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Henry Ford said “Coming together is a beginning, staying together is progress, and working together is success.”

This is very true for joint ventures. Its appeal lies in the promise of sharing resources, leveraging synergies, sharing risk, and combining complementary skills to access more lucrative markets and bigger contracts. But, invariably a joint venture leads to serious (and often unintended) consequences because it is misunderstood.

What is a joint venture?

A joint venture is similar to a partnership in that two or more businesses agree to pool their resources and join forces to go after a business opportunity that they would otherwise not be able to procure on their own.

Invariably, the “partners” do not want to be exposed to each other’s creditors and risks. They usually only want that part of the other business that will benefit them. The joint venture is therefore reminiscent of a partnership.

A joint venture is not, by itself, recognised as a separate kind of business (such as a company or a close corporation). Because this form of partnering is not specifically regulated in South Africa; and because a joint venture can take many different forms, it presents various risks that can often lead to unintended consequences, if not carefully navigated.

Types of joint ventures

Joint ventures can be divided into incorporated and unincorporated joint ventures.

An incorporated joint venture usually takes the form of an entity such as a company. Here the partners will take up shares in a newly formed company and their reward and risk profile will be determined by their respective shareholding and how much they are each willing to put in. Since a company is an independent legal entity that is established by a law, the parties are isolated from each other’s creditors and other risks and they enjoy certain fixed rights and obligations. An independent company also protects the parties against the client or contract risk that arises from the joint venture itself. Key to creating fit-for-purpose incorporated joint ventures is the registering of a new company, tailoring this company’s memorandum of incorporation (better known as the MOI) to the needs of the parties, and complementing the MOI with a fit-for-purpose shareholders agreement.

In contrast, the unincorporated joint venture is created by a contract between the parties. The unincorporated joint venture thus derives its existence from an agreement between the parties. This type of agreement does not need to be in writing and can be an oral or even tacit agreement (i.e. an agreement that comes into existence because of the way the parties acted towards each other and third parties). For this reason, the contract must be comprehensive and cover all aspects of the relationship. There is no “backup protection” in the form of legislation (as is the case with a company or close corporation). The parties must therefore make sure that their agreement covers all the important aspects of their relationship. Often, one of the parties will have to be the lead party who contracts directly with a client or supplier. The parties usually have no difficulty in formulating how profit will be shared and agreeing that a joint bank account will be opened. But they often neglect to deal with matters such as liabilities that arise from the project, how disputes will be resolved and how certain obligations will be divided between them. A well-drafted joint venture agreement should clearly outline each party’s role, responsibilities, contributions, and other critical matters such as dispute resolution mechanisms.

Why would you need an attorney?

The parties are free to tailor the structure of a joint venture to their needs, liking, and risk appetite, whether they choose to go with an incorporated or unincorporated joint venture. The choice of structure depends on the nature of the project or opportunity, and the legal and tax implications. The MOI (with or without a shareholders agreement) – or joint venture agreement must be comprehensive and cater for all aspects of the business relationship. Legal advice will be key to understanding what you are getting into and gaining a thorough understanding of the intended and unintended consequences of your joint business endeavour.

Conclusion

Joint ventures present both significant advantages and risks. A joint venture should be structured not only to suit the specific needs of the parties but also to minimise risk and navigate the complex legal landscape. This requires a clear strategy and view of the legal consequences of the intended endeavour.

The above article outlines the factors to consider when entering into a joint venture. If you require more information or assistance, please contact Thinus Louw on thinusl@raubenheimers.co.za or via the relevant contact details below.

Written by: Thinus Louw – Associate

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E & OE).

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