A joint venture (JV) does not have a precise legal definition, and various business structures are routinely associated with it, such as:

• A partnership;

• An association of 2 or more participants (who are not partners) for a limited purpose; or

• Any pooling of resources and/or expertise by participants towards carrying out a commercial activity.

The existence of a JV can be established by surrounding facts and circumstances as well as the parties’ intentions. These can be evidenced by transactional documentation (including the joint venture agreement (JVA)), a partnership, or a special purpose corporation, depending on the optimum structure that parties intend to adopt.

The parties need to decide which model suits them best given their specific circumstances and concerns relating to corporate governance, tax optimization and exposure to liability.

I. Joint Ventures

The essence of a JV business model is that it consists of two or more participants who enjoy a common understanding and intend to pool their resources, expertise, and capital to carry out a particular venture in view of an economic benefit. The co-venturers may either be individuals , a legal entity (such as special purpose corporation, partnership, or trust), or a mix of individuals and legal entities.

A JV is often seen as a flexible arrangement to achieve a business objective, but like any transaction, it requires careful planning, structuring and documentation, for various reasons such as:

• Parties may belong to different jurisdictions; and/or
• The transaction may be subject to multiple regulatory and jurisdiction -specific legal requirements; and/or JV parties may be jointly developing or creating products and services which may (in the end) be utilized and marketed by them in different manners, subject to their respective jurisdictional requirements or market demands.

JVs are primarily seen as a provincial subject, with certain federal aspects requiring attention, too, depending on the industry . The JVA needs to be crystal clear on all the commercial, legal, and regulatory aspects and the respective allocation of responsibilities on each JV partner.

The commercial objectives which one can achieve through a JV can be wide- ranging and often include:

• Developing new products or services where demand exists but supply is limited or non-existent;

• Scaling up or diversifying businesses, particularly where parties see synergies in a particular market, product, or service; or

• Enhancing, rebranding, or diversifying the production methods of an offering.

A typical JV may comprise of a one-off project that is bound to be completed within a fixed time frame. The JV partners agree to share the costs and expenses required to initialize, operate and manage the project envisaged under the JV, and subsequently receive revenues on a pre-determined basis for each party individually.

II. Types of Joint Ventures

JVs are primarily structured in three (3) ways:

1. Contractual JV

The ‘neatest’ (at least optically) would be the contractual JV where the parties enter into the JVA through their own independent legal vehicles. These contractual JVs are usually easier to structure and execute and generally do not require detailed project management or operations, as you would expect from a structured special purpose corporation or partnership.  On the flip side, these contractual JVs are not formal legal entities, and as such, may not be the best option for all scenarios, transactions, or jurisdictions.

Contractual JVs are governed by the general contract principles of the relevant province or governing law opted by the parties.

Also, the parties must express that the contractual JV is not meant to be a ‘partnership’ (which is subject to specific partnership laws in Ontario and may not be what the parties intended to be bound to). The parties need to seek specific legal advice on structuring and conducting their affairs in a careful manner so as not to be construed as partners.

2. Partnership

A partnership is usually formed by the JV partners under the laws of the chosen province . The partnership itself and the relationship of the ‘partners’ to the venture are reflected in a partnership agreement. This agreement may also capture the commercial activities that the partners seek to conduct jointly. Alternatively, the parties can concurrently or subsequently enter into a JVA (with both documents cross-referring to each other) to segregate and clearly reflect the commercial, legal and regulatory aspects of the venture.

3. Corporation

The parties can also decide to use a ‘special purpose vehicle’ in the form of a corporation (SPV) that is specifically incorporated to execute the objectives of a JV. These parties will be the incorporators or shareholders of the SPV, and their relationship and management of the JV through the SPV will be typically detailed in a shareholders’ agreement or the constating documents of the SPV (by-laws and articles of association).

III. Joint Venture Agreement

Subject to the contemplated activities, the prescribed form adopted by the parties and the relevant jurisdiction where the project(s) need to be executed, a typical JVA would include (or contemplate) some of the following key aspects:

• Structuring & organization (special purpose vehicle, partnership or a contractual JV);

• Objectives of the JV (reflective of the commercial activities and the project(s));

• Management, operation & control of the JV (arrangement relating to the running and managing the JV through board/executive committees, etc.);

• Contributions from each co-venturer (financial, expertise, resources, equipment and supplies, etc.) and ownership of assets (including intellectual property);

• Responsibilities & activities of JV partners;

• Each co-venturer’s share of the profits/revenue and losses as well as the costs and expenses they will incur in respect of undertaking and completing the JV activities (including, at times, the arrangement between the parties on future income distribution of the JV after the JV is wound up or terminated);

• Term or duration of the JV (flexible enough so parties can timely complete the project(s));

• Financing and guarantees (for smooth running and operations of JV activity and sourcing requirements, including any equity that each JV partner may be required to invest);

• Employees (in case of a partnership or corporate-based JV, individuals need to be appointed and allocated responsibilities for the successful and timely completion of JV);

• Marketing (this is required, for instance, when parties are cross-selling or jointly developing a product or service);

• Restrictions on activities (parties may want to ensure that their partner(s) do not team up with a competitor, or start a competing business during or after the JV);

• Confidentiality, non-disclosure & non-publication;

• Governing law & dispute resolution (generally dovetails the region where JV activities and projects are being executed); and

• Ending the JV and termination (events or triggers of default on the part of either party, force majeure, or expropriation by the government).

​IV. Tax Treatment of Joint Ventures

The general principle is that the JV partners retain their respective ownership interest in property that they contribute towards the JV. Unlike partners in a partnership, JV partners calculate their net income independently.

For more information or specific legal advice, please feel free to reach out to:

Faisal Nasim, Business Lawyer
[email protected]
226-476-4444 x 483
 
This blog is meant to provide the readers with a general overview on the subject and should not be considered as legal advice. It is current as of the date of the publication and is subject to review and updates, in which instance, it may not continue to be accurate or relevant.