If you have ever been to a bookstore where you could also drink a cup of coffee from a particular producer, you have encountered a joint venture without even realizing it.
Sometimes called a "corporate marriage," a joint venture agreement is often deemed a more cost-effective and more flexible way for companies to achieve their ambitious business interests and goals. Although joint ventures are common among companies that wish to expand their resources in the simplest and most practical way, there are several things to consider when deciding whether to enter into this kind of business cooperation.
What Is a Joint Venture Agreement?
In brief: A joint venture agreement is an arrangement under which two or more parties pool funds, know-how, and resources to achieve a shared business goal, sharing both the profits and the losses. Serbian law does not recognize it as a distinct legal category, so the parties have considerable freedom to arrange their mutual rights and obligations, whether through a contract or by incorporating a company.
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 formalities commonly accompanying the formation of a new company.
In short terms, a joint venture mainly represents a contractual arrangement gathering the resources of several subjects around one business accomplishment. Joint venturers combine their knowledge, resources, assets, and time to achieve a common goal; afterward, they usually share both the losses and profits arising from such a 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 Venture Examples
In brief: Sony Ericsson, Vevo, and the Samsung–Spotify partnership were all formed as joint ventures. Regardless of form, joint ventures must comply with Serbian competition regulations.
Sony Ericsson was initially founded as a joint venture between Sony Group Corporation and Ericsson – eventually, the joint venture was 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. The same is true 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 the formality of joint ventures has been repeatedly confirmed before US courts; for example, in the case Wittner v. Metzger[3], the Superior Court of New Jersey held that the key factor when determining whether a joint venture exists is the intention of the participants to voluntarily enter into such a relationship. Furthermore, in Jackson v. Hooper[4], the New Jersey Court of Chancery held that no express contract is required to establish a joint venture, and that an implied decision arising from the conduct of the participants suffices.
However, if the investors decide to establish the joint venture in the form of a legal entity, the provisions of the Companies Act will apply. Joint ventures, whether incorporated as legal entities or formed through a joint venture agreement, must comply with Serbian competition law.
Joint Ventures – The Variety of Possibilities
In essence, a joint venture agreement does not require a mandatory written form – the parties can "seal the deal" with a simple handshake. Still, as is usually the case with business relationships, a written agreement can spare the contracting parties a lot of trouble should something go wrong down the line.
A joint venture may appear in the form of:
- Contractual joint venture – the parties draw up an agreement governing their rights, obligations, and liabilities, in which case the parties’ intention prevails as to the content of the joint venture agreement;
- Corporate joint venture – the position of each party is comprehensively defined by the agreement, which represents the incorporation act of the newly formed company, thereby moving from the broad autonomy of the parties’ will onto the ground of the Companies Act and its strict rules on the content of a company’s incorporation act.
The main reasons for entering into a joint venture may include:
- Personnel – the participants enter into the joint venture in order to pool their employees, experience, and knowledge;
- Equipment – an attractive option for companies that lack the technology or resources needed to achieve their business goals.
One of the areas where joint ventures are a common occurrence is the real estate industry. Given the demanding financial requirements of projects in this field, many experts with extensive real estate experience and knowledge often lack the financial resources needed to carry out such projects. Combining their experience and knowledge with interested investors often proves to be the most convenient way for real estate professionals to achieve their business goals.
What Makes a Joint Venture Agreement Alluring for Companies?
In brief: A joint venture allows companies to pool resources, enter new markets more easily, share costs and risks, exchange know-how, and offers a more flexible alternative to M&A, without any long-term commitment for the participants.
A joint venture agreement has proven to be a useful tool for many companies to achieve specific business goals, while at the same time reducing costs and sharing the risks and liabilities inherent in any new business project. Before entering into such a relationship, your company would certainly need to assess various risk factors to determine whether such a venture would be a wise business move. Still, there are several reasons why it could be.
Pooling the Resources
A joint venture can be an optimal approach for two companies with different core business activities that nevertheless strive toward the same goal – making the most of their resources by combining them.
For example, a company that already has widely developed distribution channels, but has not invested much in the production process itself, would surely benefit from joining forces with another company that has an abundance of resources and developed production technology. By combining their resources, the two companies can complement each other and create a new, comprehensive, and functional venture with the potential for great business success.
Entering New Markets
The desire to enter a foreign market can often be a decisive factor for a company entering into a joint venture. For example, if your company wants to expand its business into a foreign market, you could enter into a joint venture with a local foreign distributor who is well acquainted with the distribution channels and the local market.
Cost Efficiency
The benefits of combining several companies’ resources certainly extend to pooling financial resources. It is a fact that the larger the number of budgets involved in an investment, the lower the individual costs for each investor in the joint venture. Should the joint investment fail, the financial risks for each individual investor are also significantly reduced.
This is particularly true in situations where developed technologies are necessary for the joint venture to succeed. For example, software development costs can be a challenge for your start-up still in its development phase, including the cost of development, implementation, and modification of the software, fees for developers and contractors, intellectual property protection costs, and advertising fees… However, if these costs are shared with another company willing to invest in the new software, they become a lighter burden.
Investing Knowledge
Each participant in a joint venture usually brings specific knowledge from its own industry. By joining forces to achieve a business goal, every participant benefits from the other participants’ unique knowledge, experience, and talent. In every respect, this type of business relationship creates an opportunity to make use of the strengths of both sides.
Alternative for M&A
The results of a 2014 survey conducted by McKinsey & Company show that, out of 1,263 top-level executives representing a large number of companies from various sectors, as many as 90% consider a joint venture to be the best alternative to M&A[5]. In addition, most of those surveyed report positive experiences with joint ventures, stating that their expectations were met. This may be due to the fact that joint ventures are often more cost-effective, safer, and provide a more flexible way of doing business between companies.
Flexibility: No Strings Attached
Joint ventures are temporary by nature – by precisely defining the duration of their cooperation, the parties protect themselves from the kind of long-term commitment that arises from status changes. This way, everyone has the opportunity to leave the venture once a particular project is completed. On the other hand, if the first project meets expectations, nothing prevents the participants from turning it into a permanent partnership.
What About the Disadvantages?
In brief: Joint ventures can interfere with the participants’ regular business operations, raise questions of unregulated control and profit-sharing, expose the parties to competition law rules, and affect existing business relationships through confidentiality and non-compete clauses — and they are marked by a relatively high failure rate.
Although joint ventures may seem like a great option for anyone who needs "outside" assistance to achieve a business goal, this type of relationship carries certain obstacles that should be considered before entering into a joint venture.
First of all, when developing a new joint project, there is often not much room left for the participants’ outside activities. Accordingly, such projects can interfere with the regular business activities of the contracting parties.
Participants in a joint venture generally control the project to an equal extent, but in practice, that does not have to be the case when it comes to the use of resources, business activities, and profit. If the key terms of the agreement are not clearly defined in advance, any unregulated matter can lead to problems between you and your partner in the joint venture.
A joint venture must comply with the rules of Serbian competition law. There are two main competition law aspects that all parties involved in joint ventures should pay attention to:
(1) if the joint venture partners generate significant revenue, they could exceed the revenue thresholds (which are comparatively low in Serbia) and thus become obliged to obtain concentration clearance before implementing the joint venture, and
(2) a joint venture can sometimes be a disguise for activities such as market and customer allocation, or foreclosing third parties from entering the market, etc., all of which are considered serious infringements of the Law on Protection of Competition. Therefore, if you and your partner fail to obtain the required concentration clearance, or engage in activities prohibited under competition regulations, you risk substantial fines for violating competition rules. It is therefore essential to consult a specialist who can review the relevant documentation before you sign any joint venture agreement or enter into a formal partnership.
Entering into this kind of business relationship may change the participants’ current relationships with their other associates, since a joint venture often includes confidentiality and non-compete clauses which can affect (to a greater or lesser extent) existing business relationships of the participants in the joint venture.
Joint ventures are often described as fragile, unstable relationships marked by a high failure rate. The reason for such an impression probably lies in the fact that joint ventures are difficult to manage due to joint decision-making and possible differences in the participants’ views on running the business. An unavoidable factor in every joint venture is business trust among the participants, since otherwise there is a high probability that the cooperation will fail.
Joint Venture v. Partnership
In brief: Unlike formal partnerships, which are established for the purpose of a lasting, ongoing business, joint ventures are, as a rule, set up to achieve a precisely defined, time-limited goal.
As previously mentioned, besides an agreement, a joint venture may also appear in the form of a company – that is, some kind of formal partnership. However, due to the main features of a joint venture, which are often inherent to partnerships as well, this type of business cooperation can in practice be characterized as a partnership of limited duration, created for the needs of an individual project. In addition, given that there is no precise definition of a joint venture, it is difficult to identify the unique characteristics that set it apart from other, similar models of business cooperation.
Even greater confusion arises from the fact that the term "partnership" can be interpreted as both a formal and an informal type of business relationship. But when discussing the differences between formal types of partnership and joint ventures, each of these relationships has certain (dis)advantages that can be decisive in choosing the best solution for your business goals.
As can be seen from the table below, formal partnerships are usually entered into between company members who wish to start and run a business together, while sharing equally in the distribution of profit and loss.
| JOINT VENTURE | FORMAL PARTNERSHIPS (SUCH AS A LIMITED LIABILITY COMPANY (LLC)) [6] | |
| PURPOSE OF FORMATION | Formed to achieve a specific goal, task, or project | Established for continuous joint business operations |
| DURATION | Temporarily established, until the goal is achieved (duration is usually stated in the agreement) | Generally aims to establish a lasting relationship |
| SCOPE | (Usually) consists of a single project | Participants agree to jointly carry out all business activities of the company |
| LIABILITY | The contracting parties may regulate this matter by contract as they see fit, including providing for liability with personal assets | Members of an LLC are, as a rule, not liable for the obligations of the LLC |
| DUTIES OF MEMBERS | Joint venturers may have special duties inherent to members of a company formed through the statutory procedure, but these would in that case be modified, i.e., adapted to the needs and purpose of the project | By law, the so-called “controlling members” of an LLC have equal special duties toward the company, such as the duty to avoid conflicts of interest and to act in good faith and with due care |
On the other hand, joint ventures are usually established to achieve a precisely defined goal, which does not necessarily include the formation of a separate company. For example, two parties may enter into a joint venture to carry out research and development activities, which they would otherwise be unable to finance on their own.
Splitting the Risk, but the Success Too – Is It Worth It?
In brief: A joint venture can be a successful business move if it is preceded by a careful risk assessment and a clear arrangement of the relationship through a contract, given that trust between the participants is key to the success of this kind of cooperation.
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 considered before embarking on this kind of arrangement. It is crucial to make a prior 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 you engage in forming a new legal entity or in signing an agreement with a new business partner, the key factor for starting such a partnership is trust among the participants. In business relationships, building trust is a challenging process, but a necessary one for the success of the cooperation.
Frequently Asked Questions
Does a joint venture agreement have to be in writing?
No. A joint venture agreement does not require a mandatory written form – the parties may establish such a relationship even through an oral agreement or conclusive conduct. Nevertheless, a written agreement clearly setting out the parties’ rights, obligations, and liabilities can spare the participants from later problems if the cooperation does not go according to plan.
Does a joint venture have to be established as a separate company?
No. A joint venture can be arranged solely through a contract, without incorporating a new legal entity, or in the form of a corporate joint venture through the incorporation of a new company. The choice of form depends on the scope of the cooperation and the extent to which the parties wish to formalize their relationship.
What is the main difference between a joint venture and a formal partnership such as an LLC?
A joint venture is, as a rule, established to achieve a precisely defined, time-limited goal or project, whereas formal partnerships such as an LLC are formed for lasting and continuous joint business operations. Differences also exist with respect to the purpose of formation, scope, liability, and the duties of members, as shown in the table in this article.
Does a joint venture have to be reported to the Commission for Protection of Competition?
It depends on the circumstances. If the joint venture partners generate revenue exceeding the thresholds prescribed by law, they must obtain concentration clearance before implementing the joint venture. It is advisable to consult a specialist before signing the agreement, who can assess whether these thresholds are met in the specific case.
What are the biggest risks of entering into a joint venture?
The most common risks include interference with the participants’ regular business activities, unregulated issues of control and profit distribution, exposure to competition law rules, and the effect on existing business relationships through confidentiality and non-compete clauses. Joint ventures are also marked by a relatively high failure rate, most often due to a lack of trust among the participants.
Notes
- Source: https://content.next.westlaw.com/Document/I753856ad270a11e598dc8b09b4f043e0/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true
- Source: https://uk.practicallaw.thomsonreuters.com/7-617-2690
- Wittner v. Metzger, 72 N.J. Super. 438 (App. Div. 1962), cert. den. 37 N.J. 228 (1962)
- Jackson v. Hooper, 76 N.J. Eq. 185 (1909)
- Source: Eileen Kelly Rinaudo and Robert Uhlaner, “Joint ventures on the rise,” McKinsey on Finance, November 2014, available at: mckinsey.com/.../joint-ventures-on-the-rise
- 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.
Reviewed by: Nemanja Žunić, Partner · View profile
Updated by: David Bojić, Senior Associate · View profile
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