Key considerations for entering into a joint venture

1. Purpose and strategic objectives

Start by clearly defining the purpose of the JV.  What are the strategic goals?  Are you aiming to develop a new product, enter a new geographic market, or share infrastructure and technology?  A well-articulated purpose will guide the structure, governance, and operational priorities of the JV.  It also helps align expectations and measure success.

Successful joint ventures that illustrate the importance of clear objectives include:

• Sony Ericsson: formed to combine Sony’s consumer electronics expertise with Ericsson’s telecommunications technology.  The clear objective was to create innovative mobile phones, which led to significant market success.
• Hulu: a collaboration between NBCUniversal, Fox, and Disney to create a streaming service.  The objective was to compete with other streaming platforms by offering a wide range of content, which has made Hulu a major player in the market.
• BMW and Toyota: this JV focused on developing hydrogen fuel cell technology and sports cars.  The clear goal of combining resources to innovate in sustainable automotive technology has driven successful outcomes.

2. Partner selection and alignment

It goes without saying that choosing the right partner is key.  Look beyond financial strength and consider cultural compatibility, long-term strategic alignment, and operational capabilities.

Conduct thorough due diligence to assess your potential partner’s reputation, track record, and any legal or financial risks (see our article on counterparty due diligence here).  Misalignment at this stage can lead to disputes and inefficiencies down the line.

3. Governance and decision-making

Establish a governance framework that defines roles, responsibilities, and decision-making authority.  Consider forming a JV board or steering committee with representatives from each party.  Include mechanisms for resolving deadlocks and disputes, and ensure that key decisions (e.g. capital expenditure, hiring, strategic direction) are clearly allocated.

All of this should be included in a commercial agreement, such as a collaboration agreement for a contractual (or unincorporated) JV, or a JV agreement for an equity (or incorporated) JV.  Our article on “points to consider in a shareholders’ agreement” also largely applies to JV agreements, you can find that article here.

4. Financial contributions, profit sharing and disputes

Agree on how each party will contribute financially (whether through capital, assets, or services) and how profits and losses will be shared. Be transparent about funding obligations, revenue expectations, and financial reporting.

Parties should consider how financial disputes will be handled as well as changes in financial circumstances.  Regular financial reviews should be carried out to ensure transparency.

These terms should be clearly documented in the collaboration/JV agreement.

5. Intellectual property and confidentiality

Determine how intellectual property (IP) will be handled. If IP is key to the JV, you may want to consider:

• Whether the IP created by the JV will be owned by the JV or jointly.
• Whether existing IP will be licensed to the JV (if so, set out terms specifying the scope of use, sublicensing rights, and any royalties or fees).
• Whether exclusive rights to use certain IP are required by the JV.
• How IP will be managed.
• Requirements for IP audits (and their frequency).
• Whether critical IP should be placed in escrow.

Address confidentiality obligations in the collaboration/JV agreement and ensure that proprietary information is protected, especially if the JV involves R&D or technology sharing.

6. Risk management and liability

Identify potential commercial, legal, and operational risks and agree on how they will be managed.  Consider:

• insurance coverage, indemnities, and limitations of liability;
• creating a risk management plan with specific roles and responsibilities;
• protocols for handling disputes, regulatory changes, or market disruptions; and
• crisis management and communication strategies.

A proactive approach to risk management can safeguard the JV’s long-term viability.  All of this should be contained in the collaboration/JV agreement.

7. Exit strategy and termination

Plan for the end at the beginning. In the collaboration/JV agreement, define the conditions under which the JV may be terminated or a partner may exit.  Include provisions for valuation, transfer of interests, and restrictions on selling to third parties. Effective exit strategies include:

• Buy-sell agreement: one partner has the option to buy out the other partner’s interest in the JV at a predetermined price or formula.  This provides a clear path for exit and valuation.
• Put and call options: partners have the right to sell (put) or buy (call) their shares at specific times or under certain conditions, offering flexibility and control over the exit process.
• Drag-along and tag-along rights: if one partner wants to sell their stake, they can compel the other partner to sell as well (drag-along) or join the sale (tag-along), ensuring coordinated exits.
• Pre-emptive rights: partners have the first right to purchase the exiting partner’s shares before they are offered to external parties, maintaining control over ownership.
• Wind-up and liquidation: the JV is dissolved, and assets are distributed according to a pre-agreed formula.  This is often used when the JV has fulfilled its purpose.
• Third-party sale: the JV is sold to an external party, with proceeds distributed among the partners.  This can maximise value if the JV is attractive to buyers.

A clear exit strategy provides stability and protects both parties’ interests and should be reviewed regularly.

8. Legal and regulatory compliance

Ensure the JV complies with all relevant laws and regulations, including competition law, tax, employment, and sector-specific rules.  Depending on the jurisdiction, you may need to register the JV, obtain licenses, or notify regulators.  Legal compliance is essential to avoid penalties and reputational damage.  We have teams that can assist with advising on these aspects of a JV.

Conclusion

A well-structured JV can unlock substantial value, but only with thorough planning and solid legal foundations.  Each section outlined above should be carefully considered, with clear strategies in place to manage risks in any collaboration/JV agreement.

Our Corporate & Commercial team advise on all aspects of joint ventures – from preparing bespoke articles of association, to drafting shareholders’ agreements, and dealing with ancillary issues such as data privacy and governance. Contact our team today if you’re considering a joint venture.