Fillable Printable Model Joint Venture Agreement Checklist
Fillable Printable Model Joint Venture Agreement Checklist
Model Joint Venture Agreement Checklist
MODEL JOINT VENTURE AGREEMENT
C H E C K L I S T
INTRODUCTION
• Joint ventures (“JV”) may take a number of forms, but the basis on which they
are formed is always a commercial collaboration in which two or more
unrelated parties pool, exchange, or integrate some of their resources with a
view to mutual gain, while at the same time remaining independent. This
checklist provides a basis on which to consider the issues surrounding the
formation of the JV and the ongoing legal rights and obligations between the
parties.
• Much of this checklist relates to a limited liability company form of JV but
many of the issues raised will be equally relevant to the corporate form. In
addition, there are tax and regulatory issues that will impact the structure and
operation of the JV and they are not addressed in any great detail here.
• As this is a generic checklist it does not take into account any specific national
or state requirements. To the extent that the JV is international, local law may
mandate additional considerations, as will industry specific issues particularly
in the context of regulatory concerns.
• Note also: this checklist generally contemplates a two-party JV. Multi-party
JV’s are more complex, particularly with regard to corporate governance
supermajority requirements, dilution and exit rights.
PLANNING
1. Scope/Purpose of the Joint Venture (“JV”)
• Identify scope/purpose of the JV—consider implications of such scope in
connection with:
- what activities does the JV expressly intend to do or refrain from doing
- corporate opportunity issues (i.e., what are the existing and potential
future conflicts with each party’s non-JV businesses)
- this will lead to a conclusion on the scope of the non-compete
covenants and the confidentiality obligations of each party
- is there any core technology or other intellectual property (“IP”) either
to be transferred to the JV or to be granted by the parties to the JV
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- are there other intercorporate arrangements that either will be required
for the JV to operate or that are required to make the investment in the
JV meet the business case
- what due diligence must be completed before the JV is actually
effective—in this case the level of due diligence is generally no less
than that required for an acquisition, and in many cases may need to be
more thorough to ensure a comfort level with, for example, the
corporate culture of the co-venturer
2. Form of Joint Venture
• identify form of the JV:
- jointly owned corporation or group of corporations
- partnership—either general or limited
- LLC
- contractual (non-equity)—the contractual or non-equity JV can either
be a co-ownership model or simply a contract between the parties
whereby they retain all their own assets and agree as to their separate
rights and obligations. Most “partnering” arrangements, strategic
alliances and outsourcing services arrangements fall into this category.
It is this category that also gives rise to structuring concerns to ensure
that even though the parties wish the JV to be structured as a
contractual JV, the actions of the parties do not result in it being, in
fact, a partnership.
• issues affecting which form will be used include tax, limited liability,
regulatory, banking, labor and employment, benefits, IP ownership, third party
consents and exit strategies, among others
3. Regulatory
• identify current and any anticipated changes to regulatory issues (including
industry specific regulatory issues and general foreign ownership, antitrust,
export control issues, etc.) on:
- ownership and control of the JV, its assets or the operation of its
proposed business
- dilution, exit and liquidation rights
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4. Implications of JV on Existing Operations and Reporting Requirements
• review accounting treatment of investment in JV—will the investment be
consolidated, and the implications of the accounting treatment on financial
statements. Consider impact that particular control mechanisms proposed for
JV may have on desired accounting treatment
• review existing contractual obligations to ascertain what third party (bank and
other) approvals will be required for the implementation and ongoing
operation of the JV, including debt covenants and other non-compete or
confidentiality obligations
• consider whether any restructuring of existing operations is required before
entering into JV
5. Tax Considerations
• begin consideration of tax consequences of the proposed structures:
- for example, is flow-through or consolidation required?
• this exercise should be started as soon as possible with the other party to
ensure both parties’ tax objectives are met
6. Internal Preparation
• identify all other subsidiaries in corporate group as well as internal divisions
and departments that may have a material interest in any particular aspect of
the JV transaction and put in place process to ensure appropriate flow of
necessary information and ability to obtain required input in a timely fashion
for negotiation and implementation of JV
• it is always preferable to agree on the business plan at the outset of the JV.
Work should begin early on the appropriate financial modelling so that the
parameters of the business plan are thought through before negotiations
commence
7. Confidentiality Agreement
• consider whether confidentiality agreement needs to be signed and if so what
else it will cover; non-solicitation? Will it remain stand-alone or be
superseded by the binding letter of intent or the JV agreement?
8. Letter of Intent/Term Sheet
• binding or non-binding
• if binding
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- ensure all key provisions covered; may be difficult to introduce new
business points after signing
- can be binding unless and until replaced by a definitive agreement
agreed to by the parties within a specified time; no material changes
without further Board approval. Same concern as above. See also
conditions precedent below.
- consider use of arbitration if parties cannot agree on definitive
agreement or if there is a dispute as to interpretation of letter of intent.
Risks: Matter in dispute may not be proper subject of arbitration and
risk of uncertainty of outcome
- consider whether to include covenant to negotiate in good faith
definitive agreement. Risks: No clear guidance as to what that
means—may already be some duty in the context of a binding letter of
intent to negotiate in good faith. Also, some risk attached because
should negotiations fail one party may assert lack of good faith
negotiations in order to revoke the binding letter of intent
- ensure all appropriate approvals received before signing. This will
include all approvals necessary to enter into a definitive agreement as
this agreement will be binding regardless of whether or not a definitive
agreement is entered into and would include such matters as board and
stockholder approval, regulatory approval, third party contractual
consents, etc. If approvals not obtained in advance, letter of intent
could provide that it becomes effective once the necessary conditions
precedent have been met.
- will it contain a no-shop provision? Consider whether to leave
confidentiality agreement in place or replace it with confidentiality
obligations in letter of intent. If latter will need to ensure that letter of
intent is in fact binding and that confidentiality covenants survive
termination of the letter of intent.
- will require disclosure in context of public company
• if not binding
- can structure so that it becomes binding upon Board approval within a
specified time and/or subject to signing a definitive agreement
acceptable to both parties. In the context of the former approach note
all the requirements set out in the preceding paragraph as regards
approvals, etc.
- will need to draft very carefully to ensure non-binding letter of intent
or term sheet cannot subsequently be found to be binding. See ABA
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Model Stock Purchase Agreement or Model Asset Purchase Agreement
discussion on letters of intent.
- be aware of disclosure obligations in context of public company
- if no separate confidentiality agreement, ensure that while most of
letter of intent is non-binding, confidentiality and non-solicitation
covenants are intended to be binding.
9. Parties
• consider which parties should be parties to the JV—if holding companies are
to be used should parent entities be parties or simply guarantors – how far up
the corporate chain is it necessary to go—not only to ensure performance of
the obligations of the JV parties but to enforce non-competition covenants,
etc.
• consider whether the JV entity should be a party. If JV is a party, it may be
able to enforce obligations of co-venturers in a bankruptcy situation where
there is a receiver or trustee in bankruptcy. On the other hand, if it is not a
party, it will be difficult to get specific enforcement of obligations. It may
only result in the possibility of a damage claim.
SPECIFIC TERMS
Governance
10. JV’s governance structure will depend largely on the actual structure chosen.
However whether it is a board of directors or, in the partnership context, either a
managing board or simply representatives of the partners, there will need to be a
management vehicle to direct the JV. In the context of the management vehicle, it
will be necessary to consider:
• the extent of the authority given to the management vehicle compared to
reserving significant decisions to the joint venturers (shareholders, members
or partners). Fiduciary duties at different levels will factor into this decision.
• the choice of appointees to the board or management committee and, where
there are not already prescribed levels of accountability, setting out their
accountability to the joint venturers
• the authority to retain and remove senior officers, including the chief
executive officer
• the scope of protection for each joint venturer on fundamental decisions and
changes—particularly where one of the co-venturers has a minority ownership
interest
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• the substantive standards and processes for dealing with non-arm’s length
transactions and other conflict of interest situations involving the JV and one
of the co-venturers against the backdrop of applicable statutory requirements
• the process for developing, approving and updating the business plan and
budget
11. Management Board (Management Committee or Board of Directors)
• proportionate board representation or formula. Consider whether
representation should cease once ownership interest falls below certain level
• if a 50-50 board is established, will have to deal with deadlock possibility.
Giving chair a casting vote in 50-50 situation effectively results in unequal
representation on board
• any particular qualifications for members of management board (i.e., do
parties want management board members to have certain skill sets or
experience?) or any particular prohibitions on who can act
• removal and replacement of members of management board
• when and how often management board will meet
• notice requirements
• quorum for valid meeting
• can management board members be represented by alternates (generally not
permissible in a corporate JV)
• who can call meetings
• under what circumstances can management board act without an in-person
meeting; i.e., telephonic meetings or actions by signed consent
• determine what powers and duties the management board will have—JV
agreement may specify that certain matters require approval of majority of
management board and other matters require unanimity
• determine what decisions are not to be made by the management board but
must be referred to the co-venturers
12. Meetings of Co-venturers
• when and how often co-venturers will meet
• notice requirements
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• quorum for valid meeting
• who can call meetings
• under what circumstances can co-venturers act without an in-person meeting;
i.e., telephonic meetings or actions by signed consent (Reality is co-venturers
can always act by instrument signed by all of them)
• determine which decisions of co-venturers require approval of majority and
which require unanimity (really only relevant where there are more than two
co-venturers)
• whether chair has casting vote in case of tie
13. Management
• Officers may include President, CEO or general manager or other person
responsible for the day-to-day operations of the JV’s business as well as a
Chair
• CFO
• consider whether one or majority of co-venturers have right to nominate
which officers or whether the management board has that right. Certain
venturers could have right to nominate certain officers. Right to nominate
could rotate (often found with Chair)
• right to remove and replace officers
• limits on authority of officers, signing authority, etc.
14. Managers/Directors’ and Officers’ Liability Insurance
• verify existing coverage
• is JV coverage to be under each individual co-venturers plan or will JV have
its own coverage
15. Auditors
• who the will auditors be—auditors of one of co-venturers or independent?
How can firm be changed.
16. Reporting and Access to Information
• frequency of financial statements
• nature and frequency of other reporting requirements
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• permitted access for co-venturers to books, records and employees—notice,
during business hours, etc.
• consider whether right should be removed if co-venturer’s interest falls below
a certain threshold
17. Actions Requiring Consent – Either Management Board or Co-venturers
Consider which of the following actions should require management board or co-
venturer approval. List will vary depending on level of autonomy proposed to be
given to JV and level of decision-making already residing at co-venturer level:
• approval of annual business plan and budget or any change to any approved
annual business plan or budget
• transactions outside the ordinary course of business [over a specified $ annual
threshold]
• change of name
• change in scope of the business
• investments outside the scope of the business in excess of a specified $
threshold unless contemplated in annual business plan and budget
• creation of subsidiaries
• admission of new co-venturers (in the case of a corporate JV by issuance of
stock)
• any transfer of ownership interests (unless contemplated in the JV agreement)
• issue, sale or transfer of shares or rights to shares of subsidiaries of JV
company
• incurring debt, granting security or guarantees unless contemplated in annual
business plan and budget
• payment of dividends (in case of corporate JV) or other distribution or return
of capital except as contemplated in JV Agreement or annual business plan
and budget
• change in management board, establishment or change in committees or
appointment or removal of officers except to the extent contemplated in JV
agreement
• insolvency-related actions
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• certain types of contracts—for example those with competitors, that are not
terminable on x days notice without payment, contracts that contain change of
control clauses, etc.
• capital expenditures not contemplated in annual business plan and budget (or
language relating to business plan may capture this prohibition)
• acquisitions, investments in third parties, strategic alliances or partnerships—
either outright prohibition or subject to financial thresholds. In any event
ordinary course acquisitions of assets would normally be excluded from
prohibition if contemplated in business plan and budget.
• disposals of assets in excess of a specified limit or unless contemplated in
business plan and budget
• consider whether any approvals required in connection with litigation or other
proceedings
• creation of subsidiaries
• change in charter or organizing documents
• in the context of corporate JVs, will also need to consider such matters as
corporate reorganizations, amalgamations, mergers, issue of shares and rights
to shares in general or to third parties, including public offerings
• if not in ordinary course of business, commencing or making any significant
decision relating to litigation, administrative or investigative proceeding
• Note: may wish to consider removing certain of minority venturer’s veto
rights if ownership drops below a certain threshold or if co-venturer is in
material default (define material default and consider whether such loss of
rights should only be during the default or whether certain cure period should
be given)
18. Business Plans and Budgets
• consider what happens if approval not obtained for business plan
• consider multi-year rolling plan and annual budget process
• set out process regarding preparation of business plan and budget—who
prepares and what time frame and to what extent do others participate in the
process
• consider what happens if approvals for business plan and budget not
forthcoming. Does prior plan continue—can some third party mediate or
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arbitrate—does it go up the chain in each co-venturers organization before
something happens.
• this is often the most difficult area as co-venturers may have different views
during the life of the venture as to what the business should look like and to
what extent they are prepared (and able) to invest more funds or leave funds in
the JV
19. Disputes
• mediation
• litigation or arbitration
• define mandate of arbitrators, i.e., is it any dispute between the party or only
specified types of disputes or under specified clauses. Certain types of
disputes may not be arbitrable. Ensure arbitrator has right to order specific
performance and/or consider preserving right to go to court for certain types
of breaches – e.g., breach of confidentiality, non-solicit or non-compete
• set out rules or cross reference to specific set of rules (e.g., AAA)
• consider whether there should be prohibition on arbitrator amending the JV
agreement or granting punitive damages
• location
• applicable law
• arbitrators—number and how chosen
• costs—who pays what: consider providing that loser pays in claim involving
breach of JV agreement. In the case where there is not a dispute but a
determination of a particular value or payment is being made, may need
different approach
• consider whether to set parameters around how arbitrators are to act
Business of the Joint Venture
20. Scope of the Business
• the definition of the scope of the business is often critical in terms of the
ongoing operations of the co-venturers—particularly as the JV develops. It is
difficult to know at the outset of a venture to predict what businesses the co-
venturers will be in five years later
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21. Distributions
• a fundamental decision will have to be made as to what extent it is proposed
that profits be reinvested to grow the JV or to be distributed out to the co-
venturers. Often it is provided in any event that there will be a period where
no distributions will be made. It is useful to agree on a formula as regards
distributions, subject always to change by the co- venturers
22. Financing
• agree philosophy as regards financing—is the intent to use mainly third party
debt to the extent available?
23. Third Party Debt Financing
• generally the co-venturers will prefer that any third party JV financing be
through non-recourse third party borrowing but in start-up situation this is
almost never possible.
• if guarantees are to be given, the agreement may provide that to the extent
possible they will be subject to an agreed limit and will be given severally
pro-rata to the percen tage interest in the JV. May need to be security granted.
24. Financing Provided by the Co-Venturers
• pro rata to interest in JV. Consider what happens if third party borrowing not
possible—does it always go to co-venturers? Is it optional or a required capital
call? What if one co-venturer does not have the necessary funds?
• agreement should specify maximum amount either in actual dollar terms or
based on some formula. This ties back into business plan and budget
• agreement should also specify who can initiate capital call and who
determines what type of capital call it will be; debt or, if applicable, equity
• consider fixing in advance all relevant terms of debt, including repayment
terms, ranking of obligation to repay, etc.
• what happens if default in providing moneys once call has been made?
• on a default by one co-venturer, can the non-defaulting party withdraw
commitment? Or take up defaulting party’s obligation on terms either more
favorable as to, for example, interest rate, or causing dilution of defaulting co-
venturer’s interest. At what point does failure to provide financing lead to exit
rights, liquidation rights or rights to bring in third party investors?
• these provisions will always be hotly negotiated—especially if one of the co-
venturers is not as well established or creditworthy as the other
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