A Joint Venture agreement involves two or more parties that choose to work together towards the accomplishment of a certain endeavor, goal, or project by sharing assets, expertise, costs, and profits.
While the joint venture opens the doors to new opportunities, it also increases the risk of liabilities and losses. Therefore, at Cea Legal, when representing a company in a prospective Joint Venture, we highlight the importance of conducting thorough due diligence concerning the history, the performance, the operations, and the corporate governance of the new business partners.
Another item we cannot stress enough regards the importance of clearly defining in the agreement the scope of the Joint Venture by identifying the products and the services traded and the means and resources to be used. This is fundamental to safeguard the core activities of the JV participants. A well-drafted “scope” section will also help effectively tailor the clauses concerning confidentiality, non-competition, and conflicts of interest.
Needless to say, crucial provisions are those outlining how the JV business is going to be managed: the powers of the operating managers and the rights reserved to the silent partners providing capital shall have to be described in great detail. On this note, we often bring our silent investor clients to appreciate the importance of retaining power in connection with the admission of new JV members, the compensation of the operating managers, entering contracts or incurring indebtedness above a certain amount, the settlement of litigations, the transactions with affiliate parties, to name a few.
Besides the initial capital contributions, the rules requiring additional capital contributions among the JV parties are heavily negotiated. Specifically, we elaborate for our clients what the business triggers should be (for instance, reserves falling certain levels, or when a super-majority approves the funding of a new project) and what consequences should be faced by the non-contributing parties (for instance, loss of voting rights, dilution or forfeiture of interest, or subordination of distributions).
Certainly, more exciting for our clients are the conversations regarding distributions: we typically craft provisions describing in length the frequency and the calculation methods of distributions (which will also shape liquidation preferences), as well as limits to be observed with respect to the amount of cash reserves to maintain.
Finally, a Joint Venture agreement has to clearly define terms and termination clauses and/or exit strategies when the parties reach the intended goals. Our corporate law insight is especially helpful to avoid premature cessation of the activities, business deadlocks and structure a streamlined ending once one of the parties materially breaches the JV agreement.