Joint ventures in the UK: overview
A Q&A guide to joint ventures law in the United Kingdom.
The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.
This Q&A is part of the Joint Ventures Law Global Guide.
Domestic company joint ventures (JVs)
The concept of a joint venture (JV) is a term without any precise meaning under English law. Instead, the term is predominantly used as an umbrella description for a number of arrangements where two or more parties collaborate in carrying on a business activity.
Since there is no English law relating specifically to JVs, the relationships between the parties involved is generally subject to, depending on the chosen structure of JV, an amalgamation of:
Common law rules.
Substantive provisions of company or partnership law.
Competition law (both at European and national levels).
Other laws governing various issues including intellectual property, employment and real estate.
There are a number of forms that a JV can take in the UK, the most common being the limited company and, since 2000, the limited liability partnership (LLP). However, despite the popularity of these corporate vehicles, a JV can take several other forms including, but not limited to:
A general partnership.
A limited partnership.
In its most simple incarnation, a contractual agreement.
Both the limited company and LLP are treated under English law as "bodies corporate", in that the corporate veil gives them separate legal personality. This is in contrast to many of the other forms of JV, including the partnership, limited partnership and contractual agreement, which (with the exception of the Scottish partnership and Scottish limited partnership, which are beyond the scope of this chapter) are not separate legal entities.
This chapter focuses on the rules applicable to corporate (in the form of a limited company or LLP) and contractual JVs, although reference will be made to other relevant forms, where appropriate.
While none of the forms of JV are expressly regulated within the UK, they nonetheless remain subject to the statutory frameworks relevant to the particular form which the JV takes. For example, a JV established as:
A limited company must comply with the provisions of the Companies Act 2006 (CA 2006).
A partnership must comply with the Partnership Act 1890 (PA 1890).
An LLP must meet the requirements set out in the Limited Liability Partnerships Act 2000 (LLPA 2000).
JV partners should also consider the possible impact of the European Directive on Alternative Investment Fund Managers (AIFMD), which regulates managers of alternative investment funds. While a JV is not expressly excluded from the scope of the AIFMD, there is a recital to the AIFMD that states that it is not intended to apply to JVs. In the UK, a JV will typically fall outside the scope of the AIFMD where each of the JV partners have day-to-day control or are investing their own capital, rather than raising capital from external investors. The impact of the AIFMD ultimately depends on the facts of each case.
A contractual JV can also become subject to the European competition law framework if it is of a sufficient size that its activities may have an appreciable direct or indirect effect on trade between member states of the European Union. Likewise, in certain circumstances a JV can fall under UK competition law such as the Competition Act 1998, which prohibits the abuse of a dominant position and certain anti-competitive agreements. Contractual JVs may be subject to other regimes, such as the Commercial Agents Regulations. JVs in the public sector may be affected by European procurement rules.
Certain corporate JVs may require pre-completion approval under the EU Merger Regulation, or under the UK merger control regime set out in the Enterprise Act 2002.
The distinction between a corporate JV and a contractual JV may not always be entirely clear. A jointly-owned "corporate" JV entity may be treated as a contractual JV where that entity does not have the capacity to act autonomously of its parents (that is, the arrangement comprises cooperation between the parents rather than a hiving-down of activity akin to a merger). Specialist advice should be taken if there is any uncertainty in this respect.
Finally, depending on the activities carried on by the JV entity or participants, various other regulatory regimes may become relevant to its business. Examples of industry regulatory frameworks include the:
Consumer credit regimes.
For example, if the JV is established with the intention of providing investment advice to third parties, which is an activity restricted under the provisions of the Financial Services and Markets Act 2000 (FSMA) and associated legislation, the venture entity or the advising participant would require authorisation under the FSMA. Likewise, if the purpose of the JV is to provide nursing care or the treatment of disease, disorder or injury (both of which are activities regulated by the UK healthcare regime), the venture or its participants need to be authorised by the Care Quality Commission.
JVs can take a number of different forms, whether contractual, corporate or otherwise (see Question 1).
Examples of contractual JVs include the:
An agency agreement is essentially where an established manufacturer that wishes to exploit a new market appoints an agent that has contacts in that particular market to sell the manufacturer's products on its behalf. A distribution agreement is similar in form, although rather than the distributor merely acting as agent of the manufacturer, instead the distributor buys the product from the manufacturer at a price governed by the terms of the agreement. The distributor is then free (subject to market constraints and the terms of the distribution agreement) to sell the product to the market at its own price and retain the profits itself. The distribution agreement therefore transfers more of the risk (and potential reward) to the distributor than enjoyed by the agent under an agency agreement. Further examples of the contractual JV include:
A strategic alliance.
An intellectual property licence.
Corporate JVs are by far the most common form of JV in the UK, and may include both the limited company and the LLP. While limited liability companies have long been used as the predominant form of JV, the LLP was introduced as recently as 2000 and was originally intended to be confined to professional firms only. However, the available scope of use of the LLP was eventually broadened to performing any business. It has become a popular form of JV due to the combination it provides of:
Limited liability for all members, whether they participate in management or not.
The fiscal transparency of a partnership.
Other forms that a JV can take include the:
Partnership, the use of which has declined since the introduction of the LLP in 2000.
Limited partnership, although this form is more commonly used as an investment vehicle due to the statutory restriction on limited partners becoming involved in the management of the business.
JVs established as limited companies are subject to the UK's principal company legislation, being the Companies Act 2006 (CA 2006). Similarly, JVs taking the form of an LLP fall under the framework of the Limited Liability Partnerships Act 2000 (LLPA 2000). There is, however, no statute in the UK that has the sole purpose of governing the establishment and operation of JVs.
Formation and registration
A corporate JV must either be incorporated as a company or an LLP. The documents required to incorporate a limited company are set out in section 9 of the Companies Act 2006 (CA 2006), and include the memorandum of association and articles of association, commonly referred to as the "constitutional documents" of the company. The general rule under section 1103 of the CA 2006 is that the constitutional documents of a company must be drawn up and delivered in English. An exception to this rule is set out at section 1104 of the CA 2006, where the company is a Welsh company. The same rules also apply to the founding document of an LLP, being the LLP agreement.
With a contractual JV that is governed by English law, there is no restriction on the use of a foreign language in the contractual agreement between the parties to the JV.
There is no requirement to consult public officers or to follow a formal procedure in order to establish a contractual JV. The formation of such a JV relationship merely requires the parties to agree and enter into a contractual document governing their respective rights and obligations in the venture. Likewise, the establishment of a JV in the form of a partnership merely requires the parties to enter into a continuing business relationship with a view to making a profit, although the partnership is usually formalised in the form of a partnership agreement.
With a JV established as a body corporate (whether as a limited company or an LLP) or as a limited partnership, in order for the JV to be formally established the registration documents of the body corporate must be filed with and accepted by the Registrar of Companies in the manner prescribed by one of the following as appropriate:
Companies Act 2006 (CA 2006).
Limited Liability Partnerships Act 2000 (LLPA 2000).
Limited Partnerships Act 1907 (LPA 1907).
Generally though, no form of notarisation is required.
There are no specific requirements for a JV to register with a local registry, although a limited company or LLP must be registered with the Registrar of Companies in order to become incorporated. Likewise, a JV established as a limited partnership is held to be a general partnership until it is registered with the Registrar of Companies.
Public sector bodies
While there is no specific requirement for a corporate JV to be registered with any national regulatory or competition authority, it may be necessary for the JV's parent undertakings to seek pre-completion clearance if the size of the parties or the degree of overlap between their businesses bring the JV within the scope of the relevant merger control regime (see Question 1). A notification is compulsory if the JV meets the EU's jurisdictional thresholds. If the JV meets only the UK thresholds, a notification is only voluntary. It may not be necessary to make a filing if, on self-assessment, the parties are confident that the formation of the JV will not lead to substantive concerns of a reduction in competition.
Contractual JVs should be self-assessed to ensure they do not breach either EU or UK competition laws prior to implementation (see Question 1).
The procedural requirements for the formation of a JV depend on the legal form that the JV takes and is largely governed in each case by the statutory framework relevant to that particular legal structure (see Question 1). However, there is no general requirement under English or UK law to file the formation or constitutional documents of a JV with either the UK or European competition authorities.
The law does not make any distinction between the different fields of the economy in respect of the use of legal documents. There is also no precise definition of a "JV instrument" under the law. In this respect, there are no particular industry-related restrictions for investors to consider before deciding to participate in a JV. For possible regulation of different sectors see Question 1.
There are no restrictions under company or contract law to the activities carried on by a company or another business under contract, provided that the activities are not illegal in nature. Therefore, a JV can be established for any purpose, whether in a contractual or corporate form.
It has not always been the case that companies could perform any business they chose. Under the Companies Act 1985 (now repealed), a company was restricted to carrying on activities permitted by its "objects" as set out in the company's memorandum of association. However, the Companies Act 2006 (CA 2006) removed the concept of objects entirely from a company's memorandum of association, therefore giving companies the freedom to carry on any business.
From a legal and commercial perspective, it is vitally important when establishing a JV that the purpose of the JV and the aspirations and objectives of the parties are agreed and recorded in writing out the outset. Failure to do so can lead to costly misunderstandings between the parties at a later date, and in the worst case scenario, can result in the premature termination of the venture.
Share capital and participation
Forms of participation
A JV with a share capital must take the form of a company. The procedure by which a person becomes a member in a limited company is set out in section 112 of the Companies Act 2006 (CA 2006), which states that the subscribers of a company's memorandum are deemed to have agreed to become members of the company on subscribing their names to the company's memorandum of association and become members on the company's registration. Therefore, a member is not required to fully pay-up its share capital to become a member of the company.
Regarding participation in the share capital of a JV company, the CA 2006 does not require shares to be paid up in cash. Indeed, section 582 of the CA 2006 states that shares allotted by a company, and any premium on them, can be paid up in "money or money's worth (including goodwill and know-how)". Therefore, it is possible, for example, for a member to participate in the share capital of a JV by contributing cash, assets or intangibles such as real property, intellectual property, or any combination of these. If the company is a public company (as opposed to a publicly traded company), non-cash assets must be the subject of a formal valuation (section 593, CA 2006). Both private or public companies should pay attention to section 190 of the CA 2006, which covers member approval of substantial property transactions with directors.
There is no requirement for the members or partners of the respective entity to make a contribution under the:
Limited Liability Partnerships Act 2000 (LLPA 2000).
Partnership Act 1890 (PA 1890).
Limited Partnerships Act 1907 (LPA 1907).
Therefore, it follows that there are no statutory limits to making a contribution in kind in respect of these forms of JV.
Section 542(3) of the Companies Act 2006 (CA 2006) provides that "shares in a limited company having a share capital may be denominated in any currency and different classes of shares may be denominated in different currencies".
There are no provisions or requirements under the Limited Liability Partnerships Act 2000 (LLPA 2000) relating to the capital of an LLP. Therefore, the capital contributions of the members of the LLP can be denominated in any currency.
Duration and limits on membership
There are no statutory limits to the life of a JV either as a company under the Companies Act 2006 (CA 2006) or an LLP under the Limited Liability Partnerships Act 2000 (LLPA 2000). Likewise, a contractual JV can be established for an indefinite duration and is merely subject to the termination provisions (if any) agreed by the parties in the governing contract.
There are no minimum or maximum statutory limits on the number of participants in a JV in the form of a limited company, which can have "one or more members" under section 7 of the Companies Act 2006 (CA 2006). A JV in the form of an LLP must have at least two members under section 2 of the Limited Liability Partnerships Act 2000 (LLPA 2000), although there is no maximum prescribed by statute.
A JV in the form of a contractual relationship can have as many participants as are parties to the governing contract.
Public sector bodies
Public sector bodies are bodies created under statute and therefore must identify appropriate legal powers to enter into a JV arrangement. There is no general statutory authority on which all public bodies can rely to enter into JV arrangements. Instead, the relevant statutory power depends on the type of public body involved. Different forms of statutory bodies include, but are not limited to, local authorities, National Health Service trusts and policy authorities, and each of these types are created under, governed by and empowered by different statutory frameworks. The ability of the public sector body to enter into the JV arrangement also depends on the proposed activities to be carried out by, or through, the JV.
Therefore, it is necessary to undertake a detailed analysis of the statutory powers of the public sector body on a case by case basis to determine its ability to enter into a JV agreement. Any JV can also be subject to public procurement rules.
Non-competition and anti-trust clauses
During period of effectiveness
In relation to corporate JVs, both the European and UK mergers and competition legislative frameworks establish constraints on the use of non-compete clauses in JV agreements. The basic rule under European and UK competition law is that restrictive non-compete covenants that are directly related and necessary to the successful formation and operation of the JV and go no further than is necessary for such purpose (Notice on restrictions directly related and necessary to concentrations (OJ 2005 C56/24) (Notice on Ancillary Restraints)) are likely to be defensible. These restraints are known as "ancillary restraints" and should not be considered separately under Articles 101 and 102 of the Treaty on the functioning of the European Union (the TFEU) (see Question 18).
In order to qualify as an ancillary restraint, a non-compete covenant must be appropriately limited in scope and geographic terms. Essentially, the clause should only cover those products or services and the territory in which the JV is active at the outset (when the agreement is established). In practice, it is common for non-compete clauses to contain carve-outs permitting shareholders in the JV to hold small stakes in competing companies.
With contractual JVs, the parent companies need to self-assess the degree to which any non-compete clause restricts competition and specialist advice may be required to assist with this process. The assessment depends on the nature of any non-compete clauses:
A so-called "horizontal" non-compete (between two companies that are actual or potential competitors prior to the formation of the joint venture) is regarded in the vast majority of instances as a market-sharing agreement. This comprises a "hard core" restriction of competition that is not permitted and, if discovered by a regulator, can lead to fines. Very exceptionally, a JV can be formed by two parties that are otherwise competitors to tender for a complex project that neither party would have the capacity to execute alone. Strictly in that context, certain restrictions may be permissible to facilitate the formation of the JV but careful advice is required.
A so-called "vertical" non-compete (where one party to the JV acts as a distributor, franchisee, licensee or agent of the other) may be acceptable in certain circumstances if each contracting party's respective market share for the product concerned is below 30%, and if the non-compete lasts for no longer than five years. This takes advantage of Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (Vertical Restraints Block Exemption). If the parties have larger market shares it is necessary for them to carefully self-assess any restriction against the relevant legislation.
With corporate JVs, a non-compete clause that seeks to continue to have effect beyond the termination of the JV is unlikely to be enforceable.
With contractual JVs, the extent to which a non-compete can survive the agreement depends on the nature of the venture:
To the extent that any "horizontal" non-compete exists that was not prohibited during the JV agreement (this would be exceptional) this cannot survive the JV's termination.
"Vertical" non-competes that satisfy the requirements of the Vertical Block Exemption Regulation can last for up to one year post-termination if essential to protect know-how transferred from a supplying JV partner to a buying JV partner. However, if the Vertical Block Exemption Regulation is not satisfied, any post-term restriction must be individually assessed against competition law.
De facto company/partnership
The procedure required in order to incorporate a company is set out in detail in the Companies Act 2006 (CA 2006) and so the concept of a de facto corporation does not exist under the law.
In contrast, there is no such prescriptive process required to form a partnership, which merely requires the relevant parties to be "carrying on a business in common with a view to profit" under section 1 of the Partnership Act 1890 (PA 1980). Therefore, the parties to a contractual JV could be construed to have formed a de facto partnership if in reality their relationship meets this statutory requirement. The concept of a partnership can result in a party assuming liability for the actions of all the other partners. Therefore, it is usual to include express wording in the contractual or constitutional documents that govern the JV to state that the JV is not to be considered as a partnership.
Limiting member liability
In all JVs it is possible for the parties to seek to define their entitlement to economic benefits and their exposure to liability or risk. In certain structures, liability is limited as a matter of course, as is the case with a limited company, an LLP or a limited partnership. Other structures can expose JV participants to losses, for example in a general partnership, the liability of the partners is joint and several and unlimited.
European competition law has established a framework of rules that apply to JVs (see Question 1).
With contractual JVs, the relevant framework comprises Articles 101 and 102 of the Treaty on the Functioning of the EU (TFEU). The general rule is that the European competition regime under Articles 101 and 102 of the TFEU can apply to a JV if the venture is of a sufficient size that its activities may have an appreciable direct or indirect effect on trade between member states of the EU. Article 101 of the TFEU prohibits cartels and other agreements that could disrupt free competition in the European Economic Area's internal market. Article 102 of the TFEU is aimed at preventing undertakings that hold a dominant position in a market from abusing that position, in particular monopolies. Analogous UK legislation applies under the Chapter One Prohibition (equivalent to Article 101) and the Chapter Two prohibition (equivalent to Article 102) under the Competition Act 1998, with respect to agreements where there is no effect on trade between EU Member States but which might be anti-competitive in their use.
With corporate JVs, prior to their formation it is necessary to consider whether the JV is subject to Regulation (EC) 139/2004 on the control of concentrations between undertakings (Merger Regulation). Should the Merger Regulation not apply, it remains necessary to consider whether a transaction to form a JV would be caught by the UK Merger Control regime set out under the Enterprise Act 2002.
The boundary between a contractual JV and a corporate JV may not be clear (see Question 1). It is therefore advisable when establishing a JV to seek specialist legal advice to determine whether either European or UK competition law will have an impact on the operations of the venture and the drafting of the JV governing agreements.
As well as the European and UK competition legislative regimes, there are a number of guidelines and policies at European level applicable to JV agreements. For example, the use of non-compete clauses in a corporate JV agreement is governed by the Notice on restrictions directly related and necessary to concentrations (OJ 2005 C56/24) (Notice on Ancillary Restraints) (see Question 15). In relation to contractual JVs, the following may be relevant:
Notice providing guidelines on the applicability of Article 101 of the TFEU (formerly Article 81 of the EC Treaty) to horizontal co-operation agreements (OJ 2001 C3/02) (Guidelines on Horizontal Co-operation Agreements).
Regulation (EC) 2790/99 on the application of Article 101(3) of the TFEU (formerly Article 81(3) of the EC Treaty) to categories of vertical agreements and concerted practices (Vertical Restraints Block Exemption).
Governance and limits on directors
Generally, the parties to a JV are free to regulate the JV subject to compliance with the statutory framework of the entity that the parties are using to carry on the JV. For example, there are certain statutory restrictions concerning the distribution of profit or repayment of capital by companies and LLPs. Tax considerations are also relevant, for example, in relation to the provision by members of interest free loans to the JV entity.
A JV in the form of a private limited company must have at least one director that is:
A natural person (so not a corporate director).
Over the age of 16 (section 154, Companies Act 2006 (CA 2006)).
The CA 2006 does not contain any requirements relating to the nationality of the directors of a company.
The requirements for eligibility for appointment as a statutory auditor of a JV in the form of a limited company are set out at section 1212 of the CA 2006, which states that the individual or firm seeking appointment must be:
A member of a recognised supervisory body.
Eligible for appointment under the rules of that body.
It is customary for the procedure and method in which a JV is terminated to be dictated by the governing JV agreement. Therefore, it is crucial when establishing a JV that the JV agreement provides adequate exit routes for the participants, particularly in the case of deadlock or a breakdown in the relationship between the parties to the JV.
The termination of a JV company is usually governed by the provisions of the shareholders' agreement, which can provide for the following:
Acquisition by one party of the shares of the others.
Sale or realisation of the whole venture.
Liquidation by the directors in accordance with the provisions of the Companies Act 2006 (CA 2006).
An LLP agreement usually also contains termination provisions providing for the acquisition by one member of another's interest, or the voluntary winding-up of the LLP by the vote of a majority of its members in accordance with section 1003 of the CA 2006 (as applied to LLPs by the Limited Liability Partnerships Regulations 2009 (LLPR 2009).
The termination of a JV in the form of a partnership merely requires the cessation of the continuing business relationship between the parties, although the partnership deed should make adequate provision for the practical winding-up of the JV relationship (that is to value the assets of the partnership, pay off partnership debts, and distribute the surplus to the former partners).
A JV in the form of a contractual agreement is generally terminated by the parties in accordance with the termination provisions in the contract.
Most JV agreements usually provide for the venture to be terminated in the event of another party's insolvency. The insolvency regime is governed predominantly by the Insolvency Act 1986 (the IA 1986). In general terms, a company is deemed insolvent under section 123 of the IA 1986 where:
It becomes unable to pay its debts as they fall due (cash flow insolvency).
The value of its liabilities exceeds the value of its assets (balance sheet insolvency).
However, in reality the scope of the insolvency regime is much broader than this and extends to several other events. Therefore, it is necessary for the parties to have an appreciation of both the termination provisions in the JV agreement and also of the wider UK insolvency regime. A typical insolvency-related termination clause in a JV agreement can therefore provide that the events leading to termination are:
Liquidation, whether voluntary or compulsory.
The making of an administration order.
The appointment of a receiver or administrative receiver.
In the case of an individual, his becoming bankrupt.
Generally, there is no public sector third party approval required to terminate a JV, regardless of the form it takes. Instead, the procedure and method in which a JV is terminated is usually set out in the governing JV agreement (see Question 21).
However, the Registrar of Companies must be satisfied of the proper striking-off or liquidation of the corporate entities such as a limited company or LLP, or the dissolution of a limited partnership.
Choice of law and jurisdiction
The parties to a contractual JV are free to choose the governing law and relevant jurisdiction of the contract. There are also no restrictions regarding the governing law or jurisdiction applicable to a JV agreement of a corporate JV, whether a shareholders' agreement or LLP agreement. For example, the shareholders' agreement of a JV established as a UK limited company does not need to contain an English and Welsh governing law clause.
However, the form or entity used to create the JV (for example, a limited company or LLP) is subject to the statutory provisions relating to such bodies incorporated in the UK.
JVs with foreign members
Validity and authorisation
The regulatory authorities
Financial Conduct Authority (FCA)
Main activities. The FCA is responsible for the regulation of the UK financial markets and financial services sector. Its aims are to protect consumers, enhance the integrity of the UK financial system and promote effective competition in the interests of consumers.
Description. This website is the official archive for all UK legislation and is managed by The National Archives on behalf of the Government. The content is published by and under the authority of the Controller of Her Majesty's Stationery Office (HMSO). Content on the website may not be fully up-to-date.
Caroline Newsholme, Partner
Professional qualifications. England and Wales, Solicitor
Areas of practice. Corporate M&A; joint ventures.
Non-professional qualifications. LLB Law, London School of Economics
Acting for a global insurance company on the disposal of a German real estate portfolio for a consideration in excess of EUR500 million.
Advising a major hotel chain on a joint venture for the acquisition of a 50% interest in a luxury London hotel.
Advising a US real estate investment trust on acquisitions of healthcare real estate assets in the UK.
Acting for a Norwegian shipping family office in on the acquisition of a major development site in the UK.
Languages. English, French
Professional memberships/association. Associate member of the Institute of Chartered Secretaries and Administrators.
Patrick Groves, Associate
Professional qualifications. England and Wales, Solicitor
Areas of practice. Funds and indirect real estate; joint ventures.
Non-professional qualifications. BA History, University of Bristol
Acting for a global insurance company on the establishment of a £1.2 billion joint venture for the acquisition of an office tower development in the City of London.
Advising a UK fund manager on the establishment of a joint venture to acquire a property portfolio for £184 million.
Advising a sovereign wealth fund on its US$500 million investment into a pan-Asian real estate fund and a related US$100 million co-investment platform.
Acting for a UK fund manager on the structuring, establishment and closings of two pan-European real estate funds with combined commitments in excess of EUR1.4 billion.
Advising on the corporate disposal of two UK shopping centres for £202 million and £170 million.
Professional associations/memberships. Representative member of the European Association for Investors in Non-Listed Real Estate Vehicles (INREV).