What is a joint venture?

Some businesses think joint ventures are an official cooperation, others see them as a marriage. Either way, joint ventures are designed to boost business growth in areas such as IP, market share, and the bottom line. Find out why joint ventures are considered commercialisation courtships.

A joint venture is a legal term that describes the relationship between two or more parties entering into an agreement to work towards the same strategic goals while remaining separate entities. Joint ventures occur across most industries where companies may combine forces for a specific project but may even be competitors for others.
An example of how a joint venture works is media joint venture Yahoo7, combining the search engine Yahoo! with Channel 7 in Australia. The ‘Yahoo7’ joint venture is an Australian online strategy only: Yahoo! remains a standalone search engine outside Australia, and Channel 7 still broadcasts in a different medium (television) with no Yahoo! influence. The alliance works on the principle that the strength of their brands combined online garner a higher market share than two separate, smaller brands.
So is a joint venture a partnership? In spirit, yes, but technically, no. A partnership is more integrated, working across all business activities over a long term. A joint venture differs in that it relates to a specific project or business goal, usually with a defined end, that may only relate to part of the business.
For a lot of SMEs, however, joint ventures often relate to the whole enterprise, and could be the only viable option to grow their business without sacrificing what they’ve already built. Commercialisation is thus an important part of the joint venture process, so businesses must be able to identify the value they bring to a relationship—whether that’s IP, market share, or money.

Legal Advice

Commercialisation of an idea is the process you undertake to get your innovation—whether it is in the form of products or services—to the marketplace. Before you seek investment partners, you need to make sure your intellectual property (IP) is protected via either registered rights, such as patents, trademarks and designs, or unregistered rights, like copyright and confidentiality agreements.
Seeking legal advice early is crucial to the future success of any joint venture that may result from your commercialised idea. Your protected IP is what will attract potential partners, the ‘dowry’ that you bring to the joint venture marriage.

Finding the Right Investor

Expanding your business or market via a joint venture is an arrangement that involves an investor, usually a venture capitalist, given a share of the business in return for investment capital, rather than receiving payment. There are a number of issues—financial, strategic and emotional—that must be considered before a business enters a joint venture arrangement, and covered in the shareholders agreement, a document outlining the rights and responsibilities of each party.
The investor usually requires an exit mechanism (usually 3–5 years) that capitalises on the initial investment, preferred rights to shares making them a priority creditor should the venture fail, and some control over the company’s activities, including a position on the board of directors, power to appoint a CEO or other key employees, and influence in major business decisions.
Other types of joint ventures may involve one or more other businesses complementary to yours to gain mutual benefit. It could be that your product forms a vital component of another, so it makes sense to share the risks and returns in a joint venture partnership with the other company.
Joint ventures needn’t be 50-50, but the proportion must be defined as each party provides equity, undertakes risk and receives return in relation to their contribution.

Joint Ventures and IP

It is vital to get ownership of IP sorted early in the relationship to avoid problems later down the track. Keep in mind that IP rights created by participants prior to or during the project must be automatically transferred to the entity holding the IP soon after creation. Without formal assignment to the holding company, developers of the IP rights will personally retain certain rights rather than the IP ownership in the holding company.
Restraint provisions are an important consideration should an individual participant depart the joint venture. Provisions defined within the scope of the venture ensure that on departure, each shareholder and/or director agrees to a period during which they will not compete with the business and will maintain secrecy of information obtained during the project.
If the exit mechanism that the venture capitalist anticipates is the company’s public listing, then the investor will usually require assignment, instead of licensing, of the IP to strengthen the company’s assets. Regardless of whether the IP is licensed or assigned to the start-up company, the IP owners still have the issue of what they should receive financially in return for that licence or assignment.
Often, the investor will expect the owners to licence or assign the IP in return for shares in the start-up company, hence the owner postpones all benefits or financial rewards relating to their IP until the start-up company is successful. When the company is successful, these rewards will come in the form of dividends and appreciation in share value. However, if the start-up company is not successful, the owners will receive very little or nothing.
A start-up company mechanism therefore entails the IP owner taking some trade-offs. There is often no immediate financial gain in relation to their IP, and all returns are postponed. They often give up control of managing their IP, since the venture capitalist either controls the board of directors or requires that its consent be obtained before specific management decisions are put into effect.
Despite these disadvantages, start-up companies are becoming increasingly popular because the model provides a mechanism to enable a large capital injection to develop and commercialise IP when traditional sources of equity or debt capital are unavailable for commercialisation purposes. Essential features of this start-up commercialisation mechanism are the investor’s exit strategy and participation in decision making as distinct from a passive equity investor who is in for the long haul with little participation in decision making.

Overseas Partners

Joint ventures can be a great way of expanding your business internationally, however before adopting an approach in the international market similar to that of the Australian market, ask yourself a series of questions:
* Would I generate the best returns by establishing my product in Australia first, or should I approach the Australian and world markets at the same time?
* Should I manufacture my product in Australia and distribute it to other countries, or outsource production in another country?
* Do I have the manufacturing and distribution capabilities to supply to countries outside Australia?
* Do I have the marketing and promotion networks to successfully commercialise in other countries?
* Do I have the resources, including human and capital resources, to successfully commercialise outside Australia?
* Will I need financial support and do I have the track record and security to generate that finance?

One of the great benefits of IP rights is that there are many approaches to commercialising your product internationally. It is quite common to retain some activities for yourself and to partner with external providers in relation to others.
An example of an overseas joint venture arrangement could be each participant taking shares in respective companies and nominating directors to the boards of those companies but contributing their particular elements of a successful marketing initiative.
In this scenario, Company A has various patents and designs used in Australia in the plumbing area using their own brand. The brand is not well known outside Queensland and only in particular market sectors. Company B has an international brand and a well-known distribution channel throughout Australia and Asia, with a far better known brand in these market sectors. Allowing Company A’s product to be sold under Company B’s brand and using their distribution channels achieves an all round result. In this example, two complementary commercial resources combine for a common commercial objective—more sales using the respective elements of IP from both businesses, which might otherwise be competitors. The joint venture agreement would contain provisions for use of each company’s brands in the achievement of these sales.
Joint ventures can be a successful way of getting your new idea to market or grow your business when you might not have otherwise been able to, due to lack of funds. There are many financial, emotional and legal issues that need to be worked through before entering into a business ‘marriage’ so seek the advice of your solicitor and/or accountant before you make a commitment.

—Philip Noonan is director general of IP Australia and a Dynamic Export panel expert

Joint Venture Key Concepts

* Commercialisation is the process of getting your IP to market.
* You should have your IP formally protected where possible or have other protection strategies (such as confidentiality agreements etc) in place before you enter into discussions with potential partners.
* You can commercialise on your own, through a partnership such as a joint venture, or a combination of these arrangements.
* There are different issues to consider when commercialising in Australia as opposed to internationally.
* Make sure, regardless of how you commercialise your IP, that you maintain confidentiality arrangements with all parties.
* Assignment involves transferring or selling the IP—the owner retains no rights to the IP.

Useful Websites

Australian Tax Office: www.ato.gov.au
Make sure you’re across all your tax obligations when forming a joint venture.
AVCAL: www.avcal.com.au
The Australian Private Equity and Venture Capital Association provides information on how to obtain venture capital.
Business Angels: www.businessangels.com.au
Assists with joint venture matchmaking.
IP Australia: www.ipaustralia.gov.au
For administration of all types of IP rights including patents, trademarks, designs and plant breeder’s rights.
IP Toolbox: www.iptoolbox.gov.au
Run by IP Australia, this toolbox provides more business-oriented information on commercialisation and joint venture partnerships.

Joint Law Ventures

In 2007, Allens Arthur Robinson became the first Australian law firm to enter a joint law venture (JLV) in Singapore since the start of the Singapore–Australia Free Trade Agreement. Although the firm had practised foreign law there since 1981, they considered the conditions, which included holding a minimum number of partners each with a minimum level of experience, a bit risky.
“The Asian economic crisis had left us concerned that while we might qualify, we did not want to be locked in to long term minimum numbers of partners. For that reason we declined to apply,” explains Jim Dunstan, executive partner–Asia at AAR.
However, the FTA provided favourable conditions to formalise their alliance with TSMP Law Corporation. Dunstan says the change was distinct—their initial licence application took many months but the JLV licence took just hours following the FTA.
“We would not have applied for the licence had the FTA not achieved the changes which made an application possible. Singapore officials had a clear understanding that the FTA intended to encourage Australian law firms to enter the Singapore market in this manner,” he remarks.
Dunstan says the similar aims of the two firms made the JLV the best option and, in terms of structure, the only option.
“We wanted to be able to work together efficiently under the one letterhead, and to market together,” he says. “We wanted to take on the larger JLVs in certain work types such as funds management and needed to be able to operate as one unit.”
The result saw AAR increase local business with inward investment and funds management work, while TSMP have leveraged off AAR’s regional network to expand their client base.
—Adeline Teoh

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