Joint ventures can be an efficient and effective way to access new markets, develop new products or explore new industries. They can be operational in nature, or passive if they are used to hold intellectual property or licences.
Their effectiveness has been confirmed by research from Bain & Company which conducted a global survey of 253 companies that have used joint ventures (JVs) to generate growth or optimise their product mix. More than 80 per cent of those firms reported that the deals had met or exceeded their expectations.
The study also found that the value of the joint ventures in question grew, on average, by 20 per cent per annum – that’s twice the typical rate for M&A deals.
Why then do more companies not use JVs on a regular basis? The answer is the added complexity and potential risk involved in bringing multiple parties together in such a way, particularly across borders when different cultures and legislation can add to the challenge.
A JV can take many different forms, from an informal contractual arrangement between two parties to an entirely new entity formed by multiple partners complete with equity stakes or shareholder agreements. In between, there are hybrid forms, such as the temporary joint venture or UTE popular in Spain, which is used to win large government contracts such as infrastructure build projects.
Having a formalised structure with a new company can be a useful way to record value, hold capital and apportion liability more accurately. It also makes it easier to assign a set of rules and regulations that all partners have to abide by. It may, however, also expose the JV partners to multiple tax legislation, which can be costly and complex to resolve.
An informal, contract-based structure might be better suited to partners who are less familiar with each other and aren’t ready to commit capital, time and people to a formal arrangement. In some cases, it may be more difficult to apportion liabilities under these arrangements, but the contract can be drawn up to include a variety of clauses designed to limit liability, such as defence, indemnification and hold harmless provisions.
Each type has its advantages and disadvantages, depending on the goal of the joint venture and the structuring priorities for each partner. In the following discussion, our experts describe some of these differences in more detail, touching on the reasons why certain vehicles are used in particular jurisdictions and the way in which their use can affect the apportionment of liability in case of a dispute.
We have a special focus on tax, highlighting how the Trump Administration’s new corporation tax code has affected JV structuring in the US and focusing on the importance of transfer pricing legislation and double taxation treaties.
The feature draws on the expertise of IR Global members from ten jurisdictions – including Spain, UK, US, Brazil, Germany, Slovakia, New Zealand, Iceland, Belgium and Cyprus.
