Joint Venture Contract

The joint venture agreement as a key success factor

If German and American companies join forces cooperatively, it can be an “equity joint venture” (= both the German and the American business partner are involved in a legally independent corporation) or a “contractual joint venture” (= no separate company is founded, but the distribution of tasks, profits and risks between the partners is regulated by means of a contract).

In the latter case, the term says it all: a contract is required. However, this is no less the case with equity joint ventures: a clever written agreement tailored to the parties is the road map to joint success.

Individual joint venture agreement for international contracts

Every company is unique. If two companies want to make “common cause”, this does not reduce their uniqueness - on the contrary: two expectations of the collaboration are multiplied by two different economic situations. In this case, a precision requirement should be applied to the agreement that both parties make. Especially in the case of a possible contribution in kind (such as services or industrial property rights / IP): these things need to be described both precisely and individually so that the contract text really fulfills its purpose.

If the companies involved come from different countries, not only economic and legal aspects have to be harmonized, but also cultural and linguistic aspects. The joint venture agreement is also the crystallization point for this. It should be drawn up individually with sensitivity and experience.

Advantages of a “tailor-made” joint venture agreement:

In any case, it is important to clearly define the business partners' expectations of the collaboration when drafting a contract. This not only makes the contract more relevant and precise. The future relationship between the parties also gains in mutual trust and understanding. It is an extremely valuable side effect of the contract drafting process that conflicts can be resolved in advance and avoided in the future.

The underlying contract can be particularly decisive for success, especially in the case of cooperations or joint ventures. A standard contract is not sufficient for this. Rather, a joint set of guidelines is required that comprehensively takes into account the processes, the value creation interfaces, the distribution of risk and the corporate law aspects and fiduciary duties of the parties.

Joint venture contract: disadvantages of standard contracts

Standard and model contracts generally fail to achieve their purpose because they do not do justice to the individual situation of the partner companies. How is a text template supposed to harmonize the needs and objectives of two cooperation partners? If the document does not fit the project, this makes conflicts more likely and the subsequent negotiations more protracted.

No joint venture should therefore save on such an important point as the agreement - an imprecise contract can ultimately be much more expensive. Last but not least, the wasted opportunity to plan important economic aspects when drafting an individual contract makes it clear that a “template agreement” is not the more favorable alternative.

Cooperation with a US partner

Medium-sized companies very often pursue their strategic goals in the USA through long-term cooperation with local partners. The presence and knowledge of the American partner about the US market are regularly a good basis for the success of the joint venture.

When initiating such cooperations, the German partner must disclose its business and trade secrets to the targeted US partner at a very early stage in order to be able to evaluate the potential of a cooperation. It is important to ensure that the German partner's trade secrets are protected during this process and, if necessary, during the cooperation. US law provides sufficient possibilities for this. The basis for this is the Uniform Trade Secrets Act (UTSA), which has been introduced by all 50 US states. In contractual terms, the conclusion of a confidentiality agreement is also urgently required. Unlike under German law, however, it is not possible to agree contractual penalties, as contractual penalties (unlike liquidated damages) are not permitted under US law.

However, in the event of an infringement by the US partner, the UTSA offers the possibility of claiming damages from the US partner. This can even exceed the calculated damages by double (so-called “exemplary damages”).

In the case of an equity joint venture, the German partner can obtain control over a company jointly established as part of a joint venture. This can even go beyond the voting and management rights associated with the shareholder position, provided that he becomes a member of the board of directors. In addition to a US corporation, such a board of directors can also be installed in companies in the legal form of an LLC. In the event that the cooperation with the US partner does not develop as hoped, purchase or tender options can be agreed in the articles of association or in a shareholders' agreement, which ensure that the German partner can either acquire all shares in the established company or decide to disinvest under previously defined conditions.

Joint venture agreement: What happens after conclusion?

The challenges continue once the contract has been signed. Due to the differences in language, culture and legal awareness, good relationship management is just as important as a contract that is advantageous for you. Here too, a practical approach can contribute to success. It goes without saying that a contract cannot fully represent a relationship. A relationship requires a further connection between the parties. The parties should get to know each other well and expectations must be openly exchanged in order to build a successful business relationship. Nevertheless, a contract should always be used as a basis, which should be as balanced as possible, as this promotes the relationship more than a one-sided contract.

It is very common for the contract not to be honored. In principle, this renders the deal null and void and only renegotiation can restore it. It is hardly possible for agreements to always be implemented as planned. It is therefore advisable to include clauses in the contract that set out a procedure for renegotiation. The more frequent the regular contact and communication between the parties, the greater the likelihood that the parties will be able to adjust to new situations together and by mutual agreement.

A regulation that deals with regular contact and exchange can also be included in the contract. If challenges arise, a willingness to compromise may be helpful. In the event of a dispute, termination or court or arbitration proceedings should not always be considered immediately. Extrajudicial efforts (e.g. a mediation process) can often help to put the parties back on the right track. Court proceedings can be expensive and time-consuming for both parties and will usually lead to the dissolution of the business relationship.

Each joint venture is an individual project which, as such, must be adequately covered by the drafting of the contract. A specialist lawyer for international law such as Galaniuk advises his client on the breadth and depth of the joint venture project and adds considerable value to the success of the project. As a common law lawyer and native English speaker, Mr. Galaniuk masters the nuances of contract negotiation and drafting and translates the client's ideas into the design of the joint venture.