregulated matter may cause an issue between you and your partner in the joint venture.
  • Entering into this type of business arrangement may require its participants to modify their current relations with their other vendors, given that joint venture agreement commonly includes non-compete or confidentiality clause which affect (to a greater or a lesser extent) the existing business relationships which the party is a part of.
  • Joint ventures are often described as fragile, volatile relationships resulting in a high failure rate. The reason for such belief probably lays in the fact that joint ventures may be difficult to manage, due to the shared decision-making and possible differences between the joint venturers. The one thing which must inevitably accompany entering into a joint venture is trust and faith between the parties, given that otherwise, the cooperation itself is highly likely to utterly collapse.

Joint Venture v. Partnership

As previously mentioned, besides as an agreement, a joint venture may also be established as a company – some type of formal partnership. However, due to the main characteristics of a joint venture which are often inherent to the partnership as well, this type of business engagement de facto may be defined as a limited-term partnership created for the need of a single project. Additionally, taking into account that there is no strict definition of a joint venture, it might be hard to mark out its unique features which separate it from other similar types of business cooperation models.

This confusion may go even deeper if considering that the term “partnership” may be interpreted as both formal and informal type of relationship. However, if speaking about the differences between the formal type of partnership and joint ventures, both of these types of alliances do have certain (dis)advantages that may be decisive in order for you to choose one of them as the best solution for achieving your business goals.

joint venture vs partnership

As noticeable from this comparative overview, formal partnerships are usually formed between co-owners who wish to launch and maintain the business while equally participating in both profit distribution and loss share. However, joint ventures are mostly established for the purpose of accomplishing a precisely defined goal which does not necessarily include the separate company formation. For example, the participants may agree to form a joint venture to conduct research and development activities, which they would otherwise be unable to finance individually.

Splitting the Risk, but the Success Too – Is It Worth It?

If thoughtfully agreed on, a joint venture agreement may be a widely prosperous way of connecting businesses with the purpose of achieving great business success. However, there are several key concerns that need to be cautiously thought through before embarking on this kind of arrangement. It is crucial to make a previous thorough assessment of all the pros and cons of a joint venture and to cover all the significant issues through a carefully drafted agreement in order to make the best out of your new business undertaking.

Regardless of whether your joint venture agreement will take the form of the incorporation act of a new legal entity, or a private written agreement between you and your new business partner, the key precondition for entering into this type of relationship is mutual trust between the parties. When it comes to business relationships, trust is not easy to find – but trust is a must.

[1] Source: https://content.next.westlaw.com/Document/I753856ad270a11e598dc8b09b4f043e0/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true
[2] Source: https://uk.practicallaw.thomsonreuters.com/7-617-2690?transitionType=Default&contextData=(sc.Default)&firstPage=true#:~:text=Joint%20ventures%20are%20usually%20formed,one%20of%20the%20following%20forms%3A&text=An%20unincorporated%2C%20contractual%20arrangement
[3] Wittner v. Metzger, 72 N.J. Super. 438 (App. Div. 1962), cert. den. 37 N.J. 228 (1962)
[4] Jackson v. Hooper, 76 N.J. Eq. 185 (1909)
[5] Source: Eileen Kelly Rinaudo and Robert Uhlaner, “Joint ventures on the rise,” McKinsey on Finance, November 2014, available at: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/joint-ventures-on-the-rise
[6] LLC is used as the example of the most common form of formal partnership in the Republic of Serbia. However, there are other legal forms of companies which are subject to different rules compared to LLC.

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