Establishment of and Operation in a Joint Venture

A joint venture is established through an agreement of the parties. The agreement should, at a minimum, include provisions regarding the organization and purpose of the joint venture.

A joint venture may be incorporated, for example, as a limited liability company, with the venture parties acting as shareholders. The venture may also be a partnership or a limited liability partnership, with the parties acting as partners. However, a joint venture does not necessarily have to be an independent legal entity if it is established purely on contractual basis.

In case a legal entity is used as a joint venture, it should be noted that in order to incorporate a limited liability company or a partnership/limited liability partnership, the drafting of a Memorandum of Association or Partnership Agreement [Starting a business in Finland], respectively, is required. An important agreement in respect of joint ventures incorporated as limited liability companies is the shareholder agreement [The Shareholders' Agreement], which can be used to set forth the rights and obligations of the parties, as well as, for instance, decision-making procedures, in more detail. Other agreements that may be useful for incorporation or operation of the joint venture include cooperation agreements, such as license agreements [Licence Agreement] and financing agreement [Financing Agreement]. The agreements may include, for example, provisions regarding the parties’ obligations to provide raw materials or components for use by the joint venture, or transfer real estate, buildings or intellectual property rights [Intellectual Property Rights] or financing to the joint venture.

A single agreement may not always be sufficient for establishment of a joint venture. In case of several agreements, it is important to ensure that they are not conflicting.

Formation of the Corporate Relationship and Debt Liability in a Joint Venture

A limited liability company is not incorporated through signatures of the Memorandum of Association or a shareholder agreement. Instead, a limited liability company is incorporated only upon registration, whereas a general partnership and a limited partnership are incorporated upon signature of the the partnership agreement. The statutory corporate relationship of general partnerships and limited partnerships arises, when two or more parties jointly carry out business for a financial (profit-making) purpose. The corporate relationship may, accordingly, arise even if the parties had not intended to incorporate a company. This may, in turn, result in liability for the company’s obligations contrary to the parties’ original intentions.

The partners of a general partnership and the general partners of a limited liability partnership are fully liable for the partnership’s obligations. However, in a limited liability partnership, the liability of silent partners is limited to the value of assets invested in the partnership by each partner respectively. In case the parties wish to avoid liability for the obligations of a joint venture, it is advisable to incorporate the venture as a limited liability company. The liability of shareholders in a limited liability company is limited to the amount of equity capital invested by each respective shareholder, and they do not have personal liability for the company’s obligations.

See further regarding the liability of partners and shareholders in [General Partnership and Limited Partnership], [Partners and the Liability of the Partners] and [Shareholders of a Company].

Decision-making in a Joint Venture

The purpose of a joint venture is to make decisions concerning the venture jointly, rather than based on a majority votes.

As regards operation of the joint venture, it is important to agree upon dispute resolution mechanisms. Traditional dispute resolution methods are not well-suited for joint ventures. The agreement should, therefore, include a provision regarding obligation to renegotiate. In other word, the parties would have an opportunity to renegotiate the terms of the agreement in case of a dispute. The renegotiation obligation should clearly set forth the scope of renegotiation, as well as how and for how long the negotiations are to be conducted.

The agreement may also include an exit clause. This clause may, for instance, set forth the rules applicable to redemption procedures.

The most important precondition for successful decision-making in a joint venture is, naturally, the choice of a good and reliable cooperation partner. Accordingly, particular attention and care should be exercised in the selection of the cooperation partner.