Two or more parties establish a joint venture (JV) when they combine their resources to pursue a common goal.
JVs have a vast range of applications in the life sciences sector, from cross-border drug development initiatives between leading pharmaceutical companies to NHS trusts collaborating with specialist healthcare providers. Numerous JVs have been established to tackle the coronavirus pandemic, such as to develop vaccines and therapeutics and to manufacture and distribute medical devices, personal protective equipment and testing materials.
Key areas to consider before establishing a JV include:
- Structure
- Contribution of resources and financing
- Management and control
- Deadlock and termination
Structure
In the UK, JVs are most commonly structured as private limited companies or non-statutory contractual arrangements. Less common structures include limited liability partnerships and partnerships.
Limited companies have the advantage of clear separation of the business activities of the JV company from the JV partners. This separate legal personality enables the JV company to own assets, contract with third parties in its own right, employ staff, open a bank account and raise third party finance. The liability of the JV partners is limited to the amount paid up on their shares in the JV company. The Companies Act provides an established legal framework for the governance and reporting obligations of the JV company. Share ownership provides a clear exit strategy for JV partners and can also be used to incentivise employees of the JV company.
Unincorporated contractual arrangements, on the other hand, provide more flexibility, enable JV partners to retain direct ownership and control of the resources being contributed to the JV and reduce the administrative burden and disclosure requirements.
Operational, tax, regulatory, competition law and accounting considerations frequently influence the choice of JV structure, especially in more complex and cross-border JVs.
The remainder of this article focuses on the private limited company structure.
Contribution of resourcing and financing
Non-cash resources to be contributed by the JV partners may include tangible assets, intangible assets (such as intellectual property), employees (who may be seconded to the JV company), supply and distribution arrangements etc.
If a limited company structure is used, all relevant terms will need to be included in ancillary agreements between the relevant party and the JV company. It is important to consider termination provisions in ancillary agreements in conjunction with those in any shareholders’ agreement between the JV partners and the JV company.
The JV company will often undertake due diligence on the assets being contributed and obtain warranties from the JV partner contributing them. There is also the question of how the contributed assets will be valued and how this will affect the contributing JV partner’s funding obligation.
JV partners typically fund the JV company by subscribing for shares and/or loan capital. They may also provide guarantees of the JV company’s obligations to third parties. The JV company may additionally seek third party debt finance. In any case, the future financing requirements of the JV company will need to be considered.
Management and control
Management and control of a JV company will typically be determined by a combination of the shareholdings of the JV partners, their representation on the board of the JV company and their contractual veto rights.
In a 50/50 JV company, each JV partner has an equal shareholding and enjoys equal representation. In contrast, a shareholder with over 50% of the voting shares will be able to appoint and remove directors and pass ordinary resolutions of the shareholders.
Minority shareholders will seek negative control in the form of contractual veto rights. These usually comprise specified matters which the JV company may not undertake unless all or a specified proportion of the shareholders agree. Such matters may include the:
- Issue of new shares (other than pro-rata)
- Transfer of shares (either at all or within a specified period)
- Alteration of constitutional documents
- Entry by the JV company into material contracts or capital expenditure
- Dealings between the JV company and any JV partner
- Winding up
Further matters affecting the management and control of the JV company include the rights attaching to the shares, the frequency and procedures for shareholder and board meetings, the number of directors, the process for their appointment and removal, and who is to be chairman (and whether they have a casting vote).
Deadlock and termination
JVs can become deadlocked when the board of the JV company cannot agree on a proposed course of action or a minority JV partner exercises its right of veto. The shareholders’ agreement will typically define what constitutes a dispute or deadlock and set out the method of resolution.
This may include escalation of the matter to senior representatives of the JV partners or similar procedures. However, once exhausted, dispute resolution procedures will often result in the termination of the JV. There are a number of different ways this can be achieved.
The aggrieved party may have the right to buy shares from (or sell them to) the other party (though query on what terms) or to require the liquidation of the JV company. “Texas shootout” provisions enable shareholders to make an offer (on a highest sealed bid basis) for the other’s shares. While “Russian roulette” provisions enable shareholders to offer to either sell to or buy out the other shareholder at a given price and the offeree has the right to accept or elect to do the opposite on the same terms.
The JV may also terminate automatically either upon all shares in the JV company being held by one party, upon the JV company’s winding up, after the end of fixed period, upon termination of key ancillary agreements or other key events such as destruction of a material asset.
JV partners may enjoy voluntary termination rights, for example if another JV partner fails to remedy a material breach, becomes insolvent or undergoes a change of control.
The consequences of any such automatic or voluntary termination of the JV will need to be considered, including whether the shareholder terminating the JV has the right to sell its shares to or acquire shares from the defaulting shareholder (and on what terms).
The rights of the shareholders on the dissolution of the JV company also require consideration, including the distribution of assets, outstanding contracts and rights to the JV company’s intellectual property and know-how.
Summary
JV arrangements are commonplace in the life sciences sector as they present an established and efficient framework for two or more parties to combine their resources and individual expertise when working towards a common goal.
James Floyd