joint venture

From time to time, two or more companies might decide to pool their resources and create a jointly-managed business that has the best of everything. Such businesses are called "joint ventures." There are many situations where a joint venture can be a great idea:

• When companies in different industries want to create a company that bridges the two industries, e.g. MSNBC (a news organization combining the internet experience of Microsoft with the TV news experience of NBC).
• When companies in the same industry want to combine strengths in different fields, especially across borders, e.g. Nikko Citigroup (a Japanese investment bank combining the domestic power of Nikko Cordial with the international reach of Citigroup).
• When companies in the same industry are too small individually to finish a major project, e.g. Airbus Industrie (combining the resources of several European aerospace companies to produce large commercial aircraft).
• Some countries, like the People's Republic of China, require that joint ventures with local companies be used for all foreign direct investment.

The term "joint venture" has little legal significance in itself. It can refer to a variety of business organizations. A JV is usually organized as an independent corporation, but can also be a partnership, limited liability company, or other type of entity, depending upon tax and liability considerations. It may even lack much of a separate legal existence of its own. However, each party to the joint venture usually has a proprietary (e.g. equity) stake in it, as well as some degree of control so as to protect that stake.

The difficult part about joint ventures is that they are necessarily finite in length and scope, rather like a marriage. Any number of things might eventually happen...

1. One party buys the other parties' stakes and turns the JV into a subsidiary.
2. A third party, or group of third parties, buys the entire thing and "spins it off" from its old parents.
3. A syndicate of underwriters arranges an initial public offering, turning the JV into an independent public company, which may continue life as an agent, distributor and/or licensee of the stakeholders depending on the circumstances.
4. The JV does poorly, is broken up, and the parties fight over its remaining assets—the corporate version of divorce.

As a result, joint ventures are usually governed by a hefty stack of contracts. Some of the contracts you're likely to see are:

• A "master" or "framework" agreement, which sets up the basic structure of the JV, provides a framework for the other agreements to be signed, and (like a corporate prenup) dictates what will happen when someone wants to pull out. One of the most important provisions here is the right of first refusal, providing that nobody can sell their share of the JV without offering it to the other stakeholders first.
• Licensing agreements for any intellectual property rights that are involved, such as patents and trademarks. These often have special provisions to account for what will happen if the stakeholder who owns the IP pulls out of the JV.
• Service agreements for the stakeholders to give the JV company access to their personnel, facilities and other resources.
• Lots and lots of non-disclosure agreements so that the stakeholders don't end up giving away all of their business secrets to the world.
• The articles of incorporation and bylaws (or equivalent documents) for the JV company, which set up the internal structure of the JV.

Obviously, most businesses don't try to do all this themselves: they hire big-ticket lawyers to do it for them. Many lawyers have developed reputable practices in joint ventures and can advise their clients on which arrangements will avoid trouble down the road. (This is one of those areas where a lawyer need not be bloodsucking, but can actually pay for themselves in the long run.)