On the Legal Nature and Origin of Joint Ventures 

 Companies are continuously striving to gain access to new markets and sources of supply, to make better use and capitalize on technology and assets, namely, to become more profitable in every aspect of conducting business. In such circumstances, joint venture agreements became a popular toolkit for business association. Hence, a joint venture agreement may be defined as a contractual relationship by which two or more business entities decide to combine their assets and work for the purpose of achieving a mutual business-related goal, while the profit and business losses are borne equally (unless otherwise agreed). 

To explain such form of cooperation, we use the term joint venture, which originates from Anglo-Saxon law and refers to a legal creation of autonomous law, which in its nature resembles the legal form of partnership that is a familiar term in our legal tradition. Joint ventures bear a striking resemblance to strategic alliance since both forms of association are aimed at achieving predetermined business strategic objectives. Although a joint venture can also be achieved through the creation of a separate legal entity to carry out mutual goals, in this article we are mainly going to deal with the contractual side of joint ventures. 

Back in the 60s and 70s, a number of U.S. and foreign companies, fueled by stories of the great wealth hidden at the bottom of the ocean, independently engaged in exploration and figuring out exploitation technique for raising manganese nodule to the surface. By the early 80s, all the companies had grown into five joint ventures. Taking into account all economic, political and technical factors back then, forming joint ventures was a manner to successfully continue the exploitation process. 

Main Perks of ‘Corporate Marriages’. 

Joint venture agreements are often referred to as ‘corporate marriages’ or ‘marriages of convenience’. Similar to marriages, business entities need to find a partner that is a good match. To successfully conduct business in the joint venture form, essential ingredients can be laid down as mutual understanding, compatibility, trust and commitment to common goals.  

Main purposes for entering into joint venture agreements can be seen in its various economic functions such as cooperation and forming alliances with market competitors, a means of avoiding potential business restrictions (e.g., measures of protectionism related to domestic production), a means of joint financing of the contracted investment and other business-related goals.  

A 2014 survey on joint ventures and other forms of business alliances showed that 68 percent of respondents stated that they expect their companies’ joint venture pursuits to grow over the next five year. Moreover, respondents that had previous experiences with joint ventures proved to be more likely to use them in the future as well. Namely, approximately 90 percent of respondents at companies were already familiar with joint ventures, stated that joint ventures are considered as serious alternatives to mergers and acquisitions. For the sake of comparison, only 40 percent of respondents at companies with no prior joint venture operation stated the same.  

Different Types & Best Practice Examples 

While many categorizations may be found in legal literature, we are going to lay down four most common types of joint ventures and a few best practice examples, regardless of the fact whether the joint ventures are contract-based, or partners have created a separate legal entity to carry out the joint venture. 

 First let’s discuss the project-based joint venture. As the name suggests, business entities enter into such an agreement to achieve a specific assignment. That type of cooperation is usually used for a specific purpose, and once that particular project is done, the joint venture ceases to exist. For example, in 2016, the pharmaceutical company GlaxoSmithKline formed a project joint venture with Verily that was set to last for a period of seven years, and with the main objective to research, develop and produce bioelectric medicines. 

Then we have horizontal and vertical joint ventures. In the case of horizontal joint ventures, the association happens between business entities in the same general line of business. One of the most famous cases of horizontal examples is the BMW Brilliance joint venture. Back in 2003, the car manufacturer BMW formed a joint venture with the Chinese manufacturer Brilliance Auto Group. On the other hand, vertical joint ventures occur between companies operating at divergent levels of the supply chain, such as between suppliers and buyers. For example, in 2021, Ford Motor announced the plan to form a joint venture with the South Korean battery manufacturer SK Innovation amid an expected surge in electric vehicle sales. 

An interesting form is the functional-based joint venture. Under this type of agreement, business entities cooperate to obtain a mutual benefit based on synergy in terms of functional expertise in particular areas. The main point of this type is to increase the likelihood to perform better together in comparison to operating separately. A real-life example of such a joint venture is the collaboration between Procter & Gamble and Groupe Danone created to mutually develop and market a line of healthy snacks. Procter & Gamble brought to the table their expertise in product development and marketing, while Danone contributed with its knowledge of the food industry and distribution channels. 

Drafting Joint Venture Agreements: Due Diligence & Corporate Prenups  

Joint venture agreements can be a great tool for entering a new line of business or market and developing a particular project or technology. In many cases the best match for a joint venture may be found in the competitor. Therefore, a well-defined agreement is important for any contract-based joint venture. Before entering into the agreement, it is vital to define the partners’ rights and obligations, ownership over intellectual property, the extent of what will be shared, management, funding, equipment contributions, profit recognition and distributions and others. 

As mentioned above, joint ventures are referred to as ‘corporate marriages’, and when terminated, ‘corporate divorces. While joint venture dissolutions are not rare, the absence of a well-defined agreement may create a situation of uncertainty and partners being caught off guard by the consequences of termination. Such situations can be made easier for partners by laying down ‘exit strategies’ such as exit triggers, exit mechanisms, and post-exit considerations (e.g., in relation to intellectual property). 

Such exit provisions have been labeled as ‘corporate prenups’. Even though drafting exit clauses in a joint venture agreement can be challenging taking into account that partners don’t know how successful the joint venture is going to be, or who will exit and when, negotiating such terms before the contract’s conclusion may have a broad impact on the business relationship and mutual understanding. 

Sources: 

Books/Journal Articles/Publications: 

Branding Pyle, T. (2022). All Joint Ventures Come to an End: Four Tips for Drafting JV Exit Terms. American Bar Association – Publication. 

Bogojević, A. (2016). Joint Venture and Market Competition. Godišnjak Fakulteta Pravnih Nauka 6 (6), Banja Luka, pp. 254-267. 

Killing, P. (1982). How to Make a Global Joint Venture Work?. Harvard Business Review – May 1982. 

Peng, M. W. & Shenkar, O. (2022). Joint Venture Dissolution as Corporate Divorce. The Academy of Management Executive, Vol. 16, No. 2, pp. 92-105. 

Walters, B. A. et al (1994). Strategic alliances and joint ventures: Making them work. Business Horizons, Vol. 37, Issue 4, pp. 5-10.  

Website Articles: 

BMW Group (2018). 15 Years BMW Brilliance Automotive: BMW Group strenghtens commitment to China. BMW Group- Press Release. 

Rinaudo, E. K. & Uhlaner, R. (2014). Joint ventures on the rise. McKinsey & Company – Survey Results.