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There are two distinct types of joint ventures under English Law, namely corporate joint ventures and commercial joint ventures. The latter tends to relate to joint ventures that are formed by commercial contracts such as research and collaboration agreements. For the purpose of this article I intend to consider the nature of corporate joint ventures. In the first instance it will be necessary to evaluate what sort of legal entity will be most appropriate for the joint venture. The four most commonly used corporate joint venture legal structures are: (i) a private company limited by shares; (ii) a private company limited by guarantee; (iii) a limited liability partnership (“LLP”); and (iv) a general partnership. To determine which legal structure would be the most appropriate, the following factors should be considered and evaluated: 1. Tax – It is important to ensure that the legal structure is tax efficient and taking tax advice at an early stage is advisable. It is important to evaluate the founder’s personal tax position, and also separately, the tax position of the legal entity. 2. Liability – Another important consideration is the potential liability exposure of the founders. In general where an entity has limited liability then the liability is limited to the assets of the company. Please note however that this may not apply in certain situations including where the founders are guilty of criminal activities. It is also possible to limit or exclude liability exposure by ensuring that relevant provisions are included in the legal entities terms and conditions for the supply or services and/ or goods. A further useful tip is to ensure that the legal entity has taken out appropriate insurance policies to cover the risk. This could include: (i) employer’s liability insurance; (ii) public liability insurance; and (iii) professional indemnity insurance. Therefore it would be appropriate to take insurance advice at an early stage. In addition the founders may also wish to consider directors and officer’s liability insurance. The founders should also ensure that the constitutional documents of the legal entity include an indemnity, indemnifying them against any liability incurred while undertaking their officer’s duties. 3. Public Record – In relation to legal entities that are registered with Companies House, certain information about the legal entity is a matter of public record and can be viewed by anyone who undertakes a relevant search of Companies House records. Therefore, should confidentiality be an important concern, then a legal entity that is not on public record might be more appropriate. 4. Legal Entity Structure – The structure of the legal entity is also a major consideration. Partnerships, whether LLPs or general partnerships, are governed by relevant legislation and also by a partnership deed which is negotiated and signed off by the founders. Limited companies are governed by their own legislation and also the constitutional document of the company which is the Articles of Association. In addition, in relation to a private company limited by shares, the founders/ shareholders can also negotiate and sign off a separate shareholders agreement which regulates the rights and obligations of the shareholders. 5. Industry Practice – Many industries have developed standard industry norms in relation to legal entities operating in the sector. Many years ago many legal and accounting practises were general partnerships due to the importance placed on maintaining confidentiality in relation to the operation of the practice. This has, to a certain extent, changed over the years with many legal and accounting practises becoming either LLPs or private companies limited by shares. This is because liability exposure has become an overriding consideration. 6. Bespoke Considerations – This might include anything that is pertinent to your specific joint venture project and the industry sector that it is operating in. This might include regulatory consideration or funding considerations. Once these basic considerations have been evaluated the next stage will be to negotiate and agree the constitutional documents of the relevant legal structure. The author, Christian Browne is a business solicitor and the Managing Director of Summerfield Browne Solicitors (www.summerfieldbrowne.com). Christian Browne is also a legal advisor with the Institute of Directors in London. Christian Browne can be contacted on (0044) (0) 1858 414284 or by email on cbrowne@summerfieldbrowne.com
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