In the clean energy sector, joint ventures have become a key strategy for developers looking to innovate, share risk, and capitalise on the opportunities presented by renewable technologies and projects.
Successful joint ventures require a deep understanding of the legal and operational intricacies that come with them and so, in this series, we will explore:
- the various forms of joint ventures;
- the crucial documents that underpin these arrangements;
- the regulatory challenges associated with joint ventures;
- effective strategies for resolving deadlock situations that arise in joint ventures; and
- the key considerations every organisation should keep in mind when forming a joint venture.
Top ten considerations
No two joint ventures are the same and, as such, the importance of each consideration will vary depending on the type of technology, or project, and the ultimate goals of the parties involved.
In this first installation of our series, we set out the top ten considerations to keep in mind when forming a joint venture:
Purpose
The most fundamental consideration for any joint venture is its purpose.
What are you, as a joint venture party, trying to achieve? It is critical that all parties involved are clear and aligned on the purpose of the joint venture from its inception, as this will track through into many of the other considerations noted below.
The parties and their responsibilities
When considering forming any joint venture, it is important to consider who the parties are, what they're bringing to the relationship, and their respective commercial aims. For example, will one party provide funding and the other expertise, or property?
General business responsibilities should not be overlooked either, such as who will be responsible for regulatory filings or other reporting. The parties should also consider if, due to the size of the parties involved, there are any prerequisites for entering the relationship, such as regulatory consents.
The form of joint venture
There are many different legal forms that joint ventures can take. Will the joint venture by formed as a company, a partnership, an unincorporated association, or be solely a contractual joint venture?
The decision of which form the joint venture will take will, among other things, determine the documents involved and the level of coupling of resources.
Funding
The parties must consider how the joint venture will be funded.
What is the agreed budget and can this be amended? How will initial funding be provided and in what proportions? Will there be any third-party funding and, if so, what security will be given? What happens if the venture requires an overspend from the budget forecast? If one party can't pay when required, will the other party be required to 'step in' and pay? If so, how will the party 'stepping in' be compensated for doing so? For example, the defaulting party could be required to transfer some of its interest to the party 'stepping in’ to pay.
Management
The parties should consider how the day-to-day business of the joint venture will be managed. Will the joint venture parties have proportionate management responsibility/representation? Will there be specific requirements concerning the frequency and/or location of management meetings?
Will there be a chair? How will the chair be appointed? Will they have a casting vote? How will conflicts be dealt with?
Reserved matters
The joint venture agreement will usually contain a list of ‘reserved matters’ which are actions that the joint venture can only take with the prior approval of all joint venture parties or by a qualified percentage of the joint venture parties. The list of reserved matters should be considered carefully and tailored to that specific venture. For example, the reserved matters relevant for a development project may vary considerably from those relevant to a cleantech.
Deadlocks and disputes
It is crucial that all parties give proper consideration from the very outset of their relationship to the mechanisms for dealing with deadlock.
What issues create a deadlock? How will deadlock disputes be resolved? Should all matters be capable of resolution? What are the consequences of an unresolved deadlock?
Transfers
The joint venture parties should consider whether an interest in the joint venture should be capable of being transferred.
Are there any pre-approved transferees? How are interests to be valued? Are any particular transfer mechanisms required? For example, lock-in periods; rights of first offer or refusal; and drag-along or tag-along rights.
Returns
It is common to specify the joint venture policy with regard to the timing, and amount, of any return to the joint venture parties. For example, the joint venture agreement will often provide that no amounts can be paid to joint venture parties until any outstanding loans have first been repaid.
Term
The parties should consider the lifetime of the venture.
Is the joint venture for a fixed term or will it last indefinitely? Linked to the transfer provisions, does one party intend to exit the joint venture at a certain point? What issues or actions would lead to an early termination?
Thinking of entering into a joint venture?
If you are considering entering into a joint venture or require further information on this or another related matter, please do get in touch with our corporate finance team.