What are useful pointers when entering a "Joint Agreement"?

In Florida, a joint ventureopens in a new window is not a statutory entity or form; rather, it is a contractual arrangement whereby two or more persons or entities join forces to operate a venture.

Many joint ventures operate by agreement only.  The participants do not have to create a separate entity as the vehicle for the joint venture. However, nonprofit corporations, for-profit corporations and LLCs can each function as the entity vehicle for joint ventures.   The LLC is the preferred entity/vehicle for when liability protection and maximum flexibility are required and the number of participants/investors is small.  For example, a tax-exempt nonprofit corporation pursuing a social mission and a for-profit corporation operating a business can join together and form a joint venture using an LLC as the vehicle for the enterprise.

The parties should decide on:

  • Name of the joint venture
  • Names, address, and occupations of the joint venturers
  • Description of the proposed venture
  • States/countries in which the venture business will be conducted
  • The rights and obligations of each member.
    • Each member remains bound by the laws and rules governing its own existence (so that the nonprofit may not confer an undue economic benefit on the for-profit co-venturer, nor may the business corporation use the joint venture to do something that it could not do directly)
    • Usually, the parties will be joint and severally liable
  • Venture must be for a specific purpose and scope (so as to not create a permanent partnership nor include other projects or contracts under it)
    • there has to be a specific time period or undertaking by which the joint venture will expire
    • what expansion possibilities are contemplated?
  • Form of Entity considerations:
    • LLC, corporationopens in a new window or contractual joint venture?
    • Tax considerations can drive the decision.
    • Any local or foreign laws that have impact on the choice of entity?
    • What is the best way to limit liability?
  • Designate the sponsoring joint venturer
  • Interests of the parties:
    • in and to any profits and assets derived from the performance of the venture
    • in and to any property acquired by the joint venture
    • in and to any contributions required
    • in and to losses incurred
  • Management:
    • How will the joint venture be managed?
    • Will there be a Board of Directors, and if so, what is the Board makeup?
    • 50-50 management?
    • How will officers be appointed?
    • What powers do the officers have?
    • How are deadlocks resolved? Options include the CEOs of the partners meeting to resolve the deadlock; exercise of a Buy-Sell option to buy out one partner; binding arbitration.
  • Contributions and loans:
    • What cash will be contributed by the joint venturers?
    • What assets will be contributed? And what liabilities are assumed?
    • Whether the parties will be required to make additional contributions. And so, what amount and in what proportions
    • Remedies for when a joint venture fails/is unable to provide its proportionate share of funds required by the venture
      • Period of time
      • Proportion by which the interest of defaulting joint venturer decreases
    • If loans, then what are the maturity date, the interest rate and other terms?
  • How monies will be treated: trust funds?
  • Bank accounts for the joint venture
  • Books of accountopens in a new window
    • Who will keep them;
    • Whether periodic audits will be made by an independent party
  • What will be done with equipment upon completion of the venture
  • Bankruptcy: in the event of bankruptcy or dissolution of any of the parties, whether the joint venture will cease or terminate
    • What happens to the interest of the bankrupt/dissolved party
  • Determine the costs to the parties of the joint venture
  • How disputes among the parties will be resolved, if they occur:
    • Which disputes should be resolved by all Venturers? A majority of Venturers? Should certain Venturers have the right to make the final determination of particular disputes?
    • Arbitration?
  • Liability: The liability dangers inherent in forming a Joint Venture and the alternatives thereto: the difficulty in avoiding the presumption that one venturer binds another. If the Venturers intend that they will not be able to bind each other, then they should consider:
  • Drafting a document that not only makes it clear that they will not have the power to represent each other, but that any person, without express written authority, who either (i) attempts to, or (ii) in fact binds the other will be liable to the person so bound.
  • Participating in an entity in which the owners have limited liability, such as a limited liability company.
  • Participating in an entity, such as a corporation, where the mere fact that a person is an owner does not give that person any aura of authority (perhaps an S corporation to take advantage of the single tier taxation of an S corporation).
  • Granting each other (or either one of them) limited powers of attorney to bolster the idea that they have limited authority to bind each other.
  • Prohibitions on joint venturers: whether certain acts may be done without the consent of all venturers:
  • Significantly change the venture’s operations or operating methods.
  • Acquire the business or assets of another entity or person as a going concern; or sell, lease, exchange, or otherwise dispose of all or a substantial portion of its assets; or consolidate, merge, or amalgamate with any other company, association, partnership, or legal entity; or create or acquire any subsidiary.
  • Enter into any transaction with a venturer other than as specifically agreed to
  • Enter into any transaction outside the normal course of business.
  • Make any material change in accounting practices and procedures.
  • Create any lien, pledge, or other encumbrance outside the ordinary course of business; or give any guaranties or indemnities of the obligation or liabilities of any person or company otherwise than in the normal course of business.
  • Enter into any intellectual property rights to agreements outside the normal course of business.
  • Establish or make a material change (an annualized change in access of 10%) to the overall compensation and benefits structure of any employee or independent contractor.
  • Establish or make a material change (an annualized change in excess of 10%) to any individual’s incentives, shares option, or other bonus plans and make awards thereunder.
  • Establish or make any benefit for any employee or independent contractor.
  • Hire
  • Enter into any employment agreement not terminable at will unless employment contracts in a particular locale cannot be terminable at will, in which case the employment contract shall give the employer as much flexibility as it can reasonably get.
  • Enter into any severance agreement in excess of one month’s pay.
  • Enter into any transaction with any employee or independent consultant outside the terms of that employment or independent contractor relationship.
  • Settle any litigation or threatened litigation, tax claim, or other claim not in the ordinary course of business, involving or against it and involving payment
  • Borrow or guarantee any borrowing, establish bank accounts or bank credit lines, make any change in bank credit lines, or make any change in relationship between the Venture and any commercial or investment bank.
  • Select or terminate an auditor.
  • Enter into negotiations with any labor union or into any binding agreement with any labor union.
  • Make any political contribution.
  • Change the nature or extent of warranties and guaranties covering products and services.
  • Sell or issue any share in the capital of the entity; or consolidate, subdivide, or convert any of the share capital; or alter any of the rights attendant thereto.
  • Lend money, including loans to employees or equity holders, or make any investment or capital contribution in or to any entity.
  • Pay any dividend, or make any other distribution to, or redeem any interest of an equity holder.
  • Approval of any agreements, documents or other arrangement between or involving the joint venture and any shareholder or affiliate thereof, as well as any amendment, consent or waiver with respect to such arrangement;
  • Removal of directors other than by the party which designated the director to be removed;
  • Approval of the appointment of the members of any committee established by the Board of 
Directors;
  • Terms of any employment agreements with officers of the joint venture
  • Approval of, and amendment to, any budgets, assessments, or financial plans;
  • Approval of agreements providing for the payment or receipt in excess of a designated amount;
  • All transactions regarding building and land, including the lease, purchase, sale and mortgage thereof;
  • Individual plans and projects which are capital in nature and for which the anticipated expenditure will exceed a designated amount;
  • Providing loans, guarantees, or other extension of credit other than in the ordinary course of business;
  • Amendment of the joint venture documents;
  • Merger into or with acquisition of all or part of the business of another person or entity;
  • Sale, lease, transfer, or other disposition of the assets of the join tventure having a fair market value, sale price, or book value at time of disposition greater than a designated amount;
  • Liquidation, dissolution, winding up or voluntary bankruptcy of the joint venture;
  • Fixing compensation of officers, including bonuses;
  • Change in the Business Plan
  • Declaration of dividend
  • Appointment, removal or change of any officer
  • Any material change in the business of joint venture,
  • Issuance, purchase or redemption by the joint venture, or any securities and any change, increase or reduction in the capitalization;
  • The borrowing of funds by the joint venture in excess of a designated amount.
  • Non-compete: are the joint venturers prohibited from competing?
    • geographic limits
    • length of time of the prohibition
    • what happens if one venturer withdraws from the venture?
    • can venturers enter new countries independent of the joint venture?
  • Special legal issues:
    • are there anti-trust issues?
    • is a Hart-Scott-Rodigo filing triggered?
    • foreign investment laws?
    • regulatory approval or filing required?
    • what is the governing law applicable to the entity?
  • Representations and warranties:
    • due incorporation, qualification, and authorization to enter into the joint venture
    • exclusive ownership of any assets being contributed
  • Transfer/Exit Strategy:
    • Restrictions on transfer—right of first offer, right of first refusal, tag along rights, drag-along rights
    • Transfer to competitors?
    • What consequences of a change or control of one partner?
    • How to end joint venture if not working out? Buyout by one partner? Dissolution and distribution of assets?
    • Buy/sell options?
    • What to do if tax, regulatory or other non-controllable events make joint venture 
unprofitable, burdensome or undesirable?
    • What is the term of joint venture?
    • What approval is necessary to sell the joint venture? To take it public?
  • Anticipated documents:
    • Joint Venture Agreement (setting forth the overall venture formation agreement among the parties, with accompanying exhibits such as asset contribution, licenses, etc.)
    • Secretary of State charter documents (setting forth the Articles of Incorporation or LLC formation documents)
    • Bylaws (in the event entity is a corporation)
    • Shareholders Agreement (in the event the entity is a corporation)
    • Contribution Agreements (providing for any contribution of assets to the JV with appropriate representations and warranties)
    • Business Plan (setting forth the Business Plan for JV)
    • Reimbursement Agreement (setting forth the services to be performed, personnel provided, use of a partner’s facilities and other matters to be provided to the JV by a partner, and the amount to reimburse or compensate the partner therefor).
    • Preferential Treatment Agreement (setting forth the terms of any preferential treatment and any license to be granted by the JV to a partner)
    • Employment Agreements (providing for the terms of employment of key employees of the JV)
  • Technology License Agreement (setting forth the terms of any technology licensing from a partner)
    • Consider the conditions set by the IRS with respect to tax-exempt social and charitable enterprises engaging in joint ventures, if applicable