business partnership agreement

Business partnership agreements come in a variety of flavours and forms. The common elements to them resolve around decision-making, commitment to the business, finance and investment, distribution of profits and dissolution.

Legal Consequences of Partnerships

Some refer to business partnership agreements as “strategic partnership agreements” or “joint ventures”, amongst other rubrics. In English law, partnerships are governed by the Partnership Act, and have some fairly serious consequences, such as joint and several liability.

Almost invariably, although businesses refer to business alliances as partnerships, they are not intended to be "partnerships" within the legal meaning. if they did, that would be a disaster. In commercial contracts, they are expressed not to be partnerships, such as joint venture agreements and other documentation produced. That said, whether or not a partnership exists between two business relies on the all of the background facts and not solely on the documents executed by the parties.

Cooperating Businesses for Bigger Business

In many cases, businesses do not wish to become fully fledged business partners at the very outset, but rather operate with an increased level of cooperation and exchange than what would otherwise be encountered in ordinary business relationships. That relationship might be more centred on sharing of knowledge and expertise, with a view to approach companies to supply services as a package, rather than independently of one another. The reasons usually include that the

Structuring a Business Partnership

When companies wish to engage in a higher level of cooperation, they are able to structure their affairs by agreeing to terms of a joint venture which sets out precisely what each of them is required to do.

This approach is attractive because the relationship is relatively inexpensive to establish, however management decision making of the venture relies in large part of the goodwill of the parties. Joint ventures of this sort are not recommended where there is a significant disparity in the bargaining position and resources.

An increased level of cooperation may be created by forming a special company – known as a  special purpose vehicle. In these sorts of joint ventures, each of the participating partners takes a shareholding in the special purpose vehicle, and to the terms of shareholders’ agreements which set out important considerations, including:

1. the voting rights of each of the stakeholders;
2. decision-making powers of the board of the company, and matters which are reserved for agreement between the shareholders  prior to the joint venture vehicle being able to take action;
3. contributions to the joint venture vehicle, such as:
   • levels of financial responsibility for funding;
   • intellectual property licenses to be granted to the business. Each stakeholder might contribute different types and IP rights to enable the joint venture to fulfil its intended purpose;
4. reservation of rights in customer lists, know-how, intellectual property rights;
5. deadlock provisions in the case that the shareholders or board are not able to reach consensus;
6. how shares of profits are to be distributed and where applicable retention of profits by the joint venture so that the business special purpose vehicle is able to perform its intended trading activities;
7. rights at dissolution including how assets and/or liabilities are divided up amongst stakeholders when the joint venture comes to an end.

Closing Comments

The combination of variations available when establishing companies and flexibility of what contracting parties are able to agree, that make joint ventures malleable to the parties requirements to strike an appropriate balance between managing risk and liability, control the investment, constructions of skills, finance and materials, with exit strategies if the partnership does not progress in the way anticipated.