Joint Ventures: Fundamentals, Forms and Strategic Significance

“Growth takes strength” – this holds true for companies just as much as for individuals. Anyone wishing to grow without overstretching their own resources looks for ways to work together with others. Alongside the acquisition of a company (M&A), cooperating with a partner company – the joint venture – is one of the most important forms of what is known as external corporate development. In this first part of our two-part blog series, we explain what a joint venture is under German law, what basic forms exist, and how companies choose the right structure. Part two will look at the practical drafting of the joint venture agreement.

Why companies cooperate

Cooperation is particularly well suited to offsetting a company’s own risks and weaknesses. In our advisory practice, the following objectives regularly take centre stage:

• Sharing costs and risks
• Better utilisation of existing capacity
• Securing resources, for example through long-term supply arrangements
• Addressing management and succession issues
• Building joint know-how and joint product development
• Expanding the range of goods and services offered
• Joint marketing
• Market entry abroad through a local partner

A distinction is drawn between cooperation at horizontal level (between companies at the same stage of the value chain) and at vertical level (between upstream and downstream stages of the value chain). The term “joint venture” has become particularly established for cross-border cooperation; some countries, such as China, even have their own statutory rules governing cooperation between domestic and foreign companies.

Not a fixed legal term

The term “joint venture” has no statutory definition under German law. It serves as a collective term for various forms of project-related or permanent cooperation between companies. In practice, however, a fundamental distinction has become established: the equity joint venture and the contractual joint venture.

Equity Joint Venture vs. Contractual Joint Venture

The two basic forms differ above all in organisation, liability and the degree of commitment involved:

Between these two poles there are fluid transitions: cooperation frequently begins as a contractual joint venture and, where it proves successful and mutual trust grows, develops further into an equity joint venture with its own company.

When “loose” cooperation unintentionally creates a partnership

A contractual joint venture will, as a rule, legally constitute an internal partnership under civil law within the meaning of Section 705 of the German Civil Code (Bürgerliches Gesetzbuch – BGB): the partners each act externally in their own name, while internally they pursue a common purpose.

It is important to know that a civil-law partnership (Gesellschaft bürgerlichen Rechts – GbR) can arise more quickly than those involved may realise. A vivid example from advisory practice is a lottery syndicate, which can already form a GbR merely by jointly filling in and paying for a lottery ticket – complete with partners, the need for partner resolutions, and a winding-up (liquidation) that must be regulated. If a joint venture fails, the question of whether the participants are entitled to compensation for contributions already made regularly arises.

Under the settled case law of the German Federal Court of Justice (Bundesgerichtshof – BGH), an externally acting GbR has legal capacity to the extent that it acquires rights and incurs obligations of its own through participation in legal transactions; within that scope, it also has the capacity to sue and be sued in civil proceedings (see, e.g., BGH, judgment of 29 January 2001 – II ZR 331/00, NJW 2001, 1056). For cooperation partners, this means that anyone who does not clearly distance themselves from a shared legal entity may unintentionally slip into a partnership-based liability structure. It is therefore advisable either to put the cooperation on a clear contractual footing from the outset, or to state expressly – in a way that is also recognisable to third parties – that no cooperation in the legal sense exists.

The path from cooperation to joint venture

In practice, the process of establishing a joint venture typically passes through several phases:

• Planning phase: selecting suitable partners, aligning strategic objectives
• Deal initiation phase: confidentiality agreement, if applicable an exclusivity agreement, a letter of intent/term sheet, due diligence
• Negotiation phase: concrete contract negotiations, clarifying the framework conditions
• Implementation: entry into the contractual joint venture and/or formation of the equity joint venture company

Which form suits my project?

An equity joint venture is generally advisable for long-term cooperation involving a higher level of capital commitment, where a limitation of liability is desired, or where an independent market presence (corporate identity) is sought. A contractual joint venture, by contrast, tends to suit time-limited, project-related undertakings requiring less coordination – in exchange, the partners must accept unlimited personal liability.

Conclusion and outlook

Whether equity or contractual – the choice of the right structure depends on the strategic objectives, the desired degree of commitment, and the partners’ appetite for risk. In any event, even a loose form of cooperation can unintentionally create binding legal effects. In the second part of this blog series, we will look at what matters when drafting the joint venture agreement itself – from the two-tier structure of the joint venture agreement and the articles of association to the pitfalls most commonly seen in practice.

This article is for general informational purposes only and does not constitute legal advice in an individual case. It does not replace an individual legal review. German law is authoritative; for matters with a foreign-law element, we recommend always engaging a locally admitted advisor. Any tax-related remarks in this article are non-binding and do not replace consultation with a tax advisor or auditor.