Joint ventures are a common way for companies in the Tech Sector to structure their collaboration on developing new products and technologies. There are a number of structures that may be used ranging from corporate to contractual. In many cases, a joint venture company is used giving the benefits of it being a separate legal entity able to enter into contracts and hold assets as well as providing limited liability to the parties behind it. In this article, we set out some of the key issues to consider when starting a joint venture company in the Tech Sector.
IP ownership and protection of existing rights
As IP rights are often critical to businesses operating in the tech sector, an early task is to ascertain what IP rights exist and who they are owned or held by. In respect of IP rights owned by any of the parties to a joint venture, there are a number of ways that these can be dealt with upon entering into the joint venture. The parties may each choose to retain any rights that they own and licence these to the joint venture company and/or the other party/parties. This will involve carefully documenting what rights the joint venture company and/or any of the other parties have to use and exploit the relevant IP.
Sometimes, it will be appropriate to assign IP rights to the joint venture and again it will be necessary to ensure this is properly documented and, if appropriate, filed with the relevant authorities. In this case, consideration should also be given to what licences or rights the original owner should have going forward.
In either case, adequate provisions should be included in any joint venture agreement covering what rights each of the parties and the joint venture company will have in respect of the IP upon exit from the joint venture.
Joint venture developed IP
Alongside existing IP, the parties should include details in any joint venture agreement of the rights to any IP developed by the joint venture company. It may be necessary to distinguish between IP that is developed by using existing IP owned or held by one of the parties to the joint venture and new IP created by the joint venture. The parties will need to identify what rights each is to have during the life of the joint venture as well as beyond or on exit from the venture. Who can exploit which rights and what will be the basis of such exploitation?
Data protection issues
With potentially heavy penalties imposed for data protection breaches, the parties should give thought to what data will be processed by each party and also by the joint venture company itself. Adequate arrangements should be put in place to ensure everyone has the access they need to relevant data during and beyond the life of the joint venture or each parties’ involvement in it. This will involve having the necessary internal policies and procedures at each level in addition to ensuring that data subjects are provided with the correct information about what data is processed as well as how and why. If any parties will need to have continued access to data after the venture is terminated or after their own exit, the basis for this access should be considered and incorporated into the processes and documentation.
Shareholder warranties and indemnities
The warranties and indemnities to be included in a joint venture agreement will vary from one entity to another, but they reflect the parties’ reliance on each other’s knowledge and expertise regarding what they bring to the venture. As such, the warranties are likely to be focused on any assets being transferred into the joint venture by each party so that the parties can have certainty about all aspects of those assets and their ownership of them.
In the Tech sector, the importance of the IP Rights means there will be detailed warranties and indemnities around these. If any warranties are subsequently found to be breached, the other parties will have a damages claim against the party who gave the warranty, so it is important that the parties are honest and open with each other from the start and disclose any potential issues.
Ongoing arrangements between shareholders and the joint venture
In some cases, it will be appropriate for one or more of the shareholders in a joint venture to provide services to the joint venture company, such as IT services or the secondment of key employees. Where this is necessary, these arrangements should be carefully documented to provide certainty as to the obligations, the purpose and the terms. Similarly, if there are to be any ongoing trading arrangements between a shareholder and the joint venture, the terms should be documented, and the parties should consider how such arrangements might be independently audited if necessary.
Non-compete and confidentiality provisions
In a joint venture, each of the parties will learn confidential information about the other and the joint venture itself. As such, the parties need to ensure there are protections given to each other and the joint venture by way of confidentiality obligations, non-compete provisions and other restrictions on the parties. When thinking about the extent of non-compete provisions, it will be necessary to consider what territorial and other limitations will be applicable and, in respect of the joint venture, how its business will be appropriately defined to ensure adequate protection. Thought should also be given to whether the parties should have any obligations to refer any business or clients to the joint venture. Particular attention is needed to clearly define the business of the joint venture and carving out or dealing with any potentially competing business of the joint venture parties, which can be a particular issue for companies involved in developing and exploiting tech.
Termination or exit
Whilst it may be the last thing on everyone’s minds when getting a new venture off the ground, it is crucial to consider the circumstances in which the parties may want to terminate or exit from the JV and the implications. An exit by one or more of the parties does not necessarily mean the end of the joint venture company and a joint venture agreement should therefore include detailed provisions about the circumstances in which shares may be transferred, including who they may be transferred to and how such shares may be valued. The agreement should also set out any circumstances which may give rise to an automatic termination or which may entitle one party to terminate it. Termination provisions should include details of how any assets will be distributed, including any joint venture owned intellectual property rights as well as how any contractual or other liabilities will be dealt with.
If you are considering a new joint venture or need advice on an existing joint venture make contact with Victoria Robinson or Ollie Flowers in our Tech Sector Team to discuss the joint venture and to prepare a joint venture agreement that covers off all of these aspects and more.