Joint Ventures 2023 Comparisons

International global factors have taken their toll on joint venture (JV) activity over the past year. Whilst it is fair to say that JV activity remains high, the nature of that activity and the risks that formative documents need to address has certainly evolved.

There remains considerable appetite to invest in the UK. The value of the pound sterling makes inward investment attractive to JV participants who have cash, or who see growth in particular sectors. Whilst COVID-19 is becoming a distant memory, the lessons learned from the pandemic are echoing in JVs, particularly those formed in the travel industry. However, the war in Ukraine and the effects of sanctions on Russia are arguably having the most significant impact on JV activity. Existing JVs with a Russian element are, as a result of sanctions, leaving participants unable to be involved in the business, either in terms of governance or (perhaps more importantly) in terms of sharing in the JV’s spoils. Those entities considering entering into a JV need to carefully consider whether the JV business is likely to have any connection with Russia. The JV agreement will need to provide for such an eventuality, and the parties must consider the fact that a Russian connection may not even make itself known until well into the JV’s life.

Investment in green energy continues to forge ahead apace. The global climate change agenda and the 2050 Net Zero target set by the UK government pursuant to the Climate Change Act 2008 (2050 Target Amendment) Order 2019 are driving investment in this area.

The traditional sectors of construction and housebuilding, logistics and distribution, and technology remain buoyant, as can be seen from the 2023 mergers of:

• Vodafone Group Plc and CK Hutchinson Holdings Limited;
• Vistry Group Plc and The Guinness Partnership; and
• Anglo American Plc and EDF Renewables.

Parties to a JV need to carefully consider the nature and type of the vehicle they wish to use, and as a primary consideration whether a separate legal entity ought to be established – the authors would argue that this is usually in the affirmative, but before exploring these vehicles more closely, it is worth considering JVs where a separate legal person is not required.

The primary methods vary between a legal partnership, established pursuant to the provisions of the Partnership Act 1890 (PA 1890), and a looser collaboration or co-operation agreement.

Section 1 of the PA 1890 defines a partnership as being the relationship which “subsists between persons carrying a business in common with a view of profit”. Because the formal act of incorporation is not required, persons working together need to be cautious that they do not form a legal partnership without realising it – the rules around the establishment of a partnership are merely indicative, and it is therefore a question of fact when looking at the circumstances as a whole. Where the partners do wish for a partnership to be established, a properly drafted agreement should be entered into, setting out, amongst other things:

• the purpose of the partnership;
• the way in which decisions are made and disputes resolved;
• the methods of dealing with partnership property (including its profits);
• tax matters; and
• the process of dissolution.

A collaboration agreement is merely an agreement between two or more parties to co-operate to further a particular goal. They do so independently, not as shareholders within a JV entity or as partners in a legal partnership. Such arrangements should also be carefully documented, and the nature of the documentation will be driven by the extent of the co-operation and the intended outcomes of it.

Returning to the more usual position of a separate legal person being used to further the aims of the venture, by far the most usual vehicle is that of a joint venture company (JVC). The corporate vehicle (usually of the type limited by shares but, depending on the JV’s purpose, potentially limited by guarantee) is well understood by participants, funders, bankers, advisers, customers and suppliers. It is well regulated under the Companies Act 2006, and is well supported as a consequence.

On establishment, the JVC is a separate legal person from the various JV actors. Consequently, the assets generated by the JV belong to it, as do the profits made. Similarly, the liabilities generated from the JV will be its own. The ability to use the corporate veil and the general reluctance to pierce the veil by the courts is a significant advantage for JVCs, particularly where the JV activity is considered risky. Furthermore, with the participants able to place the JV activity within the confines of a separate entity, they are able to insulate the JV business from any contagion that could be caused to the wider group.

Another commonly used vehicle is a limited liability partnership (LLP) incorporated under the Limited Liability Partnerships Act 2000. In the same way as a JVC, the liability of the JV participants is limited, and – like a JVC – as a body corporate having separate legal personality, it enters into its own contracts, holds property, accounts for its own liabilities, etc. Arguably, the main reason an LLP would be chosen over a traditional JVC is down to tax. An LLP – despite being a separate legal entity – is taxed as a partnership, so there is an element of lookthrough that does not exist with a JVC.

There are a variety of factors to which a JV participant must turn their attention when considering the choice of vehicle most appropriate to them. The commercial realities of a project may mean that the choice of vehicle is dictated by the primary actor within the project, and it is not uncommon for the vehicle itself to be subject to negotiation, even prior to negotiation around the terms governing the vehicle. Primary drivers include (among others):

• risk and liabilities;
• assets and revenue; and
• control and tax.

Risk and Liabilities

Where the JV is directed towards an aim that is risky, is novel or perhaps involves jurisdictions and markets that the participants are not familiar with, the JVC is normally used (or the local equivalent, where the JVC is not English). After settling on the JVC route, perhaps a first question parties must consider is the name of the JVC. On the one hand, a party may want the name to be aligned with its own, thus boosting that party’s (and the JVC’s) goodwill and commercial credibility. Conversely, if the JV is undertaking a function that the parties consider to be risky, having a name entirely different to the names of the various actors would be advisable, allowing clear water to be put between the JV and the participants and providing a shield against associated damage to goodwill.

The JVC’s liabilities will be its own. Save in very limited circumstances, the insolvency of the JVC will not impact on the participants beyond the loss of paid-up capital that they hold.

Regarding capital, English law does not impose any mandatory equity investment or capital contribution requirements on the JVC (assuming it is a private company), so the initial barriers to entry are considered low. The parties are free – within the confines of the JV agreement – to provide for the future financing of the JVC, either by loans from the shareholders, capital contributions or, more usually, a requirement that funding be sourced from third-party lenders. In general, though, the participants will want to ensure that risk in the JV project is minimised to the fullest extent possible, arguably making a JVC the most appropriate route for commercial projects.

Assets and Revenue

As a separate legal entity, the JVC is able to own the assets it needs to conduct its business. Potentially of more interest to the participants is the JVC’s ability to enter into contracts on its own account, to acquire assets owned by others to further its own business.

Intellectual property (IP) and proprietary confidential information (CI) are often of significant importance to a JVC and, frequently, that information is initially owned by one or more participants. By using a JVC, the disclosing party is able to enter into a formal licence with the JVC detailing the terms on which the IP and CI may be used by it. The licence will make clear that the ownership of the IP and CI remains at all times with the licensor and the JVC (and the other JV participants) will acquire no rights in respect of it. The ability of the JV participants to contract directly with the JV for its exploitation of participant-owned assets makes this company vehicle particularly attractive. 

Control

Control of the JVC is primarily dictated by the entity’s articles of association and its JV agreement. Within these documents, detailed provisions vis-à-vis management will be set out, and these provisions will set out control both at shareholder level and board level (and may also establish further layers of management not legally required by the Companies Act 2006).

The JV agreement will usually allow each participant to entrench one (or more) directors to the JVC’s board. The entrenchment right is usually linked to the shareholding of that participant in the JVC. There will be additional restrictions on the notice requirements for calling a board meeting and, importantly, quorum requirements will be modified to ensure that the main participants in the JVC are present before a meeting can proceed to business. It is usual in these agreements for a board meeting not to be deemed quorate without the attendance of the nominated director from the primary participants to the JV. Further, there will likely be “board-reserved matters” that cannot be passed without the consent of certain participant-nominated directors, thus modifying the legal baseline of voting on a majority show-of-hands basis.

Whilst certain decisions are matters for the board, the JV agreement (or the articles, depending on the nature of the decision) will almost certainly set out lists of further “reserved matters”. These are matters which, akin to board-reserved matters, require a certain percentage of the JV participants to vote in favour thereof to be passed. For the most sensitive decisions, it is not uncommon to require unanimity, but participants should consider such a high threshold carefully before agreeing to it. Because control can be dealt with at a very granular level by the sophisticated use of the JV agreement and the articles, parties are attracted to a corporate vehicle for making use of these. 

Tax Matters

As a separate legal entity, the JVC is responsible for paying corporation tax on the profits it generates. When liabilities are dealt with and taxes are paid, the remaining profits available for distribution can be paid to the participants. Within the JV agreement, it is extremely common for a formal distribution policy to be established dealing with these payments. The aforementioned liabilities will likely include debt from the participants to the JV, as it is very common that the JVC (at least initially) will be debt-funded. In general terms, interest payments are tax-deductible unless the JVC and the participant/lender are considered “connected” for tax purposes, whereupon special rules will apply. The participants to the JVC will need to pay careful attention to whether, as a consequence of their ownership stake, they form part of a group for tax purposes.

LLPs

LLPs are a comparatively recent development, being first created pursuant to the Limited Liability Partnerships Act 2000. The purpose was to offer the inherent flexibility and tax status of a partnership along with limited liability for the members. An LLP may therefore be an attractive vehicle for those who would otherwise be looking at a simple unincorporated partnership.

Collaboration Agreements

Typically, JV participants would choose a collaboration agreement where the collaboration is not likely to subject any of the principal actors to significant risk, or where it is unlikely the project will deliver much in the way of revenue generation. The parties to such an agreement would be liable for losses themselves and, potentially, to liabilities created by the other party, which they would arguably assume under the doctrine of vicarious liability. A participant may be concerned with ensuring that the assets it contributes to the JV remain its own, and accordingly a more simplified collaboration agreement may be the appropriate means to achieve that aim.

Finally, the attraction of such a simple arrangement for the parties may stem from exactly that – a lack of formality, simplicity of administration, ease of exit and a wholesale lack of any (perceived) integration between the participants. For this reason, such examples of JVs are often seen in exercises relating to brainstorming new products, services or markets and the generation of new business ideas.

The primary regulators of the JVC will largely depend on what business the JVC intends to conduct. At the legal baseline, all companies incorporated in England and Wales are subject to the provisions of the CA06 – although, as previously alluded to regarding management and administration, the JVC has the ability to modify certain statutory obligations. A private company may elect to re-register as a public company and, if it does, certain other statutory obligations under the CA06 apply to it, principally regarding capital requirements. A public company must have paid-up nominal capital of at least GBP50,000 (or EUR57,100), but there are no such minimum requirements for a private company.

For tax matters, the JVC will need to report and pay tax to His Majesty’s Revenue and Customs (HMRC).

Other regulators that may be relevant, depending on the business of the JVC, are:

• the Financial Conduct Authority;
• the Solicitors Regulation Authority;
• the Care Quality Commission;
• the General Medical Council;
• Ofgem;
• the National Crime Agency;
• the Security Industry Authority;
• the Health and Care Professions Council; and
• the Department for Work and Pensions.

Finally, JV participants must be aware of the ambit and function of the Competition and Markets Authority (CMA), the competition regulator in the United Kingdom. The CMA’s primary role is the protection of the public from unfair trading practices, including cases where unfair treatment suggests systemic market problems such as commercial cartels and anti-competitive behaviours. Where, for instance, the creation of the JVC could be considered an abuse of a dominant market position by the participants, having regard to their market share, the CMA may become involved and investigate. Further detail on this aspect is discussed later.

Anti-money laundering (AML) regulations in the UK are widespread and well established, and the JVC and its participants will be subject to a variety of provisions. The main laws are:

• the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017;
• the Financial Services and Markets Act 2000;
• the Proceeds of Crime Act 2002; and
• the Bribery Act 2010.

These laws are enforced by the Financial Conduct Authority, HMRC, the Serious Fraud Office and the National Crime Agency. Depending on the industry in which the JVC operates, other regulators will be relevant to it, such as the Gambling Commission and the Solicitors Regulatory Authority.

Compliance will be a complicated matter for the JVC and, depending on its business, it will need to take a risk-based approach, implementing all necessary safeguards and controls following a detailed assessment of the risks it faces. The JVC must understand who its clients are, the jurisdiction in which it offers services or sells its products and, conversely, where it purchases goods or services. The JVC must consider customer due diligence on those people that purchase services from it, and have ongoing monitoring procedures in place.

AML failings can lead to fines, the revocation of trading licences, employee termination and imprisonment. There is no limit to the fines the Financial Conduct Authority as regulator can impose. AML offences can, in the most serious cases, result in imprisonment of up to 14 years.

The National Security and Investment Act 2021 requires disclosures to be made by companies and investors in respect of acquisitions that could harm the UK’s national security. Therefore, before a JV arrangement is finalised, and particularly where the JV is to be run through a JVC or an LLP  (either set up for the task or acquired for the task), care must be taken to ensure that all adequate disclosures to the UK government are made. Currently, there are 17 areas that require mandatory notification, and that the government considers as most likely to give rise to a risk to national security. These are:

• advanced materials;
• advanced robotics;
• artificial intelligence;
• civil nuclear;
• communications;
• computing hardware;
• critical suppliers to government;
• cryptographic authentication;
• data infrastructure;
• defence;
• energy;
• military and dual-use;
• quantum technologies;
• satellite and space technologies;
• suppliers to the emergency services;
• synthetic biology; and
• transport.

JV participants must also be acutely aware of The Russia (Sanctions) (EU Exit) Regulations 2019, which fully came into force on 31 December 2020, as well as of the various amendments that came into force between 2020 and 2023. While the sanctions regime is extremely detailed and beyond the scope of this article, it should be noted that JVs will be affected in a number of ways.

Firstly, and perhaps most obviously, it would be unlawful for a person to whom the UK sanctions apply to enter into a JV with a sanctioned person, or where there would be a benefit to the Russian state, directly or indirectly. These prohibitions are interpreted widely. The JV participants must also be aware of, for instance:

• purchasing assets originating from Russia;
• generating profits for companies incorporated in Russia; or
• exporting goods or services to Russia.

A significant issue that many organisations are now facing is the impact of sanctions on JVs that they are already party to. Parties must carefully check their agreements to ascertain whether a force majeure event is deemed to have been triggered where the participants have any obligations between each other, or to the JVC. There may also be forced divestiture considerations under the JVC’s relevant policies of insurance.

As noted previously, the Competition and Markets Authority (CMA) is the primary regulator for competition matters, and there are numerous examples where the CMA has intervened on proposed JVs notified to it.

The CMA will seek to ascertain (amongst other matters) whether, as a result of the JV, the merger will create or give rise to a substantial lessening of competition as a result of horizontal or vertical effects. JV participants must be appraised of the relevant competition laws prior to the legal consummation of any proposed transaction.

To fall within the UK competition regime, the CMA must confirm that a transaction constitutes a “relevant merger situation” pursuant to the Enterprise Act 2000. This is where at least two enterprises cease to be distinct and where either of the following thresholds is met:

• firstly, the turnover test – where the target’s UK turnover will exceed GBP70 million; and
• secondly, the share-of-supply test – where the parties’ activities overlap and they aggregate, creating or increasing a share of at least 25% of the supply of goods or services of a particular description in the UK or a substantial part of it.

The substantive test for the CMA to consider is whether a merger has resulted, or is likely to result, in a substantial lessening of competition.

Consequences of breach are significant and varied, but include:

• fines for the businesses involved of up to 10% of annual worldwide turnover;
• personal fines and imprisonment for individuals involved in anti-competitive collusion;
• disqualification from acting as a company director for up to 15 years;
• actions in damages from directly affected customers; and
• widespread and long-lasting reputational damage.

Subject to competition law considerations, there are very few restrictions on listed companies (listed meaning, in this context, a company listed on a recognised exchange) entering into JVs. 

However, premium listed companies are required to abide by the Financial Conduct Authority Handbook’s Disclosure Guidance and Transparency Rules, which itself makes reference to the EU Market Abuse Regulation, in relation to disclosure of inside information. Inside information can be defined as information which would have a significant effect on the prices of financial instruments that a reasonable investor would be likely to use as part of their investment decisions. As entering into a JV may well represent a material transaction under the rules surrounding the performance or expected performance of the listed company’s business, the company must abide by these requirements.

The rules require a premium listed company to inform the public as soon as possible of inside information that directly concerns that issuer. This information should be disclosed without hesitation, as any delay is only appropriate if faced with an “unexpected and significant event”. Even then, a holding announcement must be used where there is a concern that information may leak before the facts and the impact can be confirmed. Standard listed companies are subject to the same disclosure rules as they are governed by Listing Rule 14.3.11R, which requires them to consider their obligations under the Market Abuse Regulation Articles 17–19 in relation to disclosure of inside information.

The listed company may need to make an early disclosure of JV discussions if there is a leak of this information or an unusual share price movement as per the Market Abuse Regulation. The above obligations also apply to AIM listed companies as governed by AIM Rule 11, which implements the requirements in the Market Abuse Regulation.

There are also requirements on premium listed companies entering into JVs in relation to any agreed exit arrangements, assuming these transactions break the significant transaction threshold found in the Listing Rules. If the listed company does not retain sole discretion over the event requiring them to purchase a partner’s stake or to sell their own stake, this obligation must be classified as a relevant significant transaction at the time it is agreed on, as though it had been exercised at that time. If the listed company does retain sole discretion over the triggering event, the purchase or sale must be classified when this discretion is exercised. These are significant transactions – as such, the listed company must then comply with the requirements surrounding significant transactions, which may require shareholder approval.

The UK has a relatively well-established regime for the identification of PSCs (persons with significant control). Pursuant to the CA06, PSCs must be identified and notified to the registrar. Such persons’ details must be recorded on the company’s PSC register. If the company does not have a PSC, or if the PSC cannot be identified, Companies House must also be informed. The PSC regime applies to all JVCs and LLPs, and thus, if a party wishes to obscure their involvement in a commercial arrangement via the use of a JVC and that individual meets the threshold for being a PSC, it would be a legal requirement for that person to be appropriately notified to the Registrar of Companies. It should, however, be noted that some entities are not required to keep a PSC register, and that the JVC will be exempt if it constitutes:

• an open-ended investment company;
• an overseas company;
• any other overseas entity;
• co-operative and community benefit societies;
• friendly societies;
• charitable incorporated organisations; or
• charity trustees incorporated as a body corporate.

The PSC regime was put in place to help improve standards of transparency and good governance. A person with significant control need not be a shareholder – therefore, prior to the rules on PSCs coming into force, there was no obligation for persons who controlled companies to be notified anywhere.

The conditions for notifying Companies House of a person being a PSC are as follows:

• where a person holds, directly or indirectly, more than 25% of the shares in the company;
• where a person holds, directly or indirectly, more than 25% of the voting rights in the company;
• where a person holds the right, directly or indirectly, to appoint or remove a majority of directors of the company;
• where a person has the right to exercise, or actually exercises, significant influence or control over the company; and
• where a person has the right to exercise, or actually exercises, significant control or influence over the activities of a trust or firm that, in each case, does not have legal personality under its governing law, where the trustees or members of that trust or firm meet any of the previous four conditions (in their capacity as such) in relation to the company, or would do so if they were individuals.

Significant decisions in the field of JVs have largely involved the CMA’s attitude towards the proposed JV itself. The law on JV vehicles, LLPs, JVCs and contractual collaboration agreements appears largely settled. This is, of course, good news for potential JV partners who are partnering in the UK, as the law applicable to their venture is both mature and well understood.

Negotiating the document for a JV begins early. The proposed participants should first discuss the nature of the business that the JV entity is intended to undertake and, on the basis of those discussions, elect the most appropriate vehicle for the project.

Non-disclosure Agreement

The first document to be prepared will likely be a non-disclosure agreement. This document will be drafted on a mutual basis and will allow each party to disclose its confidential information to the other, provided that such information is used only for the “permitted purpose” as set out in the agreement. Depending on the urgency and sensitivity of the JV project, it would not be unusual for the document to contain exclusivity provisions – ie, provisions whereby the parties mutually agree to use all reasonable commercial endeavours to enter into the JV for the purposes of furthering its aim to the exclusion of any other third parties.

Due Diligence Questionnaire

This will be used in the early stages of JV negotiations to establish the viability of a JV partner before entering into a contractual relationship with them. The questionnaire will vary depending on any existing commercial relationship between the participants and the nature of the JV enterprise. For example, if a participant is contributing (by way of transfer or licence) valuable intellectual property (IP) to the JVC, the non-contributing party will be keen to perform diligence on title to the IP, any existing licences that may affect its ability to be used by the JVC, any disputes that exist around it, etc.

Term Sheet/Heads of Terms

This document will form the basis of the JV agreement to be drafted between the parties. This will establish a core framework of the deal, setting out the key terms on which the venture will be set up. It ensures that there is agreement on key terms at a high level before further time is spent on the process of forming the JV.

JV Agreement

This is the main document that will govern the relationship between the parties from the outset of the JV and throughout its lifespan. This document will be based on the term sheet, and will flesh out all the key terms and head off any potential issues that may arise during the JV relationship, as well as contain standard boilerplate clauses. Additionally, this document may contain references to confidentiality and exclusivity elements of the deal, although these may also be contained within the term sheet or in separate documents prior to the signing of the JV agreement.

Articles of Association

If the JV is to be established as a limited company in England and Wales, it will require its own tailored articles of association, forming the basis of the day-to-day management of the company and defining the ownership proportions of each shareholder. The articles and the JV agreement work together to establish the obligations the participants have to the JVC and to each other. They set out the manner in which the JVC is to be run, how corporate governance obligations are to be discharged and how disputes between the members are resolved. 

Beyond this, it is important that the parties understand the difference between the two documents, and why certain obligations are better suited to being included in one or the other. The decision is driven by the fact that the articles of association are a public document, whilst the JV agreement is a private document. For obvious reasons, the JV partners will want to keep certain matters confidential – distribution policies and bad leaver provisions, for instance. Conversely, certain provisions are best kept publicly open – pre-emptions on transfer of shares being a prime example, the rationale being that, in the event of breach, the public nature of the obligation means potential enforceability against a third party.

On incorporation, the ultimate beneficial owner of the JV must be declared to Companies House, if the owner constitutes a PSC. In practice, given that the JV parties will likely be PSCs, they will have to be disclosed at this point. The JV shareholders will have to set out their own ownership structures if they have any persons or entities that hold more than 25% of the voting rights of the company.

A JV formed as a company limited by shares will have reporting requirements regarding finances. It will have to provide annual accounts to Companies House.

As previously discussed, it is important for all parties to decide on the appropriate JV vehicle. This will largely depend on the level of integration each party wishes to have with the new entity. If the parties wish to have a loose level of engagement, it may be most appropriate to use a simple non-statutory contractual arrangement by which they manage their JV. Conversely, it may be preferable to incorporate a limited company as the JV vehicle, in order to formalise the relationship between the parties. These are the two most common forms of JV vehicle; other options include a partnership or LLP, but this is generally considered less desirable.

Limited Company

As perhaps the most common means of establishing a JV, the limited company brings a number of advantages for the parties. Incorporating the JV into a separate company introduces an element of formality into the process, with clear legal agreements governing the relationship between the parties. Share rights can be tailored to each specific venture – for example, to reflect each party’s respective contribution. As a registered company limited by shares, there will be limited liability for the JV partners in the case of failure of the entity. Equally, it is easier for a formal entity such as this to raise funding through finance – for example, via a floating charge from a bank.

The method of incorporation is straightforward. The parties will apply, usually online at www.companieshouse.gov.uk, to register the JVC. During the application process, details regarding the company’s name, proposed directors, shareholders, shares (number issued as initial subscriber shares and their nominal value) registered office, business classification, PSCs and accounting reference date will need to be provided. A fee will be payable to Companies House (currently GBP12 if submitted online). Subject to the application being successful, the company will be incorporated and ready to use within 24 hours. On incorporation, the JVC will be given the Model Articles under the CA06. At this point, the participants should consider restructuring the JVC and putting a more appropriate constitution in place.

Limited Liability Partnership

Unlike a limited company, an LLP cannot be set up by one person. There are two types of membership within an LLP – ordinary and designated – the main difference being that designated members are legally accountable. The LLP must have at least two designated members, but there may be more. 

Incorporation, much like with a company, is straightforward, and form LL IN01 must be submitted to Companies House. The cost is GBP40, payable to Companies House. It should be noted that having a written LLP agreement in place is not a legal requirement, but for JV LLPs it is of course strongly advised.

Contractual Arrangement

A purely contractual relationship between the parties may be more desirable in order to preserve an element of flexibility. The parties are not obliged to register the venture with Companies House or HMRC, allowing for a quicker set-up process. The parties also maintain their own separate identities, and so retain ownership of their own assets without pooling any into a single JV entity such as a limited company. The parties are taxed on their own share input, which in some cases may be preferable to the more complex tax implications of a JV limited company.

There are no formal legal obligations for setting up a JV in this manner. Indeed, the flexibility and informality offered are potential strengths. That said, it is advisable that the parties document their relationship and obligations thoroughly at the outset.

Generally, the terms of the JV will be outlined in a JV agreement between the parties. This will be based on the initial agreement of a term sheet/heads of terms, which will provide a high-level summary of the agreed terms of the venture.

JV agreements will vary depending on the complexity of the proposed venture, as well as the differing contributions of the parties; however, a standard agreement will generally contain the following terms.

• Dividend policy – this should be established to ensure that the parties are aware of how they are able to draw funds from the JV.
• Conditions for completion.
• Shares:
1. share capital;
2. share transfer restrictions – it is important for both parties to be aware of how/whether they are able to transfer their shares, particularly in cases of majority/minority shareholdings which are likely to have different classes of shares with different transfer requirements;
3. pre-emption rights;
4. exit share valuation;
5. share issue; and
6. drag-along/tag-along provisions.
• Directors:
1. appointment/removal;
2. chairperson; and
3. board meetings/management/quorum.
• Shareholder meetings.
• Business plan – the business plan of the JV will likely set out the objectives that the two companies intend to achieve in setting up the company. The board of directors of the JV is generally required to provide a business plan and update it at certain intervals, which would then be approved by the shareholder parties.
• Deadlock.
• Conflict of interest.
• JV party-reserved matters – whilst the board of directors of the JV entity should have a certain element of freedom to run the business without outside influence, there will inevitably be certain core matters that the parties would prefer to reserve for shareholder approval.
• Party restrictions.
• Termination and the return of the JVC’s assets to the participants.

Decision-making in the JV entity should be clearly defined within the JV agreement and the articles of association.

The first step is to decide on the level of involvement of each party. Ordinarily, JV participants (beyond a certain shareholding level) will require, as discussed previously, one or more directors on the JVC’s board. A key element of control is deciding which decision can be passed by a properly constituted and quorate board and which decisions are of sufficient importance that they are deemed to be a “reserved matter”, potentially requiring unanimity.

If the JV is made up of equal participants, care will also need to be taken to ensure that adequate deadlock provisions are built into the agreement. Deadlock resolution provisions are often seen to be unsophisticated, sometimes requiring a party to sell their share in the JVC to the other, or, in the absence thereof, requiring the winding-up of the JVC. For that reason, care should be taken to ensure that a deadlock is unlikely to occur, perhaps by the introduction of a chairperson with a casting vote. See 6.4 Deadlocks.

Whilst the majority of decisions will be made at board level, it is important to remember that decisions at shareholder level will need to be considered too. Such decisions are likely to be of a more fundamental nature and related to the company as an entity – ie, changing its name or accounting period, or restructuring its underlying share capital. Operational decisions, however, may also find their way into becoming shareholder-reserved matters, depending on their importance. As with board-reserved matters, the JV agreement will need to carefully reflect how any such decisions are made, recorded, and put into effect.

Decision-making in an LLP follows broadly similar lines. In the absence of specific matters being treated as fundamental and thus requiring a higher percentage of the members voting in favour for approval, decisions are made by the majority of the members.

The LLP agreement is able to preclude members from having a right to participate in the management of the LLP, and this would not be uncommon in a JV LLP where a party (or parties) is very much in the minority, or where their value to the venture is somehow divorced from the running of the LLP.

Whilst there is no hard-and-fast rule, JV companies are typically funded by a mix of debt and equity provided by the initial participants, usually with a bias towards debt. Subject to the tax considerations mentioned elsewhere in this article, debt is often the most tax-advantageous method of financing the JVC.

Debt from third-party lenders is also an option for the JVC during the early stages of its life. However, at this early stage the JVC is unlikely to have much in the way of assets or trading revenues and, consequently, the participants to the JV will almost certainly be required to provide security to lenders by way of cross guarantees with supporting debentures. This may or may not be attractive for the participants, particularly if liability between them is expressed to be joint and several.

As the JVC becomes more established, third-party debt becomes more viable. It is not uncommon in JV agreements to see provisions setting out a general obligation that future funding is to be sourced in this way and that, beyond certain limits, the JV participants are not required to provide more capital or loans unless they specifically agree to do so, and the investment or loan is mirrored by the other participants. In the event of further equity investments, the participants are reminded to ensure that they remain in compliance with the terms of the JV agreement and the CA06 regarding pre-emption on allotments.

Deadlock occurs when a particular decision cannot be passed because an equal number of shares or directors vote in favour and against a motion. This is a particular risk in 50/50 JVs. The articles of association and the JV agreement should provide a resolution method for any deadlock that arises. 

A method often used is the appointment of a chairperson with a casting vote. If the participants cannot come to a resolution between themselves, the matter may be referred to the chairperson of the board to break any deadlock by way of casting vote. A typical issue that arises from this option, though, concerns how the chairperson is nominated. If a casting vote is attractive to the participants, to avoid unfairness (and if such an option is available) it is generally preferred to give this right to a director not specifically appointed by one or the other participants.

Further options to consider are the following.

• Russian roulette (also known as Shotgun), where one party offers to either buy the shares of the other party or to sell its own shares to the other party (but not both) at a specified price. The party in receipt of the offer can either accept the offer or reverse the offer at the same price.
• Texas shoot-out, being an extension of Russian roulette. Where Russian roulette sets a price that the buyer will buy and is capable of being reversed, the Texas shoot-out allows the offeree to accept the offer or submit a higher offer to the offeror for their shares. The process then goes back and forth until the highest bid wins.

An arbitration clause within the JV agreement and articles of association can provide for an external decision-maker to provide a casting vote on a particular matter. This is a popular option, as it allows experts in certain fields to be used to resolve particular decisions. If that third party is unconnected to the JVC and the participants, the likelihood of bias one way or the other is mitigated.

Finally, perhaps the most straightforward option is to provide for the failure of a deadlocked motion, often after a scheduled number of meetings and votes on the subject.

If the use of a participant’s technology or IP is a requirement of the JV, IP licences should be provided to allow the JV to exploit the relevant material. This should also be provided for within the JV agreement.

A confidentiality agreement will be necessary to maintain the secrecy of disclosed information by each participant, as they will likely be required to divulge sensitive information to the other party throughout the JV process.

If the JV is to be established as a company limited by shares, a number of ancillary documents will be required, such as:

• stock transfer forms;
• board minutes;
• shareholder resolutions; and
• the relevant Companies House filings.

The JVC will also be required to maintain – as a legal minimum – its internal statutory registers. These are:

• its register of members (Section 113 of the CA06);
• its register of directors and secretaries (Sections 162 and 275 of the CA06);
• its PSC register (Section 790M of the CA06); and
• its register of debentures and charges, for charges created before 6 April 2013. 

The constitution of the JVC’s board will be the subject of much negotiation between the parties. Under the CA06, the board is installed to run the company for the benefit of the members as a whole, and the board members owe statutory duties to the company – duties which are fiduciary in nature. These duties are set out below.

In terms of the structure of the board, negotiations will turn primarily upon control. The majority participant of the JVC will want to have either (or a combination of):

• a greater number of directors on the board of the company;
• weighted voting rights in their favour (eg, on a show-of-hands vote, “their”  director is counted twice for each vote); or
• a chairman with a casting vote. 

Such powers would be in addition to board-reserved matters, as alluded to previously, where certain decisions of sufficient import are removed from the ambit of the powers of the board and are given specific thresholds to meet in order to be considered passed.

The number of board members (or weighted voting rights in their favour) would generally correspond to their nominated shareholder’s percentage holding in the JVC. In addition to being able to nominate directors, the rights in the JV agreement should extend to entrenching those directors. In the absence of such entrenchment, the removal of a director is a matter of agreement between the individual director and their board, or, lacking such agreement, of a specific procedure set out under the CA06.

A JV participant, especially if they hold less than 50% of the shares in the JVC, will want to ensure that their director or directors cannot simply be removed from the board by the majority and thus precluded from participating in the management of the JV’s business.

The principal duties under the CA06 require directors to:

• act within their powers;
• promote the success of the company;
• exercise independent judgement;
• exercise reasonable care, skill and diligence;
• avoid conflicts of interest;
• not accept benefits from third parties; and
• declare interests in transactions or arrangements.

The duties are fiduciary in nature and, in the event of a breach of these duties, the proper plaintiff is the company.

These duties are owed by all directors to the company, and there is often an inherent tension in JV situations regarding how such duties are balanced against the duties or obligations a director owes to the JV participant who installs them.

Within the JV agreement or the JVC’s constitution, the parties will, as a matter of course, seek to divide the directors up by reference to the participant that nominates them.

The statutory duties of directors include three that relate to conflicts – namely:

• to avoid conflicts of interest;
• not to accept benefits from third parties; and
• to declare interests in transactions or arrangements.

The question of the appropriateness of an individual joining the board of a JVC, having regard to their existing role with the JV participant, will be a question for the relevant individual to consider at the time. It is important that they remember that compliance with the conflict duties is not a “one-time thing”. The duties continue to exist throughout the time the individual sits on the board and must be constantly monitored, and, where appropriate, fresh disclosures must be made.

The authors have noted that a JV participant will often look to appoint their own director or directors with the aim of protecting or enhancing such shareholder’s interests in the JVC. Tension arises from the general legal position that the director, once installed, will be under a statutory duty to promote the success of the JVC for the benefit of the members as a whole.

Practical mitigation of these risks involves special articles of association being put in place for the JVC, expressly providing for the conflict. Ordinarily, this would include the right for a conflicted director to attend, be counted in a quorum, and vote on matters where they would otherwise be precluded from doing so.

Directors must also consider other duties that they have, particularly regarding confidentiality. In addition to the duties under the CA06, common law duties of confidence exist as between a company and its directors. Where a director of a JVC learns of confidential information about the JVC, they are unlikely to be able to take that information back to the participant that nominated them or to the JVC’s board without the consent of the JVC.

IP issues for JVs can arise in a number of ways. It would not be uncommon for the IP of one of the participants (which may include that participant’s corporate name or trading style) to be licensed to the JVC to allow it to benefit from the licensor’s goodwill. Similarly, the creation of IP would be common for a JV conducted both through a separate legal entity or through a contractual collaboration. 

Where the JVC wishes to use the IP of a participant, it is important that a specific licence for the use is entered into. The terms of the licence will depend on the nature of the IP which has been licensed. As a minimum, the licensor will want to ensure that the licence of their IP is terminable on the expiry of the JV’s purpose (and possibly earlier depending on other factors, such as a dispute between the parties). They may wish to impose a licence fee for the use of the IP, and to impose a variety of conditions on the way the IP is used. 

IP created by the JV during its lifespan needs to be carefully considered. The extent of the consideration will depend on the JVC’s purpose and, thus, on the nature and importance of the IP that is likely to be created. As a minimum, the JV agreement should deal with:

• ownership of created IP;
• licences to use such IP – perhaps between JV partners or members of their respective groups; and
• ownership of the IP when the JV comes to an end.

The question of whether IP rights should be licensed or assigned is very much situational, depending on what the participants are looking to achieve. Upon the JVC’s inception, the participant may hold valuable IP, the exploitation of which is critical to the success of the JVC. However, the participants might:

• not have much experience with the other party;
• consider the JV to be risky; or
• believe that the venture has a limited lifespan.

In that case, the participant is unlikely to want to transfer its IP to the JVC for fear that it might not be able to repatriate it when the need arises.

Conversely, where both parties are contributing equally and the JVC is accordingly more than the sum of its parts, a formal transfer into the new entity may be the most appropriate route to take.

As alluded to previously, a significant implication of the choice of transfer or assignment is the return of the IP when needed. If the IP is licensed, its return to the owner is by-and-large straightforward upon the occurrence of a trigger event detailed in the licence – ie, the termination of the JVC, its insolvency, a breach of the JV agreement, etc. IP owned by the JVC (whether transferred to it or created by it during its lifespan) is more troublesome. As a matter of law, the IP does not belong to either participant. Depending on the makeup of the board and provisions in the JV agreement around transfer of significant assets, all (or at least the majority of) the board may need to consent to its transfer. On liquidation, the IP will be treated in the same way as any other asset in the liquidation. 

Depending on the nature of the JV’s enterprise, IP may well be its lifeblood. The parties need to ensure that the JVC has the appropriate rights to exploit the IP for the success of the JVC, but must not tie it up in such a way that it cannot be easily extricated should the situation call for it.

Why Is ESG Important?

ESG is critical to establishing resilience and creating long-term investment value for shareholders and investors. ESG factors give an extensive view of a company’s performance; when parties decide to enter into a JV arrangement, it is important for each party to carry out their own due diligence. Each party should be looking at ESG performance criteria when investigating the potential JV partner, which includes:

• environmental – the impact the company has on environmental areas, such as climate change, carbon emissions, energy, greenhouse gas emissions and resource scarcity;
• social – how the company manages relationships with employees, suppliers and customers, human rights issues and modern slavery, whilst also taking into account diversity, equality and inclusion (DEI); and
• governance – the company’s governance structure, dealing with the company’s practices, decision-making, executive compensations, internal controls and shareholder rights.

It is important to carry out this due diligence to ensure that both parties’ ESG values align.

Recent Significant Court Decisions or Legal Developments Relating to ESG/Climate Change

The ESG landscape has continued to evolve; whilst not specifically related to JV arrangements, there has been an increase in derivative actions brought by shareholders on behalf of companies against directors. It is important to bear this in mind generally as a director, but also when entering into a corporate JV and setting up a JVC with a JV partner. The recent case of ClientEarth v Shell & Ors 2023 was a derivative action brought by ClientEarth (a minority shareholder in Shell) and concerned climate change. ClientEarth argued that the directors of Shell had breached their duties under Sections 172 and 173 of the CA06; in particular, ClientEarth accused the directors of Shell of failing to adopt and implement a strategy to manage climate risk and of failing to comply with an order made by the Hague District Court to reduce its CO2 emissions. Whilst the High Court dismissed this claim, it has highlighted that directors must be mindful of their statutory duties under the CA06 in light of the current climate.

Actions/Measures to be Taken/Implemented by JV Participants or by the JV Entity

To the extent that it has not already done so, taking into account the aforementioned ESG performance criteria and the size and type of company, the JV participant or the JVC should consider implementing certain measures. For example, on the governance side, it may be desirable to consider amending the company’s articles of association to take into account:

• environmental and social objectives;
• directors’ general authority ensuring that the directors manage the company’s business in a manner that benefits wider society and the environment;
• development of an environmental strategy, an annual emission reduction target and annual water target; and
• the company’s environmental strategy and the funding requirements of future environmental projects when declaring a dividend.

Where a corporate JV is being set up, the JV participants may wish to set out in the JV agreement obligations and restrictions on the JVC and its management to ensure the JVC adopts sustainability goals and a net transition plan.

The UK’s Main ESG Regulations

In the UK, there is no single piece of legislation or regulation that covers all aspects of ESG. The main sources of legislation are:

• the Companies Act 2006;
• the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008;
• the Climate Change Act 2008;
• the Disclosure Guidance and Transparency Rules;
• the Listing Rules; and
• the UK Stewardship Code 2020.

Other relevant legislation may also apply as regards ESG matters, such as:

• the Modern Slavery Act 2015;
• the Equality Act 2010; and
• the Bribery Act 2010. 

Depending on the form of JV arrangement, there are a variety of ways a JV can come to an end, including by:

• consensual termination (which is the most straightforward);
• sale of shares in the JVC; or
• winding up the JVC.

Where the JV arrangement is a contractual JV, on termination the parties should consider:

• the enforceability of any restrictive covenants;
• the transfer of any assets on termination; and
• any tax consequences.

Additionally, where any IP licences have been granted by one party, these are terminated.

Similar matters must be considered where there is a JVC in existence; if one party is selling its shares in the JVC, the name of the JVC may need to be changed. The assets contributed by the leaving party will also need to be dealt with in accordance with the terms of the JV agreement, as well as any financing arrangements that have been put in place (for example, a party may have granted a guarantee in respect of the JVC).

When transferring assets between the JV participants, it is important that the assets are valued from the outset so there are no complications or disagreements between the JV participants on termination.

Where assets have originally been contributed by a participant to the JV, thought must be given as to how the JV will continue to operate without these assets in the event that the participant decides to terminate the JV – for example, a separate licence or transfer agreement may need to be entered into.

Where assets have originated from the JV itself, the participants should consider how these assets are to be split on termination, particularly when such asset has been created using pre-existing IP owned by one participant. Additionally, the participants will also need to factor in any tax consequences resulting from the transfer of assets.