While a company or partnership structure carries with it a clear set of legal rights and obligations, the same is not necessarily the case for a joint venture.
A joint venture (JV) may see two or more individuals or companies ‘partner’ on a project, but not formally create a partnership, a company, trust or joint ownership structure. In most JVs, each party brings its own skills, assets and finances to the undertaking in order to achieve its completion, splitting the profits on the basis of its interest once they exit the project.
This is not to say there are no legal restrictions or legal consequences in relation to a JV. Below we’ll outline some of the things to consider, as well as why the JV structure might work for you. If you have any questions about how this structure works, you should contact us at South Geldard Lawyers. One of our specialty areas is business structuring, including forming a JV for a one-off project.
What are the key features of a joint venture?
A JV can be set up in a number of different ways and each agreement will have different features. In Australia, there is no one legal meaning of the term JV. Some typical features include:
- they are generally formed in order to realise a one-off enterprise project;
- each party to the JV contributes and manages their own finances;
- each party remains a separate legal entity;
- the parties to the JV may decide to create a company to manage the JV.
In United Dominion Corporation Ltd v Brian, Justice (later Chief Justice) Mason described a JV as “an association of persons for the purposes of a particular trading, commercial, mining or financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.”
What are the benefits of a joint venture?
When a business or investment opportunity arises there are compelling reasons why two or more parties might decide to JV in order to capitalise on it and make a profit. Chief among them is the sharing of resources with the JV partner/s doing something they may not be in a position to do on their own. A JV also spreads the risk and liabilities should the benefits of the project not materialise. In Australia, a JV is one way to allow foreign investment in a project.
There are essentially three forms of JV in Australia: unincorporated JVs, incorporated JVs and unit trust JVs. We’ll take a look at each in turn.
Unincorporated JVs: In this form the parties to the JV are bound only by the terms of an agreement between them in realising the commercial opportunity they undertake to complete together.
This JV will generally be covered by a Joint Venture Agreement which sets out the rights and obligations of each party. These will usually be expressed, for example, in clauses which state that:
- The rights and obligations of each party are several rather than joint.
- The operator is appointed separately by each party.
- The parties are not agents for each other, except where one of them is appointed the manager of the operator.
- The JV is conducted so as to give the parties a right to share in the product of the undertaking as a proportion of their financial interest in the JV.
- Operation of the JV may be undertaken by a manager that may be either of the parties, a third party, or a third party contracted manager.
- The management structure of the JV ensures that each party contributes its agreed percentage interest; and that decisions about the JV are made by an operating committee comprised of representatives of each party.
- The undertaking is a JV and not a partnership.
- Assets are held as tenants in common by the parties.
- Any transfer of the interests of the parties is usually subject to pre-emptive rights held by the other parties.
- The parties may decide to be in a fiduciary relationship with each other or deny such a duty by express terms in the written agreement.
Incorporated JVs: Here, each party agrees to incorporate a separate legal entity to undertake the joint project, with each party holding a percentage of shares in the new company. This form of JV is often referred to as an equity JV. A shareholders’ agreement sets out the nature of the new entity, though other rights and obligations will generally be separately negotiated.
Because a new company is formed, there is a different legal relationship between the parties to the JV under the Corporations Act 2001 – as shareholders, in their relation to the JV company, and as between directors and shareholders.
Unit trust JVs: In this structure a unit trust is created with each party to the JV holding units in the trust to reflect its equity in the undertaking. This structure can attract some of the benefits of the incorporated JV as well as those of an unincorporated one, including reducing overall tax liability.
It’s important the trust is formed under a clear written agreement – the 2016 NSW Supreme Court case of Coyte and Anor v Norman and Anor; Centre Capital (Newcastle) Pty Ltd and Anor dealt with a unit trust JV where claims of a breach of contractual obligations in an oral agreement failed because the court did not find the agreement existed.
The importance of legal advice
The term ‘joint venture’ has no settled legal meaning in Australia. As this article shows, there are a number of structures which may constitute a JV, each imposing different rights and obligations depending on the form.
At South Geldard Lawyers we can help clarify the issues around JVs for you. If you’re considering participation in a JV and are unclear on what may be the best structure for it, or just need a better understanding of the legal implications of this type of vehicle, call us at today on (07) 4936 9100.
It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.