THIS article looks at some of the areas to consider when setting up a joint venture company to enable two parties or more parties to develop a business together.

The term joint venture is generally used to describe a commercial arrangement between independent parties. Joint ventures can take a number of legal forms. In the UK the three main legal forms of joint ventures are limited companies, partnerships (or limited liability partnerships) and arrangements based on contractual co-operation. The two principal governing legal documents in a corporate joint venture (i.e. one where a limited company is used) will be the articles of association of the company and a shareholders’ agreement. Some of the key commercial legal issues to consider at the outset of forming a joint venture company are:

lPurpose of the joint venture: This should be specified precisely, in order to clarify the expectation and responsibilities of the parties. The type of business, business model, its products and/or services need to be captured. In addition, there many issues surrounding the territory in which the business will be carried out.

lShareholdings: A major decision to be made is to how the shares in the joint venture company will be held. Issues such as the rights attaching to the shares in the company (for example, in relation to voting, dividends and return of capital) as well as the allocation of shares, will need to be determined.

lBoard of directors: Who will comprise the board, what will their role be, how often will they meet and what voting rights will they have? Who will be entitled to appoint initial, additional or alternate directors?

lManagement of the company: The day-to-day management rights and responsibilities of the company need not always mirror those of the equity shareholders, but very often they will do.

lDeadlock: There are many crucial issues surrounding what would happen if the parties disagree on fundamental issues. There are a number of mechanisms which can be put in place in an attempt to resolve matters should a deadlock arise. These include the use of a chairman’s casting vote, a third party’s “swing vote”, reference to the parties’ chairman (where there are corporate shareholders), arbitration, mediation or expert determination.

lProtection of a minority: This looks at how minority shareholders are protected where the other shareholders wish to pass resolutions without the approval of the minority. There should normally be detailed provisions to prevent the parties freely transferring shares.

lTransfer and termination: Parties should consider how the termination of the joint venture should be governed.