(RGCOLaw Series): Joint Ventures - Types and Factors to Consider (Part 1/2)

What is a Joint Venture?

A joint venture is a business partnership between two or more parties who agree to collaborate and share their resources, expertise, and experience to achieve a common business objective or project. Usually, joint ventures are formed when businesses lack the necessary resources, capital, or knowledge to enter a specific market or industry. In recent years, joint ventures have become increasingly popular due to the benefits they offer, such as risk and cost sharing, access to new markets, and a strategic advantage over competitors. However, it is crucial to comprehend the various structures, terms, and conditions that apply to a joint venture before entering into one.

Types of Joint Ventures

There are two categories of joint ventures: incorporated joint ventures and unincorporated joint ventures. Incorporated joint ventures involve the creation of a new legal entity, usually called a Special Purpose Vehicle. On the other hand, unincorporated joint ventures rely mainly on the existing legal status of the parties involved and their respective obligations and responsibilities, which are outlined in a primary joint venture agreement.

Incorporated Joint Ventures

In an incorporated joint venture, the parties contribute their assets and resources to the joint venture and receive ownership interest in a newly created entity called a Special Purpose Vehicle (SPV). The SPV can take two forms: a company incorporated under the Companies Act 2016 or a limited liability partnership incorporated under the Limited Liability Partnership Act 2012. The SPV is separate from the legal status of the parties to the joint venture, protecting them from adverse project or financial risks. This protection limits the liability of the parties to their shareholding in the SPV.

When an SPV is formed as a company under the Companies Act 2016, the shareholders will execute a joint venture agreement and a shareholders agreement. The shareholders agreement will cover various aspects, including but not limited to the percentage of shareholding, composition of the Board of Directors, management committee, share transferability, voting rights, and appointment of key personnel.

Unincorporated Joint Ventures

Unincorporated joint ventures are also known as contractual joint ventures. The primary distinction between incorporated and unincorporated joint ventures is that there is no separate legal entity in the case of an unincorporated joint venture. Instead, an unincorporated joint venture is established through an agreement, such as a joint venture agreement, partnership agreement, or collaboration agreement. The parties involved in an unincorporated joint venture will fulfill their respective roles, duties, and obligations according to the terms and conditions specified in the relevant agreement.

Profit-sharing in an unincorporated joint venture is usually based on the contributions made by each partner to the joint venture. Similarly, each partner will be liable for debts and liabilities based on their respective contributions. An enticing aspect of an unincorporated joint venture is that it can be a short-term arrangement between the parties, unlike an incorporated joint venture, which is usually structured for a longer period to accomplish the objectives of the joint venture.

Factors to consider when entering into a Joint Venture with another entity

Before entering into a joint venture, parties should consider various factors stemming from a due diligence and the business model. Thus, It is important to conduct at the very least, a preliminary due diligence on the following:

1. The Identity (and reputation) of the parties involved;

2. Financial Statements;

3. The corporate structure of the party;

4. The nature and scope of business;

5. The objectives of the parties for the joint venture;

6. Any past or ongoing litigation involving the parties.

To avoid future setbacks down the road, it may be beneficial for parties to appoint a legal professional to conduct a full legal due diligence on the party(ies) involved in the intended joint venture. This promotes transparency among all parties and helps minimize future risks.