How to Create a Legally Binding Joint Venture Agreement?
You started a business from scratch. You evolved from a small startup to a big company. You come across a project concept that is out of your league. How can you handle this situation?
You can form a legally binding joint venture agreement with an organization that can execute your project concept but does not have the resources or machinery to do it. This alliance will take both organizations to another level.
However, the question would arise: What is this agreement that binds the whole working strategy between two big companies? This article explores the basics of a joint venture agreement and how you can ensure that you have a definitive, legally binding joint venture agreement.
This article will also break down the essential clauses in a legally binding joint venture agreement and the importance of this agreement. It also sheds light on the integral factors to be considered while drafting the joint venture agreement.
What is a Joint Venture Agreement?
A joint venture (JV) Agreement is a cooperation between two or more parties to perform a specific project or assignment. As part of the agreement, the parties share their resources, including but not limited to the capital, physical equipment, facilities, or Intellectual Property such as trademarks, patents, or copyrights. This article will help you learn more about a licensing agreement that mainly works on sharing IP in depth.
It is an arrangement in which two or more people collaborate to run a business. A joint venture can take many forms, such as equity-based or contractual joint ventures. The agreement can be for an extended time concerning the running of the business forever or on a finite period basis, depending upon the fruition of a specific project concept. It may involve forming an altogether new venture or a business positioned to benefit from the unification of the new party.
Unlike other agreements, JV is quite adaptable based on the need. Therefore it will be highly dependent on the number of resources or desires of the parties concerned. It shows that a joint venture is the foundation of a coalition between two or more parties where the assets of the involved partners are transferred, leading to significant progress.
What is the Purpose of Creating a Joint Venture Agreement?
Forming a legally binding joint venture with an ideal business partner provides a fast way to influence complementary resources available to form a better partnership, share each other’s skills, access the new market, or diversify into new business.
Some of the disadvantages faced by big conglomerates are when they find it hard to achieve the expectation in the global market in terms of:
- Product Quality
- The management process
A strong partnership between companies possessing varying expertise and capabilities in technology, marketing, distribution, etc., is essential to meet the needs of modern businesses.
What are the Key Elements for Creating a Legally Binding Joint Venture Agreement?
By the beginning of this article, an opinion may have formed in your mind that these types of agreements would happen only between huge conglomerates. While it may sound surprisingly legally binding, joint ventures are flexible and customizable to merge companies of any size. The advantage? It ensures efficiency and effectiveness. The stages of forming an agreement are very crucial and cannot be ignored:
Forming of a JV agreement stage-wise:
Stage 1. Market research on companies that will help you achieve your goal. Filter and discuss opportunities with potential partners.
Stage 2. Form a legal team of the best business lawyers or hire an already established law firm to offer legal advice whenever required. Continuously seek advice to maintain legal compliance.
Stage 3. Select the correct type of joint venture. Draft the first iteration of your legally binding joint venture agreement.
Stage 4. Enter JV agreement amendments as required.
What Details Should be Provided in a Written Joint Venture Agreement?
Now that all stages are clear, it is time to shine a light on the main critical clauses that shall be inserted in any legally binding joint venture agreement:
- The essence of the association: One of the essential purposes of the joint venture agreement is to clarify the nature of the relationship between the joint venturers. One part of this is whether the parties are under any fiduciary obligations to one another, or it is purely a contractual association where the parties stay within the defined limits.
- Parties’ contributions: Clarifying the parties’ contribution to the agreement. It ensures that each party understands what it is that they are committing to and ensure that that commitment binds them.
- Sharing of profits, risks, and liability: Defining how the profits, risks, and liabilities will be shared between the parties.
- Control Issue and decision making: Defining who will manage the venture and take care of its day-to-day operations.
- Intellectual property: This point addresses preventing the exploitation of a venture’s intellectual property for its gain. A joint venture agreement must specify who will be the proprietor of any recently developed intellectual property devised by the business venture and the scope to which the parties may utilize that IP outside the venture.
- Other clauses: The agreement should contain a range of other provisions and clauses, such as:
- Restriction on sale of shares;
- Installation of plant & machinery;
- Maintenance facilities;
- Dispute resolution mechanism, etc.
The contract should ensure that all parties understand their rights, responsibilities, and limitations. While it may be drafted by you or your partner’s corporate adviser, you should always have your joint venture agreement reviewed by a lawyer to ensure your interests are fully protected. Keep this article in mind by bookmarking this URL the next time you need advice on a JV agreement!