We often read in the news about the latest “joint venture” launched by two or more companies to pursue research, market expansion or product launch aims.
Recent notable examples include the mobility sector, with Daimler and BMW – for example – running five different joint ventures to enter all areas of modern mobility, from ride-hailing and car-sharing to smart parking and charging stations. Sony and Philips famously collaborated for the development of the Compact Disc. Even the International Space Station can also be referred to as a joint venture!
All these examples share the same key element: entities that would normally compete with one another come together for the realisation of a common objective.
Partnership or Joint Venture?
“Joint Venture” has become a bit of a buzzword within the entrepreneurial world, with many – including several media outlets – blatantly overusing the term even when companies enter different types of agreements.
In fact, it is quite common to form a partnership in the form of a separate legal entity which is co-owned by two or more companies. This operates as a business in its own right and needs to be registered with HMRC.
Conversely, in a joint venture the parties remain legally separate from each other. Their collaboration is outlined in an agreement which describes the purposes and duration of the relevant project. When the project is completed and the joint venture ceases to exist, the companies continue to operate as usual in the respective market.
Pros and Cons
By entering a joint venture agreement, companies can benefit by pooling risks and costs of a project. The typical scenarios in which joint ventures thrive usually involve research and development towards a shared technological goal, the penetration of a new or highly competitive market. In these kind of situations anything that can protect participants from the high risk involved is key, from sharing equipment to first-mover’s advantage over other competitors outside of the agreements.
However, a joint venture cannot completely remove the risk intrinsic to any business agreement. Aligning the interests of competing entities can be hard enough, additionally cooperation between different team, leadership styles and working practices can create further difficulties.
Joint ventures and competition law
It is important that a joint venture does not compromise competition within a specific sector. Cooperation between firms that are meant to compete with each other can result in market stagnation, lack of innovation and price fixing, which ultimately damage consumers.
For these reasons it is important that a joint venture agreement adheres to CMA guidance. Fines as high as 10% of the company’s global turnover can be applied to businesses breaking competition law. It is therefore advisable to seek legal advice to draft a joint venture agreement.
What to include in a joint venture agreement
After you carried out the necessary due diligence on the partners involved, making sure that they are trustworthy and they possess the right resources for your collaboration to be successful, it’s time to draft the actual agreement.
This should contain details about the kind of project you are going to undertake, what are the purposes of the joint venture and when the project can be considered completed.
Details of each party’s responsibilities and contributions should be specified in the agreement, along with other key elements of the deal such as the ownership of the products of the venture.
The agreement should also outline what happens at the end of the project, both in the instance of a positive, successful outcome and even if things go wrong – for example, if one of the partners do not uphold their part of the deal.
Even for relatively small ventures it’s a good idea to consult a legal expert at each stage of the process, and to have any agreements reviewed.