The power of joint ventures: cooperation for success

Joining the forces of companies can be very lucrative. One of the best-known joint ventures in the Netherlands is the cooperation between Vodafone and Ziggo. This made VodafoneZiggo one of the largest providers of telecom and television in the Netherlands. There are also many international companies starting joint ventures in the Netherlands. Joining forces can lead to many new business opportunities and company growth. However, setting up a joint venture also brings legal and strategic challenges. How do you ensure that the collaboration runs smoothly? What needs to be legally recorded to avoid future conflicts? And what happens if the collaboration goes wrong? In this article, I discuss the main points to consider when setting up a joint venture, from the legal structure to the potential pitfalls.

What is a joint venture?

A joint venture is a partnership between two or more parties. A joint venture can involve a horizontal or a vertical collaboration. A horizontal joint venture involves cooperation between two or more companies operating at the same “layer” of the (distribution) chain of goods or services. On the contrary, a vertical joint venture involves cooperation between two or more companies that are not in the same “layer” of the (distribution) chain of goods and services. There is then cooperation between companies in the so-called “supply chain. Depending on the needs of the parties, a business partner from the same or another layer is sought.

A joint venture can also be temporary in nature. In this case, cooperation takes place during a project, after which the joint venture is stopped and dissolved at the end of the project. This allows the parties to respond to developments in the market and thus move quickly by using each other’s strengths.

Why choose a joint venture?

A joint venture can be a godsend for companies that want to leverage each other’s strengths. For example, if a company is very good at developing products but does not have the knowledge, skill or capital to scale this up, a joint venture can be entered into with a company that does have this knowledge, skill or capital. The latter company can then benefit from the new products being developed by its partner.

Legal setup of a joint venture

When parties wish to set up a joint venture, a new company is often formed, usually in the form of a limited liability company (“bv”). The parties working together then become shareholders of the new bv. The division of control in the bv between the cooperating parties is obviously important. In most cases, this depends on the contribution of the parties. For example, if one party invests a lot of money in the bv, that party may also get more control in the bv. However, this need not always be the case: it is also possible that one party does not invest a lot of money, but mainly contributes knowledge and skills. This can happen, for example, by contributing employees or intellectual property rights. These points can lead to a different division of control than, say, 50/50 in the case of two shareholders. This obviously also applies to the division of profit rights between the parties.

Also, careful consideration will need to be given to who will become the directors of the PLC since they will be responsible for the day-to-day management and representation of the PLC.

Legal concerns in a joint venture

For the agreements on the division of control, the most important document is the shareholders’ agreement. We have previously written an article on the essentials of the shareholders’ agreement. It is important to lay down in it which decisions require the approval of a certain majority of the shareholders. This will prevent a shareholder with, say, 51% of the voting rights from being able to make all decisions without the approval of the other shareholder(s). If there is a 50/50 division of control between two shareholders, much attention will need to be paid to solutions for so-called ‘deadlock situations’. Indeed, it is important to have a mechanism in case a decision cannot be taken because the shareholders have equal voting rights and do not agree with each other.

It is also important to properly define the responsibilities and obligations of the shareholders. This way the shareholders can hold each other accountable for those obligations and, more importantly, demand that those obligations be fulfilled. This could include investment obligations in terms of injecting capital, introducing the joint venture to certain parties, or performance obligations (KPIs). There is a lot of freedom to make agreements between shareholders, and companies like to take advantage of this to ensure a well-coordinated partnership.

Conclusion

A joint venture can be very rewarding for companies that want to spread their wings further. For a successful cooperation, it is very important that the agreements between the shareholders are well established. This prevents parties, who initially want to work together on good terms, from splitting up afterwards with arguments.

Are you planning to set up a joint venture or do you already have one, but is it not going as expected? Please send me an e-mail or fill out the contact form for an informal first meeting. I will gladly help you!