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Joint Venture Agreements: Key Drafting Issues

Aug 5, 2008
The key provisions in any JV include:

(1) Clearly defined business objectives;

(2) The degree of participation and the management roles of each joint venturer in the business;

(3) Contribution of capital and ownership rights to property / division of the profits and losses;

(4) A dispute mechanism to avoid management impasses that may produce deadlock or litigation;

(5) Termination/liquidation of the JV and the buy-out provisions;

(6) Confidentiality; and

(7) Indemnification.

(1) Clearly defined business objectives. The agreement must initially lay out the purpose of the joint venture, generally a common business interest or investment. For instance, paragraph one could say: "1.1. Business Purpose. The business of the Joint Venture shall be as follows:" and then describe the business purpose. This paragraph should also define the term of the agreement.

(2) Degree of participation and the management roles of each joint venturer. Next the agreement should lay out the roles, management responsibilities, and degree of participation of each joint venturer. This provision will be contractually enforceable, so it must be clearly drafted to accurately define the roles, obligations, rights, and duties of the parties. In the case of a new entity or where an equity investment is involved, it is typical to address representation on the joint venture's or the other party's board of directors or similar governing body.

(3) Contribution of capital and ownership rights/Division of the profits and losses. The agreement should next describe the capital contributions and other resources each party will convey to the venture, as well as method and percentage of profit and loss sharing for the venture. Who will be primarily responsible for losses, and how and when shall profits be shared? Typically parties often share profits pro rata according to their respective equity interests. In cases where one company contributes more cash, however, that company may receive priority on the distribution of profits.

(4) A dispute mechanism. The Agreements should lay out the terms of an internal mechanism for resolving any disputes that may arise between the joint venturers. This mechanism is necessary to avoid management impasses that may produce deadlock or litigation. Neither party would benefit from adjudicating claims externally by way of litigation or arbitration while the joint venture is in place. This provision could create a board, filled by executives from each venturer, who would be responsible for hearing and resolving disputes.

(5) Termination of the Joint Venture / Buyout Provision. Joint ventures typically are not intended to last forever. The parties often provide a termination date, at which time contractual arrangements will terminate or one party will buy the other's equity stake. Buyout provisions can be difficult to negotiate in advance because the parties may not be able to accurately predict the value of the strategic alliance or joint venture at the time of the buyout. One solution is to provide that the valuation will be based on revenues or profits at the time of the buyout, or that a third-party appraiser will determine the valuation. Alternatively, the parties can adopt a "shotgun" or "auction" provision, whereby one party initiates the process by proposing to buyout the other party at a specified valuation, and the other party must agree to buy or sell at that price, or begin an auction by proposing to buy at an increased valuation.

(6) Confidentiality / Intellectual Property. The parties to a strategic alliance or joint venture should consider carefully how to allocate, control and protect confidential information and other intellectual property that is contributed to, or developed in, their business relationship. The parties may want to provide that all employees and consultants with access to confidential information must execute a separate stand-alone confidentiality and nondisclosure agreement. The parties also should consider how to allocate new intellectual property that is developed in the course of the business relationship. In a classic joint venture where the new intellectual property becomes the property of the new entity, the parties should consider who will own the new intellectual property if the entity subsequently is dissolved

(7) Indemnification. Finally, an indemnification provision of a joint venture agreement must be in place to indemnify the manager and its directors, officers, employees and agents, and any person who is or was serving at the request of the joint venture as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liability. Most importantly, this provision should cover such a director or employee's costs in defending a third-party law suit, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by such indemnitee in connection with the defense or settlement of such action, suit or proceeding, if such indemnitee acted in good faith or in a manner reasonably believed by such indemnitee to be in or not opposed to the best interests of the joint venture; provided that the indemnitee's conduct shall not have constituted gross negligence or willful or wanton misconduct.
About the Author
Mark Warner is a Legal Research Analyst for RealDealDocs.com. RealDealDocs gives you insider access to millions of legal documents drafted by the top law firms in the US. Search over 10 million Documents, Clauses, and Legal Agreements for Free at http://www.RealDealDocs.com
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