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Six things to agree in advance in a JV

One of the major strengths of joint ventures is that they allow two or more parties to collaborate, bringing their different experiences and ideas to a pharmacy business. Unfortunately, where two or more parties are working together, disputes can arise.

Having a clear understanding of the blueprint for a joint venture will significantly reduce the likelihood of a future dispute. And the best time to discuss and agree such things is at the outset. With this in mind, here are six things we would suggest agreeing before any pharmacy joint venture starts.

Structure

Joint ventures can be conducted using companies or other corporate vehicles (such as limited liability partnerships (LLPs)), but it is also possible for each party to have a direct contractual relationship with each other. The best option for the structure of a business will often depend on tax considerations and the intended scale of the business activity to be carried out.

Ownership

If the joint venture is to be conducted through a company, the parties should agree how many shares will be owned and the rights attached to each share (voting, dividend or director appointment rights, etc). Generally, founders will resist allowing shares to be freely transferable, as they will not wish to find themselves in business with an unknown third party as a result of a transfer by another shareholder.

Common compromises involve giving the remaining shareholders a right of first refusal before any transfer takes place or permitting individual shareholders to transfer shares to their spouse or children. If one joint venture party decides to leave the business, it is common to compel that party to sell their shares to the other shareholders. Depending on the situation, it may instead be more appropriate for the company to be wound up.

Operation of the business

The roles and responsibilities of each party should be agreed at the outset of the joint venture. For company-based joint ventures, it is common for each party to nominate directors to sit on the board, so the operation of director meetings and things like quorum and notice requirements should be agreed.

The parties will often agree a list of key actions (changing a company’s articles, amending share rights or taking key business decisions, for instance) that can only be taken with their unanimous consent. This will serve to protect the interests of any minority shareholders, but a note of caution – the longer the list, the higher the risk that a deadlock situation can arise.

Finance

The parties should discuss how any initial funding will be provided – whether through loans, share subscriptions or by external finance, such as bank borrowing. We would also suggest discussing the ongoing funding requirements for the joint venture so that each party is aware of any ongoing expectations in this regard.

What to do if things go wrong

If there is a fundamental disagreement about the business, the joint venture can find itself in deadlock. This is particularly relevant to companies with equal shareholders, as each shareholder can block the other, thus preventing the joint venture from operating properly. It is sensible to plan for this situation and agree a solution, however unlikely the prospective joint venture partners think it is. This could involve one party buying the other out or even winding up the joint venture.

Documentation

We recommend that a joint venture agreement (sometimes called a shareholders agreement) is entered into at the outset of any such business venture. A document of this nature will set out the blueprint for the business and will provide certainty to each party. The process of negotiating the agreement will also prompt discussions (and hopefully solutions) on any points of disagreement at an early stage – hopefully providing a more stable foundation on which the business can be built.

The above is a general overview. Independent legal advice should be sought for any specific concerns.

Samuel Milne is corporate associate in the pharmacy transactions team at Charles Russell Speechlys LLP samuel.milne@crsblaw.com




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