Andy McNish

Joint Ventures: Which Vehicle?

Under English Law, there are four main structures through which a joint venture can be arranged.

  • A purely contractual co-operation agreement (also known as a consortium agreement).
  • A partnership
  • A limited liability partnership (LLP).
  • A limited liability company.

Broadly, the four forms reflect varying degrees of integration of the interests of the parties in the joint venture.

When two or more parties want to set-up a joint venture, the most basic choice is whether or not to set up a separate legal entity for it. The incorporated options (i.e. limited company and LLP) will usually involve putting all the trading activities, and assets and liabilities relating to the joint venture operation into a single vehicle, of which the participants each own a share.

This is not the case with the consortium agreement or partnership options, where the participants retain direct ownership of the assets and one or more of them will be directly responsible for any liabilities.

The nature and value of the venture, level of risk, privacy requirements and resources of the investors will determine which vehicle is most appropriate.

A consortium agreement (pure contract)

This is essentially just a contract and can be a quick and highly flexible method of structuring a joint venture.

The agreement will specify the scope of the venture, the obligations and commitment of individual participants, as well as provisions covering the financing of the venture and the entitlement of individual participants to the benefits of the venture.

Pros

  • Speed – no entity needs setting up or registering. Can be entered immediately.
  • Can be easily dissolved once the venture has ended.
  • Privacy – The agreement will usually remain private to the parties.

Cons

  • No fall-back default position as there is for jointly owned companies or partnerships. The contract must be drafted well and cover off all relevant issues.
  • Risk of creation of partnership by accident, which would lead to additional uncertainty and unwanted complexity as the inappropriate default positions under the 1890 Partnership Act would then apply.
  • No separate legal personality. A venture carried on under a consortium agreement cannot employ staff or hold or give security over assets on its own account. This can make it difficult for lenders and other third parties to deal with it. They also have no separate tax status. This also means that whenever a participant deals with a third party as part of the joint venture they are exposed to the risk of direct legal claims.

Consortium agreements are commonly used for JVs involved in:

  • Property development, tenders and construction contracts.
  • Projects where the participants make their contributions at different stages.
  • Collaborative exercises in developing new products, marketing and exploitation of know-how (such as R&D Agreements).
  • Short-term, simple/low risk ventures.

Partnerships

moving in the same direction

Partnerships are governed by the Partnership Act 1890. The Act does contain (rather outdated) default provisions for partnerships, but any JV partnership should have a bespoke partnership agreement drawn up.

A partnership will be found to exist (even in the absence of a partnership agreement) if individuals carry on a business in common with a view of profit, with a full pooling of the profits and losses of the venture.

In general each partner can, by its acts in relation to the partnership business, commit the other partner(s) to obligations to third parties and cause liabilities to arise on other partners.

Pros

  • Highly flexible.
  • Private as no public filings to be made.

Cons

  • Other participants may be financially liable for acts of one partner.
  • Unlimited liability so assets can be targeted if partnership assets are insufficient.

A partnership structure should be considered where:

  • The exposure to unlimited liability is acceptable to the participants and participants are well-known to each other/enjoy a high level of trust.
  • You think that there would be material tax, accounting and/or commercial advantages in using a partnership structure (such as avoiding transfer costs and taxes by the participants retaining direct ownership of assets).

A limited liability partnership  (LLP)

An LLP is a body corporate with a legal personality separate from that of its members, but is (broadly) taxed as if it were a partnership.

Pros

  • Liability falls on the LLP and not its members.
  • Taxed as a partnership
  • Commercial details can be private in LLP agreement

Cons

  • Lack of readily transferable shares.
  • Accounts have to be publicly filed and member details given.

When is an LLP appropriate?

  • Suitable if participants do not want to replicate the director/member divide found in limited companies as members (partners) are, by default, treated as combined shareholders/managers.
  • For some joint ventures that would otherwise have chosen a conventional partnership form, such as professional partnerships of individuals.
  • There are particular accounting, tax or commercial advantages to this structure.

A company limited by shares (JVC)

A new company will be formed to act as a vehicle for the venture.

The participants will usually be the shareholders and be (or, if a corporate entity, nominate) directors of the company.

The JV agreement (also known as the shareholders’ or investment agreement) and/or the articles of association of the JVC, contain provisions setting out the contributions of and the different  obligations and powers as between the participants, as well as capital exit and other relevant provisions.

Pros

  • Easier to sell shares or seek further investment in future.
  • Participants cannot be pursued for their personal assets (in the absence of specific guarantees etc.)
  • The JV agreement itself can remain private.
  • Flexible – Can easily incorporate participants who are passive investors.

Cons

  • Articles of association, accounts and ownership will be public.
  • Higher administrative/regulatory burden and ongoing professional costs.

When is a JVC used?

  • JVCs are by far the most popular way to structure a JV enterprise if it is significant in terms of size or number of participants or likely duration.

If you have any questions about JVs, please call Andy McNish, partner, on: 0161 832 3304.

If you are making an enquiry then please contact us, or if you require one of our professional services.

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