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Terms of a Joint Venture

Terms of a Joint Venture

Where two or more businesses pool their efforts for mutually beneficial purposes, their respective contributions and expectations should be specified in writing. In addition, a joint venture agreement is necessary to determine their respective duties and obligations in running the enterprise.

Issues during the Lifetime of the Agreement

The joint venture agreement should address in particular: financial arrangements for providing the initial capital and any additional cash required; the division of responsibilities; the division of profits (or losses); the appointment of directors (in the case of a joint venture company); management rights e.g. board representation and powers and where shareholders approval is necessary; the preparation of accounts; the matters for which unanimity between the two parties is required (deadlock); the circumstances in which the joint venture comes to an end and the consequences of termination (see below); how long the joint venture is intended to last; and the arrangements which are to apply if a party wishes to transfer or dispose of its interest.

In addition, the agreement should address rights to, and ownership of assets including technology and other intellectual property brought into the joint venture, generated or exploited during the joint venture and the parties respective rights in those assets after the joint venture has ended.

Termination Issues

Termination and the consequences of termination are generally the most difficult points in a joint venture agreement. It may be helpful to build in arrangements for arbitration or alternative dispute resolution if difficulties arise, preferably by an independent expert known to both parties.

Always ensure at the outset, if you can, that your exit route is safeguarded if things go less well than you expect. In particular if you are involved in a joint venture company, the Articles of Association or the shareholders' agreement often provide that a participant requiring to dispose of his or its stake must give the other participants a right of first refusal. Sometimes a 'candy bar' formula is used i.e. whereby a participant wishing to leave or end a joint venture offers to sell his shares to the other participant at what he considers the appropriate figure-but the other participant may then be obliged to sell his own shares at the same figure if he does not accept the initial offer.

If the joint venture is discontinued, the assets will normally be disposed of, the liabilities discharged and the net balance divided between the participants in proportion to their shares in the venture.

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