A joint venture is best described as an entity formed by two or more parties to undertake a particular project or series of related projects. Each party contributes something to the joint venture and most frequently both share in revenues, expenses and control of the business. Several well-known joint ventures include: MSNBC (Microsoft & NBC), Verizon Wireless (Verizon and Vodafone), Sony Ericsson and TriStar Pictures (Columbia Pictures, HBO and CBS). Some countries (China, India and Mexico) require foreign companies to form joint ventures with their local companies in order to conduct business in that country.
There are a number of reasons to enter into joint ventures, such as, building on a company’s strengths, spreading costs and risks, obtaining a greater market share in a certain industry, creating new technologies and products and sharing a competitor’s resources and skills. Joint ventures are popular in the high-tech pharmaceutical, oil and gas industries.
The mutuality of a joint venture raises some unique issues. Unlike a merger or acquisition, joint ventures involve parties who will continue to be separate entities. Joint ventures frequently involve a two-way exchange of information, some of which may be confidential. Prior to any exchange of information, the parties often enter into detailed confidentiality agreements which cover issues related to who will be the gatekeeper of information at each company, what information will be exchanged, limitations on use of the information, permitted disclosures of the information, return of materials, and other protections should the joint venture not occur.
Some preliminary considerations to be made when considering entering into a joint venture include, antitrust issues, i.e., are there any required filings or notices to be made in the particular industry of the parties or the joint venture, choice of entity, i.e., will the joint venture entity be a partnership, corporation, limited liability company, each of which have varying tax implications, deciding what each party will contribute to the joint venture and who will be responsible for day-to-day management.
Once the parties agree to enter into a joint venture, it is beneficial to have a written agreement which covers topics such as the scope and purpose of the joint venture, contributions from each party, how will the joint venture be managed, how will profits and losses be distributed, restrictions on transfers of interest to third parties, dissolution or buy-sell rights, defaults by either party, reporting and accounting procedures, how to resolve disputes, confidentiality and competition. Another important aspect of the joint venture is the business plan, which should be revised as the joint venture continues to address changes in the industry, development of new goals or any unforeseen issues which arise post-closing.
Jill F. Rosenfeld is an Associate at WJ&L and practices in our Business, Corporate and Transactional areas.