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Joint Ventures, 8th January 2013 - Click for larger version Joint Ventures, 8th January 2013

In these days of reduced liquidity and a pressing need to identify new ways of making margins and finding a competitive edge, we are seeing a good number of joint venture proposals coming to our attention.

Recent joint ventures we’ve advised on have included: a venture set up to exploit capital projects opportunities across Africa (between Scottish and South African partners), a pioneering medical device development programme between Scottish and US partners and a consortium of four Scottish (and competing) service providers coming together in a consortium to bid for a Scottish national infrastructure project.

There are some basic elements to be considered when analysing a proposed joint venture:

Profits and losses

To what extent (if at all) are these to be pooled? How are profits to be extracted? In the case of a project, are all the profits being taken at the level of the joint venture, or are some being taken through separate agreements entered into by the participants?

Entitlement to assets and revenues

To what extent (if at all) do the participants want to have direct interests (whether discrete or undivided) in the assets and revenues attributable to the joint venture?

Risk-sharing and liabilities

Are all the risks of the enterprise being borne by the joint venture or are some being assumed directly by the participants? How much legal responsibility is each participant willing to accept for losses of the business and for liabilities to third parties incurred by the joint venture, particularly in the light of their relative financial positions? How much authority (if any) is a participant prepared to give to the other participants? Are there any grounds for displacing the usual assumption that a limited liability company is the appropriate vehicle?

Management structure, employees and employment incentives

Will the joint venture have its own employees? How much autonomy will it have? What sort of board and management structure will be required? Is any form of employee participation or incentive plan proposed?

Control and minority protection

How is the joint venture effectively to be controlled? Will the structure accommodate suitable protection for minority participants. Could a deadlock arise and, if so, how should it be resolved?

Tax

What is the tax effect on the joint venture parties of the contribution of assets or businesses to the joint venture? How will the joint venture be taxed and how will the interests of each participant be taxed? Does the structure provide the best tax treatment for the joint venture and the individual participants? What is the expected tax treatment of any subsequent termination on the joint venture parties?

Financing

How do the participants foresee the joint venture being financed? If funds are to be raised externally, what are the requirements of the lenders in relation to recourse to the participants and security?


Termination and dispute resolution

Is the venture for a finite term? In what circumstances should it be capable of termination? How are disputes to be resolved?

In short, many elements to consider, both legal and commercial.

As ever, careful planning and attention to the detail at the outset can minimise the risks and maximise the rewards to the mutual benefit of the partners.

Last updated: 1.42pm, Tuesday 8th January 2013

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