One way to increase revenue quickly is to acquire another company. Another way is to go into a joint venture with that company.
Joint ventures are commonly perceived to have less risk than a full-on acquisition or merger – and they can be by two or more parties used to solve particular commercial problems without getting too involved with each other.
- A joint venture is a commercial enterprise between two or more parties to undertake a specific venture where the parties retain their individual identities.
Mergers and acquisitions are permanent. They depend on a shared vision of the future. Joint ventures, on the other hand, are not usually permanent and enable each party to maintain its identity.
Joint ventures are particularly attractive between companies in similar but different fields where each brings its respective assets, relationships and competencies to bear in a symbiotic way. One party may contribute money, the other technology, another marketing or distribution. Joint ventures are extremely valuable in:
- Creating value in companies – particularly prior to capital raisings or business exits.
- Enabling parties to pursue bigger opportunities than they could individually
- Establishing a presence in a new country
- Lowering costs by sharing overheads
- Exploiting one party’s intellectual property
- Increasing revenue or customer base
- Expand product or service distribution through another party’s channels.
A “joint venture” does not have an actual definition in Australia. There is nothing in the Corporations Law specifically regulating joint ventures in the same way that companies are regulated. There isn’t even a legal definition of a joint venture.
There are a number of ways to form a joint venture:
- Unincorporated association
- Incorporated joint venture.
Unincorporated Joint Ventures
Trusts and partnerships are relatively well known and have their own bodies of law. An unincorporated joint venture does not have a separate legal personality as an incorporated joint venture does. Rather, the unincorporated joint venture depends on contracts between the parties. The main contract is the joint venture agreement, but there are a number of others.
The assets of the joint venture are held as tenants-in-common by the joint venturers in proportions set out in the joint venture agreement. These are the participating interests or shares in the joint venture. The joint venturers contribute time and/or money, but they take their returns in direct output of the joint venture rather than a share of profits.
There is a management committee that governs the joint venture and each of the participants has a vote on the committee in proportion to its participating interest. The liability of the joint venturers is usually several and in proportion to their participating interest, rather than joint and several. The parties also are usually required to act in good faith – either generally or in relation to specific matters. The parties agree not to be partners and this is also set out clearly in the joint venture agreement.
Significantly, the joint venture is usually for a specific project set out in the joint venture agreement rather than a series of projects. In relation to fund raising, each partner is usually free to mortgage its share in the joint venture.
Advantages of an Unincorporated Joint Venture
The widespread use of unincorporated joint ventures indicates many enterprises see advantages in them:
- Several liability of the joint venturers to third parties dealing with the joint venture rather than the joint and several liability that arises under a partnership
- The partners can lodge their own tax returns dealing with the joint venture, unlike incorporated joint ventures (companies) and partnerships that have to lodge their own tax returns and have their own tax treatment under the Income Tax Assessment Act 1936 (Cth). The advantage here is that each joint venturer can offset income from the joint venture against losses from other activities, can offset losses from the joint venture against income from other activities and capital expenditure has a similar flexibility.
- The joint venturers can arrange their own financing and mortgage or pledge their participating interest. A partner, on the other hand, can’t give a security over partnership property that lets the financier sell off or take possession of a proportion of the partnership assets. Thus a joint venturer with a strong balance sheet or with a top credit rating can get financing for its share at better rates than an incorporated joint venture company could.
- Each partner can adopt its own tax and accounting treatment of its share
- Each partner can consolidate its joint venture interest into its own accounts.
How an Unincorporated Joint Venture is Different to a Partnership
There is no specific legislation dealing with joint ventures, but there is a lot of legislation dealing with partnerships. There are definitions of “partnership” in the ITAA and the state partnership acts. The main differences are:
- Partnerships are defined as “carrying on a business” which is usually a series of commercial events, whereas many joint ventures are confined to a single project (though a single project is often a “business” as well)
- Partnerships are defined as carrying on a business “in common” whereas unincorporated joint ventures carry on the joint venture in severally, not in common. Yes, there are “common” aspects in relation to the management committee, but everything else is several: the joint venturers take the output of the joint venture separately, sells it separately, has separate tax treatment, cannot bind its other joint venturers and finances its share separately.
- Partnerships are defined as carrying on a business in common “with a view to a profit” whereas joint venturers usually take a share of the product or the output of the joint venture (I am not going into whether the output couldn’t be “profit”).
- Unincorporated joint venture documents usually have a clause saying that the venturers “are not partners or agents” and that they have no power to bind each other. This doesn’t mean that if they are partners that they can deny it by putting this in, but ordinarily it certainly helps. Partners can bind each other.
- Several liability is usually specified, rather than “jointly” or “jointly and severally”
- The venturers are tenants-in-common and their interests are identifiable and they are only liable for their share of costs and expenses. Partners are jointly and severally liable for all debts and losses.
- The venturers appoint a manager of the joint venture, whereas partners usually manage the partnerships themselves.
- The joint venture documents usually expressly say that the joint venturers can compete with each other outside the joint venture – something that partners can’t do.
An unincorporated joint venture helps two or more parties achieve a single goal. The joining together does not have to be permanent, the parties can otherwise retain their independence and they can leverage off each others strengths to achieve a commercial result.