Joint Venture & Strategic Relationships

When businesses wish to develop a common enterprise but continue to operate as separate legal entities, they may enter into a contractual joint venture to establish their rules of engagement.  Joint ventures may benefit from sharing the burden of costs and risks, gaining access to each other’s customer and vendor base, and leveraging the advantages of scale.

A joint venture may be formed by a series of agreements, including a joint operating agreement, co-marketing agreement, brokerage agreement or other contracts that, when put together, define the terms and conditions of the relationship.

Gusto Law has assisted clients on the formation and administration of several joint venture mandates, including:

• A North Dakota-based joint venture formed to market flare gas capture and mobile CNG technologies;
• A logistics company becoming the exclusive Canadian distributor for a US-based frac agent manufacturer;
• Liquid nitrogen producers pooling their operational facilities to reduce costs and increase their geographical reach;
• A joint venture between an international marine cargo transporter and an LNG production and logistics specialist in developing Caribbean natural gas grid-based solutions; and
• The development of client relationship management software and back-end administrative support for the European hotel industry.

Contractual joint ventures provide parties with ample flexibility in establishing the terms of their business.  Generally, they are freed from some of the tax, corporate governance and dissolution considerations that parties would have to contend with if they formed a corporation to run the joint venture’s business.  This does not mean that joint ventures are immune from regulation.

In some instances, contractual joint ventures may qualify as mergers under the Competition Act, which could be subject to the Competition Tribunal’s review. The Competition Tribunal will apply the “principal substantive test” to determine whether a merger “would or would be likely to prevent or lessen competition substantially” in a relevant market.

They will consider several factors in balancing the merger’s pro-competitive efficiencies against any anti-competitive effects: for example, the extent and effectiveness of foreign competition in a cross-border context, the extent and availability of acceptable substitutes for products supplied by the parties in the applicable market, current barriers to entry into the market, whether the transaction would result in the removal of a vigorous and effective competitor, or the extent to which effective competition would remain following the transaction.

If the Tribunal determines that competition in a market has been or will be prevented or lessened substantially as the result of the deemed “merger” created by the joint venture, it may exercise broad discretionary power to undo the joint venture.

However, joint ventures are much more likely to disband as a result of conflicts that arise during the life of the venture.  A failure to understand the counterparty’s objectives, a lack of clarity of the division of responsibilities between the joint venturers, and poor governance and accounting processes, are all common reasons why a joint venture might be dissolved.  As well, there are times when a joint venture fails to contemplate and prepare for changes to market conditions which make the business opportunity no longer economic.

Gusto Law has advised joint ventures at all stages in their life cycles.  Drafting and negotiating effective joint venture agreements requires the willingness to identify potential pinch-points, as well as the business instincts to adapt the agreements to the joint venturers’ business cultures, prescribing more structure in some instances, or more procedural or governance flexibility in others.

Joint venture agreements are typically project-driven arrangements, limited in scope to a single objective or to a specific timeframe. Joint venture partners may apportion and divide up the associated costs, and may share or assign to one party the bulk of the management responsibilities.

The joint venture agreements that accompany these relationships usually define the following:

• The scope of the joint venture, often including budgets, schedules and milestones;
• The contributions (working capital, pre-formation assets and operational assets) of each member;
• The obligations of each member;
• How the joint venture will be managed; and
• How revenues or expenses will be distributed.

Gusto Law has extensive experience in building and tailoring these agreements to each unique joint venture opportunity, providing insight on potential areas of conflict and risk.

Joint operating agreements (or “JOAs”) typically involve a consortium of joint venture partners where one of the partners acts as the operator of the joint venture’s assets, and holds legal title to the assets, in trust for the joint venture.

In the oil and gas exploration context, when the co-owners of oil and gas mineral rights decide to use a joint venture structure, the joint operating agreement will govern the operations, and establish the rules of decision-making, cost-sharing, and divestiture procedures.  The joint venture “tenants-in-common” must adhere to the terms of the JOA for the duration of their co-ownership.

In Canada, most upstream JOAs follow the model agreement forms prepared by the Canadian Association of Petroleum Land Administration (CAPLA). The precedent agreements will consist of the main agreement, referred to as the “Head Agreement,” to which a model form operating procedure is attached. The Head Agreement can modify the operating procedure but usually does not. Internationally, an upstream JOA is usually a stand-alone, model form agreement.

Co-marketing agreements are drafted when two or more businesses work together to promote a product, typically owned by one party to be deployed to the market by its distributor joint venture partners.

By pooling their resources and sharing costs, the businesses can leverage each party’s area of expertise and goodwill, generating more sales opportunities than could be created by the product owner alone.

Like in any relationship, it’s hard to anticipate future problems when the joint venturers are focused on the excitement of a pending collaboration. Marketing joint ventures may fail for a multitude of reasons, including a market that doesn’t buy into the promoted product, a failure to anticipate start-up and marketing costs, or a distributor who does not live up to the product owner’s expectations.

Gusto Law can help draft agreements that properly account for the best business case scenarios while providing easy exit points when it’s best to focus your attention and resources elsewhere.

Gusto Law takes a flexible and transparent approach to fees for the preparation and negotiation of joint venture-related agreements, offering the following arrangements:

• Ad hoc hourly rates: hire as required
• Flat-rate fee: know exactly what the work on a particular project will cost
• A fixed weekly or monthly rate: to cover a certain number of hours

At Gusto Law, you get the reliable legal support of a skilled and experienced corporate-commercial lawyer with the insight to cover all of the bases in your joint venture agreements.

If you would like to discuss your business’s needs, schedule a free 20-minute consultation.

This webpage’s content has been prepared to provide a general overview of legal services offered by Gusto Law, and is not intended to constitute formal legal analysis. It is not a substitute for legal advice and should not be relied on for any particular transaction or circumstance. The information is provided as of the date of its preparation, and the reader is cautioned that changes in the law, or its interpretation, may occur since that time. If you are forming a new business, please seek further individual consultation with Gusto Law.