Structural Components of Equity Joint Ventures

So-called “equity joint ventures” are collaborations between two or more business partners that involve the formation of a separate legal entity, such as a corporation or LLC, within which the joint activities will occur. An equity joint venture should be contrasted with “contractual” joint ventures, which have become a popular topic among lawyers and managers. The distinction between an equity joint venture and a contractual joint venture can be illustrated by comparing the manner in which a United States manufacturer might enter a new foreign market. If the equity joint venture strategy is used, the manufacturer might form a new corporation jointly owned with a foreign partner. The United States party would contribute a license which would allow the joint venture to manufacture the products. The local party might contribute manufacturing facilities and any needed capital and personnel and agree to act as the local distributor for the joint venture. In that case, the parties will share the profits of the joint venture. Alternatively, instead of forming a new corporation, the United States party might use one or more “contractual” relationships, such as license and distribution agreements with the local party, to achieve the desired result of sales in the new foreign market without using a separate joint venture entity.

The formation and use of an equity joint venture, referred to hereafter simply as a “joint venture,” must take into account all of the same issues which are generally encountered with any new business enterprise. For example, each of the joint venture partners will contribute various resources and skills to the new enterprise, including products; financing; personnel; facilities; raw materials; and marketing, managerial and operational expertise.  These contributions may take the form of direct investment in the joint venture or may be provided under the terms of one or more ancillary agreements between the joint venture entity and the partners. The partners must also agree on a number of issues regarding the management and operation of the enterprise.  

Assuming that the corporate form is elected for the joint venture, the basic structural components would be as follows: articles of incorporation and bylaws; a shareholders’ agreement that would cover essential issues such as formation procedures, capital contributions, governance and termination of the joint venture; and ancillary agreements covering any services to be provided to the entity by the parties, as well as any agreements with respect to the purchase of products developed or manufactured by the joint venture or the use of the assets of the joint venture by the parties in activities that may, or may not, be related to the specific purpose of the joint venture. Among the various agreements are an administrative services agreement; a supply agreement; an equipment purchase agreement; one or more licenses with respect to technology or manufacturing rights; one or more distribution agreements; and an agreement with respect to the lease, acquisition or construction of facilities.

The procedures to be followed regarding the formation of the entity are typically specified by relevant laws in the jurisdiction in which the entity is to be organized. For example, formation of a new general partnership in the United States to conduct the joint venture activities will be governed by the applicable state partnership statutes, formation of a new LLC to conduct the joint venture activities will be governed by the applicable state LLC statutes, and formation of a new corporation for the joint venture requires compliance with applicable corporations law statutes. For larger transactions, the parties may enter into a master formation of joint venture transaction agreement which sets out in detail the steps that will be taken to form and organize the new entity and accept the contributions that each of the parties has committed to the joint venture. This approach may be appropriate when the parties are both public companies contributing a substantial amount of their assets to the joint venture since such a transaction may require regulatory and shareholders' approvals that will take a substantial amount of time.

To learn more about the structural components of equity joint ventures, see Chapter 103 of my Westlaw Next online publication Business Transactions Solution.

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