Joint Ventures 2024 Comparisons

With rising interest rates and tightening credit, joint ventures (JVs) have become an important and more frequent source of financing for capital intensive businesses in multiple industries, including real estate and healthcare. Given the reduced access to capital (both equity and debt), capital partners in JVs in the current market garner more influence and have stronger negotiation leverage, often demanding more favourable economic and governance terms than before. Venturers are also seeking greater flexibility to exit or sunset a JV that is in a deadlock or is not performing up to expectations. The authors believe this is driven in large part by the current uncertain economic environment.

In addition, the overall regulatory environment has become more intense. From the adoption of the new Corporate Transparency Act (CTA) to wider antitrust enforcement and increased scrutiny (where there are non-US investors) by the Committee on Foreign Investment in the United States (CFIUS), JVs are grappling with complex and increased regulatory considerations.

The following industries have been active in the JV arena.

• Real estate: JVs have been and remain crucial for real estate projects, where developers and operators frequently seek investors to fund the majority of capital needs, although the financing environment has introduced more friction into the deal-making process. JVs for developing data centres have also been active recently.
• Healthcare: many healthcare providers are pursing JVs through which resources and experience may be combined or shared, all while managing antitrust risk.
• Media: the changing media landscape has forced many media companies to look for strategic partnerships (eg, Disney/Warner Bros, Vice Media/Savage Venturers).
• Financial services: there has been an explosion of private credit, and financing sources are entering into JVs to share risk.

Oxford Languages defines a joint venture as “a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities”. While the term “joint venture” is sometimes limited to enterprises for a discreet, specific project, for the purpose of this guide, the authors are not applying this limitation. Each party to a JV (whether as a member of a limited liability company (LLC), a partner of a general partnership, a limited or general partner of a limited partnership (LP), a shareholder of a corporation or a party to a contractual JV) is referred to in this guide as a “venturer”. The following vehicles are frequently used.

LLCs

LLCs continue to be the vehicle of choice for most JVs because, subject to certain exceptions, the members and managers of an LLC are not personally liable for the liabilities of the LLC. In addition, LLCs, sometimes referred to as “creatures of contract”, are flexible vehicles that allow wide latitude to the venturers to define their JV relationship. There are no restrictions on the types of owners – they can be natural persons or any type of entity. In addition, governance, economics (including contributions and distributions) and risk sharing can be tailored to the venturers’ needs. In addition, unless they elect to be taxed as a corporation, LLCs are pass-through entities taxed as partnerships for income tax purposes. This means that venturers are allocated their shares of the income, gain or loss of the LLC with no tax at the LLC level, thus avoiding the double taxation that is typical for corporations. In cross-border transactions, caution should be taken before using an LLC, as certain non-US tax laws do not recognise or treat an LLC as a partnership, instead viewing it as a corporation subject to double taxation. With current corporate rates at 21% and Internal Revenue Code (IRC) Section 199A, which, subject to certain exceptions, allows non-corporate venturers in an LLC, partnership or S-Corp to deduct from their taxable income up to 20% of their qualified business income, a tax advisor would need to determine whether a particular JV would save taxes as an LLC (or partnership) vs as a corporation.

LPs

LPs are also a relatively common type of entity, for many of the same reasons that LLCs are favoured. They provide limited liability to the limited partners, allow flexibility in defining the partners’ relationship and, unless they elect otherwise, have pass-through taxation. LPs are often used in lieu of an LLC for non-US tax purposes where there are non-US partners from certain jurisdictions. LPs require at least one general partner, and each general partner has unlimited personal liability for the obligations of the partnership. This concern is commonly addressed by:

• having a general partner that is an LLC or a corporation that is a single purpose entity (SPE) with no assets, other than its interest in, and possibly any fees or distributions it receives from, the LP; and
• giving the general partner no economic interest (if permitted in the jurisdiction of formation) or a nominal economic interest (0.1% to 1%) in the LP. Alternatively, in many jurisdictions, a LP may elect to be a limited liability limited partnership (LLLP). In certain jurisdictions, including Delaware, an LP may file with the secretary of state or a similar body (the “Secretary of State”) to become an LLLP. This status provides the general partner with the same protection against the liabilities of the LP that is afforded to its limited partners. Caution should be taken to ascertain whether the jurisdiction of formation authorises LLLPs and whether each jurisdiction in which the LLLP conducts its business recognises LLLP status (and the limitation of liability) for an LLLP formed elsewhere.

General Partnerships

Although prevalent historically, general partnerships are now less common because each partner is a general partner with joint and several unlimited personal liability for the obligations and liabilities of the partnership. General partnerships (including LLPs) may regain some popularity because, unlike an LP, an LLC or a corporation, a general partnership is formed without filing with a Secretary of State. Accordingly, general partnerships are not required to file reports under the CTA.

LLPs

While general partnerships do not register with any Secretary of State, many states permit the partnership to register to become a limited liability partnership (LLP), which limits the liability of each general partner to that of a limited partner. Where there is shared management by the partners and an LLC cannot be used, an LLP may be a desirable form of JV entity, provided it is authorised in the jurisdiction of formation and recognised in all other jurisdictions in which the JV conducts business.

Corporations

Corporations are less common types of JVs due to double taxation (a corporation, other than a subchapter S corporation (S-Corp), is subject to income tax on its income, and its shareholders are taxed on distributions paid to them by the corporation). Certain corporate formalities must be followed to shield the shareholders from the liabilities of the corporation, including adopting bylaws, appointing directors and officers, and holding and documenting annual shareholders’ and directors’ meetings. Corporations are also more rigid structures than LLCs with respect to capital calls and distributions. Additionally, the officers and directors of a corporation owe a fiduciary duty to the corporation and its shareholders that cannot be waived or limited, as may be permitted by state laws for LLCs and partnerships. One advantage of a corporation (including S-Corps) is the greater ability to minimise self-employment tax on the earnings of the corporation.

S-Corps

Unlike a standard corporation, but similar to an LLC or a partnership, S-Corps generally have pass-through taxation. They lack the flexibility of an LLC or an LP because there can only be one class of stock, with each shareholder having the same economic rights to receive dividends that are proportional to its ownership interest. Unlike an LLC or a partnership, ownership of an S-Corp is limited to no more than 100 shareholders. In addition, each shareholder must be a citizen or legal resident of the United States, and an individual, although certain trusts and estates or tax-exempt entities are permitted. An S-Corp may be beneficial for a smaller, simple JV where the type and number of owners is not prohibited and there are pro rata distributions, or where self-employment tax minimisation is desired. An S-Corp, however, lacks a certain degree of flexibility with respect to tax considerations in connection with restructurings or recapitalisations of its investments, and a JV that loses its S-Corp status because of impermissible actions may face severe tax penalties.

Contractual JVs

A contractual JV is a JV among two or more venturers that is solely set forth in a contractual arrangement without forming a separate entity that is owned by the venturers. These arrangements are often effective when there is a specific strategic rationale driving the relationship. For example, in a contractual JV where the venturers are not “equal” capital partners, one venturer typically has the expertise, and the other venturer has capital and will make direct investments arranged by the contractual JV. Additionally, a contractual JV may be appropriate for certain industries, for example airlines, where the venturers often are not making a capital investment into a common enterprise but rather are creating a strategic contractual alliance in their operations and profit sharing. Typically, these arrangements are easier to exit as there’s no sale of assets or dissolution of the JV entity. Instead, the venturers part ways and terminate the alliance. Another common example of a contractual JV is a profit participation agreement. In this structure, the profit participant (eg, the seller of real property) is provided the right to receive a negotiated portion of the profits or cash flow of the buyer entity becoming an owner of that entity. This structure is desirable to the owners of that entity because, except as negotiated in the profit participation agreement, the profit participant does not receive the statutory, common law and operating agreement protections that are afforded to an owner of a JV, including rights to inspect the books and records of the entity.

The primary drivers when choosing a type of vehicle or a contractual JV are typically the following:

• limitation of liability to all of the venturers;
• flexibility to determine and implement economic terms;
• tax structuring considerations and efficiency;
• governance structure; and
• exit rights.

In most cases, unless there is a special need to have a partnership, a corporation or contractual JV, an LLC likely will be the preferred choice for a JV.

In addition to the federal, state and local laws that govern a particular business conducted by the JV, the following are some key regulatory considerations affecting JVs.

State Entity Law

Regardless of where it will conduct business, a JV entity may be formed under the laws of the particular US state or the District of Columbia (jurisdiction) of its choosing.

In general, the statute of the jurisdiction governing the specific type of JV entity will regulate that entity, except to the extent, if any, that the statute allows the governing documents of the JV to modify the statutory provisions. LLC and LP statutes provide default rules for the relationship of the venturers and the formation, governance, operation and dissolution of the entity that apply where the governing documents are silent on a specific topic. Each LLC and LP statute, however, provides for certain enumerated “non-waivable” provisions that cannot be varied by contract. The non-waivable provisions provide a baseline of statutory protection for the members. Through expansive non-waivable provisions, many jurisdictions take a paternalistic approach to protect unsophisticated investors from fraud or grossly unfair operating agreement provisions. The scope of the non-waivable provisions varies from jurisdiction to jurisdiction. Corporate statutes are binding on corporate JVs, except for provisions that are expressly permitted to be modified through the corporation’s governance documents.

If the JV conducts business in any jurisdiction, other than its jurisdiction of formation, it will need, with certain exceptions, to register with the Secretary of State in each such jurisdiction as a “foreign” entity. In this case, certain affairs of the JV will be governed by the jurisdiction of formation and each jurisdiction in which the JV is registered to do business. As there is an annual fee and reporting requirements for registering to conduct business in a foreign jurisdiction, the venturers may desire to form the JV in the jurisdiction in which it will conduct business. This is often the case for smaller, less sophisticated JVs doing business in a single jurisdiction.

To choose the jurisdiction of formation, the venturers should have a good understanding of the applicable statutory provisions governing the JV, including the non-waivable provisions, and evaluate whether the applicable statutes are attractive for the particular JV.

For most sophisticated JVs, Delaware generally is the jurisdiction of choice for formation, regardless of where the JV will do business. For LLCs and LPs, the Delaware entity statutes expressly recognise the venturers’ right to contract as they please, with very few non-waivable provisions. It is one of the only states that permits the complete waiver of fiduciary duties, other than the implied contractual covenants of good faith and fair dealing. In addition, the Delaware Chancery Court is considered by many to be the best business court in the nation, including in dealing with disputes regarding the internal affairs of all types of JV entities. Moreover, regardless of where they practice, sophisticated JV counsel will be familiar with the entity statutes in Delaware, which are different in every jurisdiction.

SEC and State Securities Laws

An equity interest in a JV may be considered a security under federal and/or state securities laws. Accordingly, the structuring of any JV needs to consider applicable federal securities laws (and any applicable exemptions), as well as the state security statutes in the jurisdiction in which each of the venturers resides. If a JV will be making investments, then rules governing investment companies and investment advisers may also be implicated. Applicable federal securities statutes include, but are not limited to, the Securities Act of 1933 and Regulation D thereunder, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. The application of securities laws to JVs can be nuanced and depends highly on the structure of the transaction and the governance of the vehicle.

Financial Crimes Enforcement Network (FinCEN)

The CTA, promulgated FinCEN, went into effect on 1 January 2024, and venturers are grappling with the application of the CTA to various JV structures. A careful analysis of the ownership and governance of the JV needs to be performed to ascertain whether and what a JV is required report to FinCEN under the CTA (see 3.6 Control/Ownership Disclosure Requirements).

Federal Trade Commission (FTC)

The FTC and the Department of Justice (DOJ) have the authority to review certain JV transactions and may enforce competition laws against the venturers and the JV if they are engaged in certain anti-competitive practices.

The AML regulations that apply in Holland & Knight’s jurisdiction are as follows:

• the Foreign Corrupt Practices Act of 1977, as amended;
• the USA Patriot Act, as amended, and various executive orders thereunder;
• US Department of the Treasury Office of Foreign Assets Control (OFAC) regulations, including the Specially Designated Nationals and Blocked Persons List and Sectoral Sanctions Identification List;
• the US Department of Commerce Entity, Denied Persons and Unverified Lists; and
• the CTA.

CFIUS

This tool allows the US government to review non-US investments in US businesses due to national security concerns, and the President can block risky transactions. Its application is more common today across multiple industries, including real estate. No statute of limitations applies to CFIUS reviews, unless previously approved.

Sanctions

OFAC administers the US sanctions programmes, which precludes JVs from doing business with certain blocked non-US venturers or venturers from embargoed countries.

State Laws

In addition to federal laws, many states also have regulations to address national security issues, including the following.

• In May 2023, Florida enacted Chapter 692, Florida Statutes, which restricts, with limited exceptions, certain "foreign countries of concern" from directly or indirectly owning, having a controlling interest in or acquiring any interest in real property in Florida. Foreign countries of concern are the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro and the Syrian Arab Republic. Similarly, Texas has passed the Lone Star Infrastructure Protection Act, which prohibits certain investments from countries of concern that would affect critical infrastructure.
• Other states are following Texas and Florida’s lead and are in the process of restricting ownership of real property by China and other specified countries. The existing and proposed laws of each jurisdiction in which the JV conducts business must be analysed where there are Chinese (or other specified non-US) venturers.

Venturers need to consider applicable US antitrust regulations, which include the following:

• the Sherman Act – prohibits certain anti-competitive practices, such as price-fixing, market allocation and customer allocation;
• the Clayton Act – regulates activities that lessen competition and lead to monopolies;
• the Federal Trade Commission Act – prohibits unfair competition and deceptive practices;
• the Hart-Scott-Rodino Act – may require a filing with the FTC and DOJ before entering into certain JV formations and transactions; and
• state laws: most states have their own unfair competition laws, and healthcare-related JV transactions may be subject to review and filing requirements under applicable state statutes.

In general, where antitrust challenges may be an issue, venturers should analyse whether the JV has a legitimate pro-competitive purpose, such as the creation of a new product, a reduction in price for customers and market efficiencies. This will need to be measured against the extent to which the JV may give the venturers market power that would not otherwise exist. Venturers need to be considerate in restricting the ability of the other venturers to compete outside of the JVs and other similar anti-competitive conduct, which can raise antitrust concerns and scrutiny.

Not applicable.

CTA

Effective 1 January 2024, unless it meets one of the enumerated exceptions or is outside of the scope of the CTA, each US legal entity that is created by a filing with the Secretary of State is considered a “reporting company” that must file a “CTA report” with FinCEN. This includes non-exempt JVs that are LLCs, LPs (including LLLPs) or corporations (each, a “JV reporting company”) and excludes JVs that are general partnerships as they do not file with a state agency to come into existence. Issues relating to the CTA include the following:

• whether any exemptions apply – the CTA provides 23 specified exemptions from filing a CTA report (the “exemptions”), which need to be analysed in light of the JV structure to determine whether a CTA report is required;
• who files the CTA report on behalf of the JV reporting company – each JV reporting company must file a CTA report. Generally, the venturer who manages the JV should perform this obligation on behalf of the JV. The venturers in a co-managed JV need to agree on which venturer is responsible for CTA reporting;
• who is a beneficial owner – the CTA requires disclosure, and updating when applicable, of certain personal identification information to be provided to FinCEN for every individual who owns or controls 25% or more of the ownership interests of the JV or exercises “substantial control” of the JV; and
• timing for filing CTA reports –
1. if formed prior to 1 January 2024, it must file by 1 January 2025;
2. if formed in 2024, it must file within 90 days after formation;
3. if formed after 2024, it must file within 30 days after formation;
4. an updated report must be filed within 30 days after any change in the information previously reported; and
5. a corrected CTA report must be filed within 30 days after becoming aware, or having a reason to know of, inaccuracies in an earlier CTA report.

State Transparency Acts

States are also enacting beneficial ownership-reporting laws. The New York LLC Transparency Act, originally enacted on 22 December 2023 and amended on 1 March 2024, is based on the CTA but only applies LLCs. Unlike the CTA, it requires a filing to claim an exemption. Other states, including California and Maryland, are considering adopting their own transparency legislation.

CTA

Since its adoption, the CTA has been fraught with interpretive issues. FinCEN has promulgated regulations, FAQs and other guidance, and FinCEN offers a virtual portal to submit inquiries. JVs and their counsel, however, are struggling with numerous questions that have not yet been addressed by FinCEN. These issues include determination of who is a beneficial owner and the interpretation and application of the related ownership and “substantial control” rules. For example, the JV manager who files a CTA report, among others, may face civil and criminal liability in the event of failure to produce an accurate and timely report of beneficial owner information because the non-managing venturer failed to provide this information.

Non-disclosure Agreement (NDA)

A confidentiality agreement, or NDA, is critical any time that prospective venturers are sharing confidential information. It therefore should be entered into prior to negotiating the terms of the JV and a venturer providing sensitive information to any other venturer. A customary NDA will typically restrict a party or its representatives from disclosing the existence of the JV negotiations and the confidential information of the other party, and from using the other party’s confidential information other than in furtherance of the evaluation and negotiation of the potential transaction.

Term Sheet

Most JVs must be contractually tailored to the needs of the venturers. Negotiating a detailed term sheet, letter of intent or memorandum of understanding (each, a “term sheet”) is often advisable at the outset of negotiations to facilitate alignment between the venturers. A term sheet is much shorter, with less detail, than a JV agreement. Accordingly, using a term sheet to set the material terms of the JV will save substantial time and resources in negotiating and preparing the JV agreement, as well as setting the parties’ expectations. Most term sheets will frequently address equity ownership, capital funding requirements, distributions, governance, and transfer and exit provisions.

Term sheets are usually non-binding, except for certain provisions that are legally binding, which may include the allocation of expenses to negotiate and prepare the term sheet and other deal documents, confidentiality, governing law and, if applicable, an exclusivity period during which the prospective venturers are obligated to negotiate exclusively with each other.

The scope of each term sheet, and which material issues are included (versus saving them for negotiation in the JV agreement), is a question of strategy and negotiation leverage. In some cases, it may be better to save a problematic issue for the JV agreement after the venturers have signed the term sheet and are more invested in the JV, rather than risking killing the deal at the term sheet stage. In other cases, it may be prudent to bring these difficult issues up at the term sheet stage to make sure that the parties are in fact aligned on these issues.

Certain basic information regarding each JV that is an LLC, LP or corporation (such as the entity type, its name and address and the registered agent) is filed with the Secretary of State of its jurisdiction of formation and, if applicable, in each other jurisdiction in which it is qualified to do business as a foreign JV. In addition, an annual report is also required to be filed with the Secretary of State of such jurisdictions, which, depending on the jurisdiction, usually includes the identity of at least one JV manager.

This filed information is of public record. Additional information, including the fact that an entity may be a JV, the identity of the venturers and the scope, terms, business and operations of the JV are not required to be disclosed through these filings and remain confidential. General partnerships do not file with a jurisdiction in order to come into existence and similarly do not file annual reports. The same is true for contractual JVs as there is no JV entity that needs to file.

The extent to which additional details regarding the JV may need to be disclosed depends on the characteristics of the JV and its venturers.

• The CTA requires JVs that are reporting companies to file certain JV and beneficial owner information with FinCEN. This information is not publicly available.
• Certain rules governing public companies may require disclosure of the existence of a JV. A public company is required to disclose to the SEC when it has entered into a material agreement or transaction. Depending on the nature of the JV and its materiality to the public company, the JV and its terms may require disclosure. If the JV agreement is a material agreement, it may need to be filed with the SEC and available to the public.

• If a JV is not owned by a public company that discloses the JV to the SEC, and there is no other applicable legal requirement to publicly disclose that it is a JV, this fact may remain hidden from the public, unless and until the venturers desire to make such disclosure. The ability of a venturer to disclose non-public confidential information regarding the JV or any other venturer is generally governed by an NDA, a term sheet or a confidentiality provision in the JV agreement.

A JV that is an entity is set up by filing an appropriate formation document with the office of the Secretary of State in its jurisdiction of formation. For example, in the State of Delaware, an LLC is formed by filing with the Secretary of State of Delaware a “certificate of formation” signed by an authorised person. There will also need to be a CTA filing, unless an exemption applies. The venturers would enter into a JV agreement (which is not filed) to govern their relationship with respect to the JV.

A JV that will conduct business activities in a jurisdiction other than its jurisdiction of formation will likely be required to register in the applicable jurisdiction to do business as a foreign entity. If the JV will file a federal tax return or other tax related documents, it will need to obtain a federal tax identification number for the JV by filing a Form SS-4 with the Internal Revenue Service.

The venturers of a JV that is an LP or an LLC would execute an operating agreement (JV agreement) in the form of an LP agreement (LPA) or limited liability company agreement (LLCA). If the JV is a corporation, the JV would file a certificate of incorporation and adopt by-laws, and the shareholders may enter into one or more shareholder agreements. The shareholders would elect or appoint directors who would appoint officers of the corporation. A “close corporation” under certain state statutes may be managed by the shareholders without a board of directors.

Regardless of the type of JV entity or its industry, JV agreements are likely to cover the following topics.

• Governance – how the JV is managed, where it may be:
1. co-managed by the unanimous decision of the venturers;
2. managed by a managing venturer (or its affiliate), with the other venturers having consent rights over certain major decisions;
3. managed by an executive committee or board of managers, directors or venturers appointed by the venturers to collectively manage the JV; and/or
4. managed via the appointment of officers of the JV.
• Capital contributions (for LLCs and LPs) – how the capital contributions are being made (in cash or in kind); future capital contribution requirements (capped or unlimited); and who has the right to call capital (see also 6.3 Funding). For corporate JVs, shareholders fund capital by acquiring more shares and may want pre-emptive rights (rights to participate in any share offering) to avoid dilution (reduction in its percentage ownership interest).
• Distributions (for LLCs and LPs) – whether distributions of available cash would be made pro rata among venturers or whether there will be a distribution waterfall that sets forth an order of priority and may include a performance incentive if there is a managing venturer. Corporate JVs require that all shareholders of the same class receive the same per-share distributions.
• Allocations and other tax provisions – for LLCs and partnerships, the provisions, pursuant to IRC Section 704 and the more than 100 pages of complex Treasury regulations thereunder, allocating income, loss, gain and the components thereof among the venturers. In addition, the LLC or partnership needs to appoint a venturer or third party as the “partnership representative”, which has the authority to represent the JV and the venturers in connection with audits by the Internal Revenue Service. If the JV appoints an entity as the partnership representative, the latter must also include an individual designated by the JV or the partnership representative entity. It is critical that a tax attorney well versed in partnership taxation prepare or review and approve all tax provisions in each JV agreement.
• Affiliate transactions – to authorise transactions between the JV and any venturer or its affiliate and the terms thereof.
• Indemnification – exculpation and indemnification provisions with respect to the venturers as well as fiduciary duties (the required standard of care and ability to compete with the JV) of the venturers and managers.
• Major decisions – typically, each venturer that is not managing the JV will have certain negotiated major decision rights to approve certain actions by the JV.
• Deadlock-resolution process – what happens if the venturers cannot agree on a course of action with respect to the JV and there is a deadlock (see 6.4 Deadlocks).
• Transfers and other exits – whether there is a lock-out period before any exit is possible; the transfer rights of each venturer (to affiliates and non-affiliates); and the right of first refusal, right of first offer, and drag-along and tag-along rights.
• Confidentiality – what information the JV and each venturer is prohibited from disclosing.

Decision-making would depend on the management structure of the JV. For an LLC or LP:

• if a venturer or its affiliate, such as a manager or managing member of an LLC or a general partner of a partnership (a “manager”), manages the JV, day-to-day decisions usually would be made by the manager, with certain major decisions requiring the approval of one or more non-managing venturers;
• a board comprised of individual representatives of each venturer (or manager if more than one), acting similar to a board of directors of a corporation, could be responsible for managing the JV or voting on major decisions, with day-to-day functions carried out by officers of the JV (if any) or delegated to a manager or venturer; and
• officers of a corporate JV manage under the oversight of the board of directors (see 7.2 Directors’ and Board' Duties and Functions).

See 6.4 Deadlocks with regard to resolving deadlocks on major decisions.

JVs are typically funded by equity capital contributed by the venturers but may also incorporate in-kind contributions and/or debt from one or more venturers or third parties.

Initial Capital Contributions

The venturers typically provide some amount of capital to the JV to fund initial start-up activities.

Additional Capital Contributions

Additional funding to the JV by the venturers may be mandatory or optional, or mandatory under certain circumstances (such as up to a specific capped amount) and optional otherwise, and venturers generally provide funding on a pro rata basis based on their respective ownership percentages of the JV.

Capital contributions that are mandatory would typically follow an approved budget/business plan or other specific circumstances described in the JV agreement, such as to fund emergency expenses or non-discretionary expenses (eg, debt service, taxes and other mandatory payments).

The managing venturer may be required to fund certain cost overruns in excess of the budget/business plan.

Default

If a capital contribution is mandatory, the JV agreement will typically include punitive consequences for a venturer who fails to fund. These may include punitive (non-pro rata) dilution, default loans by the non-defaulting venturer(s) at escalated interest rates, the ability by the non-defaulting venturer(s) to buy the defaulting venturer’s interest at a discount, lost voting rights and/or, if applicable, removal of the manager. Mandatory capital contributions also may be guaranteed by a deep-pocket affiliate of a venturer.

Debt

JVs may also incur debt (via venturers or third parties) to fund the business, which is often a major decision. One or more of the venturers (or their affiliates) may need to provide guaranties to the lender, and the JV agreement will need to address how liability is allocated among the venturers if a guaranty is triggered.

How deadlocks are resolved is highly negotiated and specific to each JV, and there is no single way to deal with a deadlock. Common ways of resolving deadlocks include the following.

• Status quo prevails – it may be appropriate for certain deadlocked decisions to result in nothing happening at all if an action proposed by a venturer is not approved. For example, if the venturers cannot agree on a new budget, then the old budget may continue to apply to the JV until the deadlock is resolved.
• Escalation to senior management – venturers may agree on a process where the deadlocked issue is escalated to the upper management of each venturer to try to resolve the issue.
• Arbitration or mediation – in certain industries and/or for certain issues, binding arbitration or non-binding mediation may work better than in others. The JV agreement may designate which deadlocks are mediated or arbitrated, and which deadlocks would trigger other resolution mechanisms, as well as who is the arbitrator or mediator.
• Buy/sell – a buy-sell is a procedure where one venturer buys out the ownership interest of the other venturer(s), thereby breaking the deadlock. In a commonly used “shotgun” buy-sell, one venturer offers to buy the other venturer(s) at a certain price, and each venturer that receives the offer can choose to either (i) sell its interest to the offering venturer, or (ii) purchase the interest of the offering venturer at a price based on a valuation of the JV determined from the purchase price in the offer. Often, there is a lockout period at the beginning of the operations of the JV during which the venturers do not have a buy/sell right. This gives the JV a chance to ramp-up its operations and appreciate in value. A buy/sell may not be a desired deadlock-resolution procedure, however, when one venturer does not have the financial ability to buy out the other venturer(s).
• Forced sale – one or more of the venturers may have the right (which may be after a negotiated lockout period) to force the marketing and sale of the JV or its assets to a third party. If a forced sale is triggered, the venturer(s) that do not trigger the forced sale may have a right of first refusal or right of first offer to acquire the JV or its assets.
• Dissolution – the JV could be forced to liquidate its assets and dissolve.

Any number of agreements may be appropriate depending on the type of JV.

• Contribution agreements – if a venturer will contribute assets to the JV (such as real estate, equipment or IP), a contribution agreement may be appropriate. A contribution agreement provides the terms by which a venturer contributes the property to the JV in exchange for equity interests in the JV and may, among other terms, include representations and warranties regarding the contributed assets, as well as indemnification provisions.
• IP licences – if one of the venturers has IP that the JV needs in its business, such venturer may want to retain ownership and licence the IP to the JV (rather than contributing it) by means of an IP licence (see 8.1 Key IP Issues).
• Guarantees – a guaranty from a credit-worthy affiliate may be appropriate if the venturer lacks the financial ability to satisfy its monetary obligations under the JV, such as mandatory capital contributions and/or indemnification obligations.
• Services agreements – if a venturer or its affiliate will be providing services to the JV, then an agreement providing the terms relating to the services and any compensation therefor may be appropriate.

Unless it is a “close corporation” that elects otherwise, a JV that is a corporation must have a board of directors. The rights of the venturers to elect or appoint board members would be subject to significant negotiation by the venturers. Unless otherwise provided in the certificate of incorporation, each shareholder will have one vote per share, and board members are elected by a majority of the votes. Different classes of stock, such as preferred vs common equity, may have different voting rights.

Directors of a corporation may have different voting rights, but those rights need to be set forth in the certificate of incorporation in accordance with applicable statutes.

If the corporate JV has more than one class of stock, one class of shares may have greater approval rights or votes per share than another class (which may be nonvoting or have limited voting rights). Shareholders may enter into a shareholder or voting agreement that provides each shareholder with rights to appoint members to the board of directors or approve certain matters.

Because of the formalities that must be observed with respect to corporate entities, venturers more commonly elect to form a JV as an LLC or LP, which provide more contractual and governance flexibility. These entities may be also structured with a board but without all the statutory requirements applicable to corporations.

The directors of a corporate entity owe fiduciary duties to the corporation and its shareholders, comprised of the duty of care and a duty of loyalty. These duties cannot be waived. In a corporate JV, these duties must be exercised by a director notwithstanding that a director may also have a duty to the venturer who appointed him/her or to other parties. To avoid liability, a director who has competing duties should carefully consider in what capacity he/she is acting when making a decision with respect to the JV.

A corporate board may create committees and subcommittees to which it would delegate certain managerial functions.

For LLC or LP JVs, the manager will have certain fiduciary duties under the applicable statute. The JV agreement, however, can modify or eliminate those duties (to the extent permitted by applicable law), and the venturers have flexibility to create bespoke mechanisms for making decisions and resolving conflicts.

In the corporate context, a director who has a conflict of interest must disclose it to the entire board and recuse themself from the applicable decision.

In the case of an LLC or LP, conflicts of interests should be specifically addressed in the JV agreement. Most LLC statutes provide the default rule that such conflicts must be approved by the non-conflicted venturer(s), and this is generally an appropriate provision for the JV agreement for mitigating conflicts. Conflicted transactions also may be required to be on arms-length, market terms. The JV agreement should provide that rights on behalf of the JV under an affiliated agreement are decided solely by the non-affiliated venturer. Otherwise, the affiliated venturer could vote against the JV enforcing the agreement against it or its affiliate.

In some cases, venturers may elect to waive the fiduciary duty of loyalty so that each of the venturers can make JV decisions in their own best interest. If not waived or limited in the JV agreement, the default duty of loyalty (which generally prohibits competing against the JV) under the laws of the applicable jurisdiction would apply to the manager and possibly the venturers.

Each JV must have the right to use the IP it needs to conduct its business, which may include rights to use the names, marks or other IP owned by one of the venturers. IP can either be contributed in kind to the JV via an IP assignment or licensed to the JV. If a venturer is licensing the IP, the other venturers will want to make sure the licence is available for as long as the JV operates and address what happens if the licensor leaves the JV. The licensing party will want to specifically set out applicable usage restrictions and fields of use that govern the JV’s use of any licensed IP.

The JV agreement should also address the venturers’ rights with respect to any new IP that is developed, including who owns it and who has a right to use it. In general, if the JV develops new IP using its own employees or contractors, the JV will likely have rights to such IP. The venturers also need to address what happens to any licensed or newly developed IP upon the dissolution of the JV or if one of the venturers leaves the JV. The JV agreement should carefully delineate each venturer’s IP rights, including how it can be used by each venturer, how it can be licensed to third parties and who is responsible for enforcing the JV’s IP rights against third parties. It is common for each venturer to have the exclusive right to use the IP within a specified field of use.

The venturers will also need to consider how any IP newly developed by the JV will be owned and used upon termination of the JV. The venturers could jointly own the IP with a separate written agreement outlining their respective fields of use. Alternatively, one venturer could own the IP and licence it to the other venturer, subject to usage restrictions. If there are pending applications for IP (eg, patent applications), the venturers will need to consider who controls and pays for its prosecution.

• Whether IP should be licensed or assigned depends on the JV. In general, if a venturer has valuable IP, it will want to keep ownership thereof, in which case it would provide a licence to the JV to use the IP for specific purposes. The licensing venturer needs to balance the need to maintain ownership of valuable IP while still granting the JV a licence that is sufficient to enable it to independently operate. For instance, a short-term or terminable licence to the JV may limit its ability to grow long term and seek additional debt or equity financing. Also, the licensor should consider the JV’s right to assign any licence to a third party.
• An important issue with any licence or assignment is protection of the IP. For instance, if a JV is only licensing IP material to its business, the licence should contain terms ensuring the owner will take sufficient steps to stop third-party infringers.
• A licensor of IP will also want to consider whether it will receive royalty payments for the licence or whether the licence will be royalty-free.
• Contributing ownership of IP to the JV through an assignment is less common because the assignor would cease to directly own the IP. One way to address this issue is for the JV to obtain ownership of the IP but then enter into a broad “licence back” to the contributing venturer.

Outside of the public company context, there are no unified federal ESG regulations. However, many states have ESG-related regulations applicable to the entities formed or operating within such state. Caution should be taken to review state regulatory requirements before the formation of a JV to ascertain that the JV would be able to comply with such requirements, with consideration of the following.

• ESG materiality – a party considering entering into a JV should first consider whether ESG will be material to the transaction. Certain industries, such as oil and gas, may be subject to more ESG-related concerns, which may require evaluating how ESG may impact the JV.
• ESG goals – if one venturer has ESG-related goals, there should be discussions at the outset by the venturers as to how ESG will affect the JV’s business and operations. Careful due diligence on such venturer and its goals would be needed in negotiating the JV agreement.
• ESG-related JV provisions – the JV agreement will need to set out desired ESG reporting requirements and monitoring functions; require the adoption of ESG-related policies and targets; and provide for approval or blocking rights related to certain activities relevant to ESG.

Venturers should carefully consider, at the outset, when and how a JV may be terminated. Many JVs are intended for a specific purpose. For example, a real estate development JV may be set up for the purpose of entitling and developing raw land and constructing buildings thereon, and selling the buildings upon completion. Other JVs are created to operate a business without a specific planned termination. Many JV agreements provide that the JV has a term that is perpetual pending an express termination event. Others will set forth a termination date.

For JVs that are LLCs or partnerships, the applicable entity statute of the jurisdiction of its formation will set forth certain default events for dissolution of the JV. These need to be carefully reviewed, as the statute may permit some or all of these events to be waived or changed by the venturers in the JV agreement. The dissolution events for JVs often include:

• the disposition of substantially all of the assets of the JV;
• the decision of the venturers owning a requisite percentage of ownership interests; and
• cases where there are no venturers.

Most JVs are illiquid investments. Accordingly, in addition to the dissolution provisions, the JV agreement should address the ways in which a venturer may exit the JV. Depending on the relationships of the venturers and their goals, one or more of the following rights may be appropriate.

• Buy/sell or put or call rights – under specified circumstances, these give one or more venturers the right to acquire or sell ownership interests from, or to, the other venturers.
• Rights to transfer ownership interests – generally, each venturer would prefer to have unlimited rights to transfer its ownership interest, or as few restrictions as feasible, so it can exit the venture when desired. On the other hand, each venturer would not want the other venturer to have unrestricted transfer rights, as it is important to make sure that the transferee is an appropriate party to the JV. Accordingly, many JVs restrict transfer rights other than to affiliates of the venturer.
• Forced sale rights – these permit one or more venturers, after any applicable lock-out period, to cause the marketing and sale of the assets of the JV to third parties.
• Registration rights – to register and sell a venturer’s ownership if the JV has an initial public offering of its equity interests.

If a JV is terminated, the venturers need to consider what happens to the JV’s assets. In many cases, it may be appropriate to liquidate the assets and distribute the proceeds to the venturers. If, however, they do not want to liquidate certain assets, such as newly developed IP, the venturers will need to determine how the ownership and use of these assets can be shared among or allocated to one or more venturers.

A terminating JV will need to wind down its business by liquidating its assets, terminating or transferring existing contracts, terminating licences or registrations and paying off creditors. In addition, as required by its entity statute, the JV will need to reserve funds or make provision to pay for any future known or contingent liabilities (eg, indemnities related to a sale of an asset) and file final tax returns, if applicable.

Depending on the JV, the distribution of the net liquidated proceeds will also need to be carefully considered, particularly if there is a waterfall that requires the proceeds to be distributed to the venturers in a particular order of priority. If a venturer has the right to receive distributions based on performance, it may be entitled at liquidation to receive additional proceeds. If the JV has not been successful, or if at the end of the venture a venturer has otherwise received more distributions than it was entitled to, there may be a required “claw-back” (ie, repayment) of certain distributions it previously received. Claw-backs can be a significant point of tension in a termination, and such obligation would often be guaranteed by a deep-pocket guarantor affiliate of the applicable venturer.

The distribution of assets in kind is often a major decision of the venturers. If the JV will be distributing in-kind JV assets to any venturer during the term of the JV or upon dissolution, the JV will need a valuation mechanism for the assets to ensure they are distributed in a manner consistent with the distribution provisions and the economic arrangements of the venturers. If the venturers cannot agree on a value, obtaining a third-party appraisal may be desirable. If distributions in kind are anticipated, the JV agreement should specify the valuation methodology.

If a venturer contributes certain assets to the JV, it may want the right to receive them back through distributions, at appraised or an agreed-upon value, when the JV terminates or that venturer exits.

If there are assets that have been created or developed by the JV, the venturers will need to decide how to share or allocate ownership of those assets when the JV terminates. For example, the rights and responsibilities of the venturers related to jointly developed IP should be carefully spelled out to avoid potential conflict.