Joint Venture

A joint venture is a company founded and managed jointly by two or more partners. The parties contribute capital, know-how, or market access and share opportunities and risks. This allows them to pursue a joint project that none of them wants to handle alone. A purely contractual cooperation without a separate entity should be distinguished from the more common form using a jointly held company, in Germany usually a GmbH.

The heart of the arrangement lies not in the articles but in the partners' agreement, governing contribution obligations, responsibilities, appointment of management, consent requirements, use of profits, non-compete undertakings, use of intellectual property and transfer pricing. The provisions for conflict and for ending the cooperation matter most: since a fifty-fifty holding allows resolutions to be blocked, deadlock resolution procedures are agreed, such as escalation to shareholder level, arbitration, or buy-sell mechanisms in which one partner names a price and the other may choose to buy or sell at it. In competition law it must be noted that establishing a full-function joint venture can constitute a notifiable concentration and that information exchange between competitors must be limited.

Common occasions are market entry abroad, joint research and development projects and capital-intensive infrastructure ventures. Accounting matters in practice, because depending on the accounting framework and its design a joint venture is either proportionally consolidated or equity accounted, and in the second case neither revenue nor EBITDA appears in group accounts. Its contribution must then be captured separately for valuation. Funding also needs settling, since one partner may be able to inject capital while the other cannot, which without prior provisions leads to an unintended shift in ownership.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.