Joint Venture Law and Legal Definition
A joint venture is a general partnership typically formed to undertake a particular business transaction or project and is intended to exist for a limited time period. Joint ventures typically exist for 5-7 years. In a joint venture, two or more "parent" companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control. A joint venture is created with a specific project in mind and generally dissolves once the project has been completed. Members of the joint venture are exposed to full legal liability. A joint venture is treated like a partnership for federal income tax purposes.
Joint ventures may be formed for a vast variety of purposes. Joint ventures are commonly used in real estate matters where two or more persons undertake to develop a specific piece of real property. Joint ventures are also widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets the foreign companies would like to enter. The foreign companies generally contribute new technologies and business practices to the joint venture, while the domestic companies contribute their relationships and requisite governmental documents within the country, along with their established involvement in the domestic industry.
Joint ventures are usually formed through the legal procedures of creating a memorandum of understanding, a joint venture agreement, any ancillary agreements, and obtaining regulatory approval.
Some of the benefits of a joint venture include:
- Providing companies with the opportunity to obtain new capacity and expertise
- Allowing companies to enter into related businesses or new geographic markets or obtain new technological knowledge
- They do not represent a long-term commitment
- Companies can gradually separate a business from the rest of the organization, and ultimately, sell it to the other parent company (appr. 80% of all joint ventures end in a sale by one partner to the other).
- Sharing of fianancial support and financial risks
- New product development
Some of the pitfalls of a joint venture may include:
- Differing philosophies governing expectations and objectives of the joint venture partners
- An imbalance in the level of investment and expertise brought to the joint venture by the two parent organizations
- Inadequate identification, support, and compensation of senior leadership and management teams
- Conflicting corporate cultures and operational styles of the joint venture partners
A joint venture is a business enterprise undertaken by two or more persons or organizations to share the expense and (hopefully) profit of a particular business project. A joint venture is not a business organization in the sense of a proprietorship, partnership, or corporation. It is an agreement between parties for a particular purpose and usually a defined timeframe. Joint ventures may be very informal, such as a handshake and an agreement for two firms to share a booth at a trade show. Other arrangements may be extremely complex, such as a consortium of major electronics firms joining to develop new microchips. The key factor in a joint venture partnership is its single, definable objective. Joint ventures have grown in popularity in recent years, despite the relatively high failure rate of such efforts for one reason or another. Creative small business owners have been able to use this business strategy to good advantage over the years, although the practice remains one primarily associated with larger corporations.
Most joint ventures are formed for the ultimate purpose of saving money. This is as true of small neighborhood stores that agree to advertise jointly in the weekly paper as it is of international oil companies that agree to work together for purposes of oil and gas exploration or extraction. Joint ventures are attractive because they enable companies to share both risks and costs.
LEGAL STRUCTURE OF JOINT VENTURES
Joint ventures are governed entirely by the legal agreements that brought them into existence.
Some joint venture partners may wish to formalize the venture by creating a new joint venture company. Joint venture companies can be very flexible entities in which partners each own shares and agree on how they will be managed. More common are joint venture agreements that do not include the formation of a new entity. Instead, the venture is operated through the existing legal status of the venture partners, or co-venturers. Since the joint venture is not a legal entity, it does not enter into contracts, hire employees, or have its own tax liabilities. These activities and obligations are handled through the co-venturers directly and are governed by contract law. Corporate law, partnership law, and the law of sole proprietorship do not govern joint ventures. Finally, since the venture ends at the conclusion of a specific project, there is no need to address issues of continuity of life and free transferability, unless a joint venture company has been created.
WHY JOINT VENTURES FAIL
Many small business consultants counsel clients to approach joint ventures cautiously. They acknowledge that such partnerships can be most valuable in nourishing a company's growth and stability, but also point out that smaller businesses usually have far less margin for error than do multinational corporations, or even mid-sized companies. Some experts recommend that business owners considering a joint venture with another establishment (or establishments) launch a small joint venture first. Such small projects allow companies to test the relationship without committing large amounts of money. This is especially true when companies with different structures, corporate cultures, and strategic plans work together. These sorts of differences often make it difficult to work together smoothly. So, going through a period of "courtship" before committing to the marriage is usually a wise move.
In addition to a period of courtship, a small business should investigate the prospective partner thoroughly including interviews with prior joint venture partners, suppliers, and customers. This is especially true for a small company considering a joint venture agreement with a larger firm. Joint ventures can benefit all parties to the agreement greatly, and often do. But when they go wrong, the pattern is often a familiar one, explains Gabriel Berg, a partner in the New York City Law firm of Berg & Androphy, a firm that handles many claims of idea theft. Ms. Berg is quoted in an Entrepreneur article that highlights difficulties that often arise when a small firm wishing to market or advance a new product idea enters or attempts to enter a joint venture agreement with a large corporation.
Berg outlines the pattern she has seen in countless lawsuits arising from failed joint ventures this way. Early on, the small company will try to protect itself through the use of nondisclosure agreements and by withholding key information. Over time it may feel pressure to share proprietary information too early in the process because it needs the larger company's resources—capital or market distribution network. By divulging this information too early and before contracts exist to strictly define the terms under which the parties will develop the joint venture project, the small firm puts itself in a vulnerable position. "It's easy to think nondisclosure agreements are enough, but most leave room for either party to claim that nothing new has been invented … [and] both sides have room to come back later and say, 'Oh, we always knew how to do that.'"
People sitting down to discuss a joint venture partnership are usually in an optimistic mood and want to trust their potential partners. So far so good. However, if the optimism causes the partners to proceed before their relationship is thoroughly documented in the form of contracts, then trouble may follow. It is crucial that contracts exist that clearly define how the costs and benefits of the joint venture will be shared by each partner. Otherwise, a small business owner may wake up to the nightmare scenario described by Berg this way. "A large company calls, promising the moon, and you end up out of business, watching your ideas go to market without you." Lawsuits are very costly and they take time. Although many small firms may win lawsuits resulting from failed joint ventures they are often described as hollow victories because they cost so much to litigate and often cause the company to fail in the process. It is, of course, far better to avoid such litigation if at all possible.
Managing a joint venture partnership is another area that often causes friction in the partnership. The managers of one company may be more adept and/or decisive with their decision making than their counterparts at the other company. This can lead to tension and a lack of cooperation. Projects are made more difficult if they lack a well-defined decision making process that is predicated on mutually recognized goals and strategies.
BENEFITS OF JOINT VENTURES
Among the most significant benefits derived from joint ventures is that parties to the venture save money and reduce their risks through capital and resource sharing. Joint ventures also give smaller companies the chance to work with larger ones to develop, manufacture, and market new products. They also give companies of all sizes the opportunity to increase sales, gain access to wider markets, and enhance technological capabilities through research and development underwritten by more than one party. Until relatively recently, U.S. companies were often reluctant to engage in research and development partnerships, and government agencies tried not to become involved in business development. However, with the emergence of countries that feature technologically advanced industries (such as electronics or computer microchips) supported extensively by government funding, American companies have become more willing to participate in joint ventures in these areas. In addition, both federal and state agencies have become more generous with their financial support in these areas. Government's increased involvement in the private business environment has created more opportunities for companies to engage in domestic and international joint ventures.
SEE ALSO Cooperative Advertising; Cooperatives
Choi, Cheng-Bum, and Paul W. Beamish. "Split Management Control and International Joint Venture Performance." Journal of International Business Studies. May 2004.
Johnson, Howard E. "Reducing the Risks in Joint Ventures." CMA Management. December 2000.
Moeller, Bud. "Becoming a Corporate 'Partner of Choice.'" Corporate Board. November 2000.
Penttila, Chris. "Stop, Thief! A Joint Venture with a Big Company Sounds Like a Dream—Until the Company Backs Out, Takes Your Idea With it and Leaves You in the Dust." Entrepreneur. June 2005.
Hillstrom, Northern Lights
updated by Magee, ECDI