Drafting a Joint venture agreement- Checklist

Source:PLC

Before drafting or negotiating a joint venture or strategic alliance agreement (referred to as a joint venture agreement in this Checklist), there are certain threshold questions to answer and issues to consider. Use this Checklist as a guide when preparing a joint venture agreement. For issues to consider when setting up a joint venture, see Forming a Joint Venture Checklist.

For more information on joint ventures generally, see Practice Note, Joint Ventures: Overview.

 

Business of the Joint Venture

• What activities will be carried on by the joint venture?
• Is the purpose of the joint venture to carry out a specific project or a continuing business?
• What are the parties' objectives? Do the parties agree on what the main objectives of the joint venture should be?
• Have the parties agreed on an initial business plan and budget? How far out do those plans project?

For more information on certain issues to consider when initially deciding to set up a joint venture, see Forming a Joint Venture Checklist.

 

Structure of the Joint Venture

• Are the parties forming a new entity to carry out the joint venture? In that case:
  • If the joint venture entity will be a corporation, the parties need to draft a stockholders agreement.
  • If the joint venture entity will be a partnership, the parties need to draft a limited or general partnership agreement.
  • If the joint venture entity will be a limited liability company (LLC), the parties need to draft an LLC agreement.
  For more information on choosing the appropriate entity, see Choosing an Entity Comparison Chart and Practice Note, Choice of Entity: Tax Issues.
• Alternatively, is a direct contractual relationship between the parties more suitable? For example, a:
  • collaboration agreement;
  • joint marketing agreement;
  • agreement for joint research or the development and manufacture of goods to a particular design;
  • agreement for continuing supplies of goods or services;
  • licensing or franchise agreement; or
  • distribution or agency agreement.

For more information on certain issues to consider when initially deciding to set up a joint venture, see Forming a Joint Venture Checklist.

For more information on drafting a stockholders agreement or an LLC agreement, see Stockholders Agreement Checklist and LLC Agreement Checklist.

Parties and Background

• Have you identified all of the parties?
• Do you have each party's contact information?
• Should the joint venture entity (if applicable) be a party to the agreement? If so, what is the joint venture entity's name?
• Is there any important or relevant background information to include in the recitals? For example, the parties may want to state the reasons for forming the joint venture.

Financing of the Joint Venture

• If there is a joint venture entity:
  • What is the joint venture entity's capital structure?
  • What is the percentage ownership of each of the parties?
  • Are there multiple classes of equity issued? For example, are there classes of shares or interests that have preferences over others? Do all equity holders have equal voting rights?
  • Have the equity holders fully subscribed for their equity?
• In what proportions will the parties provide funding? How much will be provided from external sources? Who determines when third party funding is required and what type of financing it should be?
• If third party funding is required, what security and/or recourse to the parties will the lender(s) require?
• Will the parties' initial investment be in cash or in kind?
• Are there advantages (in relation to tax or otherwise) to funding through debt rather than equity, or vice versa (Practice Note, Debt v. Equity: US Tax Classification of Securities)?
• What arrangements will there be for funding on a continuing basis for:
  • working capital requirements;
  • losses incurred by the joint venture; and/or
  • development and expansion costs?
• Will each party be required (or entitled) to contribute to continuing capital calls for funding? If so, will it be pro rata to its original investment or otherwise? What happens if one of the parties defaults?

 

Contribution of Assets to the Joint Venture

• Is there any specific tangible or intangible property that is being contributed by any one or more of the parties?
• Will contributions be by outright transfers or by a lease or license to the joint venture for a fixed or indefinite term?
• Will transfer tax or other tax considerations affect the method of contribution of the assets? Who will bear the tax costs of contributions? For more information on the taxation of contributions, see Practice Note, Joint Ventures: Tax Issues.
• How are contributed assets or securities to be valued? How will any adjustments be made for any shortfall or excess in relation to any contributor's proportionate funding obligation?
• Can the contributions of assets be made contemporaneously, bearing in mind any regulatory approvals or consents from third parties (including lessors, licensors and lenders) required for any transfer? If not, should the availability of all or any particular asset(s) be a condition precedent to the establishment of the joint venture?

 

Intellectual property

• What intellectual property rights are to be contributed to the joint venture? Should they be licensed or transferred? If the intellectual property is licensed, will the license be exclusive or non-exclusive? Can the license be terminated?
• Who will own the intellectual property rights developed by the joint venture?
• Who will undertake exploitation of the intellectual property, including both production and distribution? Will there be any compensation for this?
• To what extent will the parties have access to, or rights over, confidential information, know-how and other intellectual property rights concerning or accruing or belonging to the joint venture itself?
• What will happen to the intellectual property rights (including any developed intellectual property) on termination of the joint venture?
• Will any of the parties require a license of any intellectual property from the other following termination?
• Will there be different methods of dealing with intellectual property rights depending on the exit route used?

 

Employees

• Will the joint venture need employees and, if so, from where will they be sourced? Will the employees be transferred from an existing business of any of the joint venture parties? If so, will it be necessary to make any changes to the terms of their employment?
• How will any liabilities relating to the employees be apportioned?
• What form of management structure is contemplated?
• Will employees be covered under existing employee benefit plans of one of the joint venture parties? If not, what plans will be put in place?
• What (if any) equity incentive or bonus plans are proposed?
• Will any of the joint venture parties have to terminate employees as a result of the creation of the joint venture? If so, who is responsible for any severance or other termination liabilities? Are there any issues under the WARN Act?

 

Management of Joint Venture

• How will the joint venture be managed? How much authority will management have?
• What rights will each party have to appoint directors or managers, managing members or general or managing partners in the case of an LLC or partnership (referred to as the board in this Checklist)? Are there any particular qualifications for members of the board?
• What rights will each party have to appoint officers (if any, in the case of an LLC or partnership)?
• What quorum and notice requirements will apply for meetings of the board and the equity holders?
• What particular matters should be reserved for decision by the board? What matters must be approved by the equity holders? What is the affirmative vote required to approve these matters?
• Will there be specific requirements concerning the frequency and/or location of board meetings?
• What type of information and inspection rights should each of the joint venture parties have?

 

Control and Minority Protection Relating to Voting

Depending on whether the joint venture is a 50/50 venture or an uneven ownership split, the parties may need to consider how to address the control and minority protection issues set out below.

• Will the minority be protected against majority decisions at equity holder and/or board level by:
  • any requirements for unanimity;
  • any requirements for a supermajority vote (that is, majorities of more than 50.1% or comprising particular (classes of) equity holders or members of the board);
  • any rights of veto; or
  • any rights attaching to interests of a particular class?
• Will any such protections extend to all matters for decision or just to some?
• How should protections be documented and what remedies will be available?

For more information see Practice Note, Minority Protection in US Joint Ventures.

 

Deadlock

• If the board (or equity holders) fail to agree on a matter, should the agreement specify how any resulting deadlock will be resolved or remain silent?

• What will constitute a deadlock under the agreement (and trigger any resolution procedures):
  • all issues;
  • certain fundamental issues defined in the agreement; or
  • issues designated as deadlock issues by the board or the equity holders at the time they arise or when disagreement becomes apparent?
• Will deadlock issues be resolved by:
  • reference to independent non-executive directors;
  • reference to an external expert or arbitrator;
  • reference to chairmen or chief executives of the parties to the joint venture; or
  • another method?
• Will any "cooling off" period apply?
• What rights will any party have on a deadlock? For example, will a party have:
  • the right to force the termination (or winding up) of the joint venture; or
  • a buy/sell right (when the joint venture parties must buy or sell equity interests from each other)?

For examples of deadlock provisions see, Standard Clause, Stockholders Agreement: Deadlock (with Mediation), Standard Clause, LLC Agreement: Deadlock (with Mediation) and Standard Document, Stockholders Agreement (Two-party): Section 2.04.

 

Transfer of Interest

• Should the joint venture parties be permitted to transfer their interest or should the joint venture be wound up if any one party wants to sell its interest?
• If transfers are permitted, should the joint venture parties have rights of first refusal before any sale to a third party takes place?
• To what extent will the identity of any third party purchaser be relevant to arrangements for permitting transfers or the terms of any right of first refusal?
• Should any transfers (for example, transfers to affiliates) be permitted free of transfer restrictions?
• Should the parties have drag-along rights or tag-along rights?
• How will equity interests be valued for the purposes of the transfer provisions?
• Will any new equity holders be required to become parties to the joint venture agreement?
• What will happen to any arrangements between a leaving equity holder and the joint venture (such as loans, intellectual property licenses, supply agreements or management services)?
• Should the agreement provide for continuing use by the joint venture of assets that were contributed or licensed by an outgoing joint venture party (or vice versa)? What if an outgoing joint venture party is indebted to the joint venture (or vice versa)?
• What (if any) arrangements should apply for a joint venture party that undergoes a change in control, becomes insolvent or is in breach of the joint venture agreement?

 

Business Involvement of the Parties

• Will any of the parties be responsible for the business operations of the joint venture? If so, on what terms?
• Will any of the parties be responsible for providing the joint venture with office or manufacturing facilities or support services?
• Will there be commercial or service arrangements between any of the parties and the joint venture (for example, distribution or supply agreements)?
• How do any commercial or service arrangements between the joint venture and any of the parties impact:
  • the entitlement of each of the parties to the profits of the joint venture, or responsibility for its losses;
  • the business risks and legal liabilities assumed by each of the parties in relation to the joint venture; or
  • the rights of the joint venture and/or the parties to assets or revenues over which any one party maintains direct control or ownership?

 

Competition and Restrictions on the Parties

• Will the parties be prohibited from competing with the joint venture? If so, what territorial or other limitations should apply?
• Will the parties be prevented from soliciting customers and employees from the joint venture?
• How will the business of the joint venture be defined for the purposes of any such restrictions?
• Will the parties have obligations to refer business opportunities to the joint venture?

Termination

• Is the joint venture for a fixed term or indefinite in duration? Three common exit strategies for joint ventures are:
  • an initial public offering (IPO) of shares in the joint venture entity;
  • the sale of the joint venture to a third party; or
  • the termination and liquidation of the joint venture.
• Are there any triggering events in which any party will be entitled to terminate the joint venture, for example:
  • a fixed date;
  • achievement of (or failure to achieve) operational targets;
  • a deadlock;
  • default by one of the joint venture parties; or
  • third party offers for the purchase of the joint venture?
• Who gets to decide to proceed with an exit strategy? Is majority or unanimous approval required?
• What arrangements will apply on termination for:
  • the distribution of the assets, including intellectual property and know-how of the joint venture;
  • the discharge of outstanding contracts of the joint venture;
  • the assumption or discharge of any other liabilities of the joint venture; and
  • any regulatory compliance requirements (for example, compliance with state and federal securities laws in connection with an IPO)?