In addition to conventional mergers and acquisitions, parties who wish to combine their businesses – particularly in a limited manner – can utilize a “joint venture” structure to achieve their combined goals. These structures provide an unusual degree of flexibility in the structure and nature of the ongoing relationship and obligations of the parties. As such, joint ventures can be an excellent tool when seeking to solve some of the problems inherent in business combinations.

• A key difference between joint ventures and traditional business combinations is the parties’ ability to engineer as much – or as little – formality into the structure as they desire. While a conventional business combination would most likely take the form of a merger, an acquisition or an asset purchase – each of which entails a permanent relationship and, generally speaking, the risk of the success of all relevant lines of business being shared by both participants – joint ventures can be both impermanent in duration and limited in the parties’ obligations to one another. For example, if two businesses have complementary assets for a specific business opportunity, but have other lines of business which are unrelated, they could enter into a joint venture to co-develop or co-market the complementary assets (often with certain protections to address competition and intellectual property concerns). Importantly, depending upon the business needs of the relationship, the joint venture could be implemented through structures which range in flexibility from an informal alliance to the creation of a new entity into which each participant contributes the subject assets, and then they jointly own and manage the entity. In all circumstances, this allows the participants to “silo” the opportunity for collaboration without tying up (or cross collateralizing) their other assets and lines of business.
• Due to the flexibility and the relative speed of implementation of joint venture structures, parties can also use joint ventures as a preliminary step to quickly “feel out” two parties’ ability to work together in advance of a more definitive integration of their respective businesses. This is particularly the case for businesses where personnel – as opposed to property, plant and equipment – produce the revenues of the business, as joint ventures can prove that the teams are able to collaborate (whether on development projects, sales/client retention or otherwise) and are otherwise compatible, which is an essential part of ensuring a successful ultimate integration. Where questions exist as to the feasibility of such combinations, a joint venture can provide a “proof of concept”, and further if the businesses are ultimately combined, integration risks are more likely to be limited to the back office, rather than the front office – thereby managing the risk of client or service offering disruptions.
• Where a more formal joint venture structured is used (e.g., pursuing the joint venture through a special purpose vehicle to be co-owned by the participants), often the most sensitive issues in the negotiation relate to control, financial obligations and ownership of the assets (whether during the course of the relationship or following an unwinding of the venture). Regarding management, the two most frequent approaches are either 50/50 (so each party can effectively veto any actions), or – particularly where one party is contributing more than the other party to the joint venture – a majority/minority relationship where the majority participant controls the venture subject to a number of enumerated veto rights of the minority owner. Where control is 50/50, there will often be a detailed business plan agreed upon at the initiation of the venture, so that small disagreements cannot disrupt the general objectives of the business. This approach of a robustly defined business plan is also used to manage the challenges of capitalizing the joint venture; often, each participant will agree to commit a certain amount of capital to the venture which they will be obligated to fund when the venture achieves certain milestones.
• The best approach for establishing the joint venturers’ rights in respect of intellectual property rights created by the venture often begins with a determination of whether one or both parties wish to use the intellectual property of the joint venture to support their existing businesses or if only one party is going to use the intellectual property in the business (and the other is going to receive solely an economic benefit from the joint venture). If the latter structure, this issue is resolved by finding the right economic sharing between the parties. If the former, the parties will need to set clear parameters on each party’s rights to use the intellectual property, often with great attention paid to the purpose for which the products are used, geographical and/or industry limitations, and restrictions on using the products in ways that create competitive pressures.

Joint ventures are an alternate way of moving forward with a relationship where a more formal business combination may be premature, unworkable or too expensive. In today’s dynamic environment, where opportunities can be lost if the parties are unable to quickly move to work together and exploit new business developments, the speed and flexibility of a joint venture arrangement can be an excellent approach – or even stopgap – where the pursuit of a traditional combination would be too cumbersome.

Seward & Kissel’s Business Transactions Group routinely handles the structuring and negotiation of joint ventures across a diverse set of industries. If you have any questions, please contact any of the following partners in S&K’s Business Transactions Group.