How to Draft a Joint Venture Agreement

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parts

1Planning the Relationship

2Drafting the Joint Venture Agreement

3Finalizing the Deal

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A joint venture is a formal relationship where two or more companies join together in order to take part in a specific activity. There are two main ways to set up a joint venture. First, you and the partner company can set up a third, and separate, legal entity. For example, you and the partner company could form a separate corporation or LLC and conduct the joint venture's business through that new entity. If you are interested in this option, learn how to Form a Corporation. Second, you and the partner company can enter into a joint venture agreement. Here, you and the other company would enter into a contract that would set out the terms of the joint venture. Joint venture agreements are usually advantageous when the joint venture is large and complex and you want an agreement to set forth the requirements of both parties.

Steps

Part 1

Part 1 of 3:

Planning the Relationship

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   Assess your needs in a partner. A joint venture can be an advantageous business relationship when your partner has the ability to do something you do not. In addition, you must be able to bring something to the table that your partner doesn't have. When you start thinking about entering into a joint venture, start by assessing what you need in a partner (i.e., what your business objectives are).

   • For example, you might have developed a new technology but you lack the resources to bring it to the appropriate market. If this is the case, you might look for a partner with a strong presence in your particular market so they can help you sell, promote, and distribute your product.
   • In another example, you might have started a new brewery but you lack the distribution connections to get your beer into stores across the United States. In this case, you might look for a partner with experience launching new alcoholic beverages into a nationwide market. Your partner may be able to help you contract with national distributors with connections to large retail stores.
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   Focus on finding a good fit. Once you understand what you need out of a partner, you need to identify companies that would be a good fit. Your business and a partner company will need to be able to work well together and both partners will need to gain something of value. When you reach out to possible partners, spend time together learning about the core values of that potential partner.

   • Ask yourself whether they are open to collaboration, whether the corporate cultures of each company mesh, whether the partner is financially secure enough to enter into a partnership, and whether you can trust the potential partner.
   • If you do not have a good fit between you and your partner, it is unlikely that you will be able to effectively make decisions and work together.
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   Identify the scope and purpose of the joint venture. Once you find a partner that shares your values, can help you meet your needs, and can gain something from you in return, you will need to begin planning the joint venture relationship. The first thing you and your future partner should do is define the scope and purpose of your joint venture. The scope and purpose of your joint venture should describe why you and the other business are entering into the joint venture relationship. These initial identifications may be broad and may touch on other issues needing to be discussed and ironed out later. However, thinking about them now will help you determine what type of work will need to be done down the road. You and your potential partner should consider:

   • What activities you and your partner expressly intend to do or refrain from doing
   • Whether a joint venture might create conflicts with existing business partners (and if so how to avoid them)
   • Whether any intellectual property will need to be shared
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   Determine how a joint venture will affect your existing operations. Another major consideration to make before entering into a joint venture is how a relationship might affect your business as it currently operates. If a joint venture will affect your existing operations negatively, it might not be a good idea to enter into the relationship. The following are just a few considerations you will have to take account of:

   • Where will capital or assets come from in your company and what areas of your business will no longer have access to that capital or those assets due to the joint venture?
   • Will employees be taken away from their usual duties so they can help with the joint venture (e.g., will your financial team have to make additional spreadsheets, more annual filings, etc.)?
   • Will you have to get third party approval from banks and other existing parties in order to implement the joint venture?
   • Will you have to restructure any part of your business to make room for the joint venture?
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   Prepare internally. Before you enter into a joint venture, your partner will want to know all about your business to make sure they are making a good decision. You will want to do the same to make sure the relationship makes good business sense on your end. In order to learn about each other, both you and your partner will have to prepare internally to exchange important information. Start by identifying every facet of your business that will be involved in the joint venture. Next, put a process in place to make sure necessary information can be transmitted between and within you and your partner's business.

   • This preparation will ensure that your partner will have access to the information they need to make an informed decision. You should request that your partner do the same internal planning on their end. Remember, if your partner is not willing to work with you before the joint venture agreement is signed, the relationship is unlikely to work after the agreement is signed as well.
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   Consider drafting a confidentiality agreement. Before any confidential information is exchanged, you and your partner will want to sign a confidentiality agreement (a.k.a., a nondisclosure agreement). A confidentiality agreement is a legal contract defining a confidential agreement between you and your partner. It will set forth what information is considered confidential and how that information can be used. In addition, the agreement will define how confidential information should be marked and how it can be returned to its owner.

   • This type of agreement will ensure that sensitive business information will not be disseminated outside of the joint venture. During your initial preparations and negotiations, a lot of sensitive information is being passed between businesses and you want to do everything in your power to make sure it doesn't get leaked.
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   Execute a letter of intent. If you and your possible partner are satisfied with the discussions up to this point, one party should offer up a letter of intent (LOI). An LOI outlines the preliminary terms of the joint venture and acts as an agreement to agree. The LOI formalizes your preliminary discussions before negotiations get under way. The LOI can either be binding or non-binding depending on your wishes and the wishes of the other party.

   • If non-binding, an LOI simply lays out the joint venture with a promise to negotiate.
   • If binding, an LOI can create rules of negotiation and a description of an adequate agreement.
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Part 2

Part 2 of 3:

Drafting the Joint Venture Agreement

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   Start with an introduction section. Your joint venture agreement should start with a brief introductory section providing readers with a factual background of the agreement. This section is usually formatted with a series of "whereas" sentences that offer context to the joint venture. The introductions are generally non-binding unless the agreement explicitly states otherwise. This section should also introduce the parties to the agreement. For example, an introductory section might state:

   • Whereas, Party A and Party B, having principal places of business at ______ and _______ respectively, choose to enter into a joint venture;
   • Whereas, the Parties wish to enter into a joint venture agreement to define their respective roles and responsibilities in order to achieve the objectives set forth in this Agreement;
   • Now, therefore, the Parties agree as follows...
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   Provide important definitions. After the introduction, your agreement should contain a list of defined terms. Definitions within your agreement are there to provide clarity to your document. However, do not define ordinary or immaterial words as this can create a convoluted and confusing contract. In addition, never define a term in a way that conflicts with its ordinary meaning (e.g., do not define an airplane as a hot air balloon). In joint venture agreements, you might choose to define terms such as:

   • Intellectual property
   • Debt
   • Liabilities
   • Initial contributions
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   State the business objectives of the joint venture. The first substantive provisions of your joint venture agreement should contain the objectives of the joint venture. These provisions will help define the scope and purpose of the agreement and will help both parties understand expectations. For example, your business objective provisions might state:

   • Party A enters into this agreement in order to maximize the national distribution of Party A's new beer Happy Duck IPA.
   • Party B enters into this agreement in order to diversify their beer offerings and to share in the profits of Happy Duck IPA as described below.
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   Explain the joint venture's governance structure. Every joint venture will need to be managed in a manner agreed to by both parties. The manner in which the joint venture will be governed needs to be clearly laid out in the joint venture agreement. Common governance schemes include boards of directors, managing boards, and business representatives. Regardless of how you choose to run the joint venture, you need to discuss the following:

   • How the management team will be chosen (e.g., elections or appointments)
   • How members of the management team can be removed
   • How many management members will each partner get (e.g., will it be 50-50 or will one partner get more management members)
   • How often will meetings take place
   • Who can call meetings
   • How will information be accessed and reported
   • What joint ventures will require approval by the management team (e.g., incurring debt, transferring ownership interests, entering into contracts, capital expenditures)
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   Lay out what each party will contribute. Each party will need to contribute something of value to the joint venture in order to have a binding agreement. You or your partner will choose what contributions to make depending on your business's strengths and weaknesses. Whatever you both choose, you need to create detailed provisions stating exactly hat each party is putting into the joint venture.

   • For example, if your business is being utilized for its intellectual property, information technology (IT) team, and existing distribution contracts, you will need to lay this out in the agreement. For example, your contribution provision may state: "Party A is contributing all of their intellectual property, existing distribution contracts, and IT Team to the joint venture."
   • If the other business is contributing a single invention and cash, this also needs to be included. For example, the second part of your contribution provision may state: "Party B is contributing Invention X and $250,000 cash to the joint venture."
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   Determine how profits, losses, and liabilities will be shared. Profits, losses, and liabilities may or may not be shared equally among you and your joint venture partner. In most cases, profits and losses will be shared in proportion to each party's contribution. For example, assume you enter a simple joint venture agreement where Party A contributes $750,000 and Party B contributes $250,000. In most cases, Party A will take 75% of the profits and Party B will take 25% of the profits. In addition, Party A will take responsibility for 75% of the losses while Party B only takes responsibility for 25% of the losses.

   • Liabilities will usually be separated and will be taken on by the party offering the service. For example, if Party A entered into a distribution contract before entering into the joint venture agreement, and that distribution contract is going to be utilized in the joint venture, Party A will take responsibility for any liability stemming from that agreement. However, your joint venture agreement can state that both parties will take on liability equally.
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   Create dispute resolution provisions. Your contract needs to lay out a process by which disputes can be resolved. Without a set mechanism to resolve disputes, the simplest disagreements could lead to a failed joint venture and litigation. Common dispute resolution provisions will lay out the following:

   • Mediation or negotiations should be a first step. Make sure you require that both parties negotiate in good faith.
   • Non-binding or binding arbitration should follow mediation. You should reference arbitration rules (e.g., American Arbitration Association Rules), where arbitration will take place, the laws that will apply, how many arbitrators will hear your dispute, and how the costs will be split.
   • Litigation should be a last resort.
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   Draft exit and termination procedures. Every joint venture has a beginning and an end. Just like your agreement will dictate how the relationship starts, it will also need to discuss how the relationship will end. You can choose to have your joint venture agreement terminate in various ways. For example, you can state that your agreement will automatically end on a certain date. You can also state that your agreement will automatically end upon the occurrence of some event (e.g., the creation of a business, the sale of a product, or when profits reach a certain dollar amount). You might also choose to have the agreement terminate automatically when one party breaches the agreement.

   • Exit procedures will usually be included when one party is clearly stronger than the other. When this occurs, the weaker party will usually want a way out of the agreement if certain events occur. Exit procedures must usually be exercised in order to take effect (i.e., they do not occur naturally).
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   Include boilerplate language. Your agreement will conclude with standardized language that touches on contracts generally (as opposed to your specific joint venture agreement). These provisions will help courts resolve disputes and enforce the contract. Common boilerplate provisions include:

   • Attorneys' fees provisions
   • Choice of law provisions
   • Severability provisions
   • Integration provisions
   • Warranty provisions
   • Heading provisions
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Part 3

Part 3 of 3:

Finalizing the Deal

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   Negotiate disagreements. Once your draft of the joint venture agreement has been written, send it to your partner so it can be looked over. In all likelihood, your partner will want clarifications in certain places and may even disagree with you on some provisions. Have an open discussion about the document and make any changes you feel are fair. The most hotly negotiated sections are usually:

   • The joint venture's governance structure
   • Each party's contributions
   • How profits, losses, and liabilities will be shared
   • Exit and termination provisions
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   Prepare exhibits. Once an acceptable agreement has been reached, you will need to attach any necessary exhibits before the final agreement is signed. Exhibits help explain certain pieces of the contract and offer additional guidance where needed. In a joint venture agreement, common exhibits include:

   • Financial statements
   • Intellectual property plans
   • Nondisclosure agreements and other supplemental contracts
   • Joint venture plans (e.g., financial plans, marketing plans, distribution plans)
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   Sign the agreement. Once the joint venture agreement is complete, it will need to be signed by both parties. Be sure that whoever signs the contract on behalf of both businesses has the authority to do so. Once the contract is signed by both parties, it will become effective and binding.
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