How do I work when setting up joint ventures

joint venture

What types of joint ventures are there?

Joint ventures can be differentiated both in terms of the orientation of the cooperation and the equity participation.

We speak of a horizontal joint venture if the cooperation partners are active in the same industry. A vertical joint venture, on the other hand, exists when the partners come from different stages of the value chain (e.g. raw material supplier and processing company). The following distinctions are also possible:

  • Concentric joint venture: partners come from related industries
  • Conglomerate joint venture: partners come from completely different industries

With regard to the equity participation, a distinction can be made between the equal joint venture (identical participation rates, e.g. 50:50) and unequal joint ventures (e.g. 75:25).

In addition, joint ventures can be divided into the following categories:

  • Equity joint venture
  • Contractual joint venture

The main difference is that in the case of an equity joint venture, a joint venture is established, whereas in the case of a contractual joint venture, only contractual relationships are entered into.

Equity joint venture

If two or more partners with equity stake come together to set up a legally independent company, we are talking about an equity joint venture. In this standard case, a company is created with its own legal personality. Usually long-term terms for the cooperation in the range of 30 to 50 years are agreed. The joint venture is able to import and export products. It can acquire land use rights, erect buildings and also employ foreign workers. Both profits and losses are shared between the partner companies. The distribution key depends on the capital invested.

Contractual joint venture

In the contractual joint venture, there is no independent joint venture. The partners conclude a contract under which risk, profit and cost sharing of the partner company is regulated. Compared to the equity joint venture, the contractual basis can be more open. Among other things, a free definition of the profit and loss distribution key is possible. The same applies to voting rights. Since the contractual joint venture does not necessarily have to be a legal person, the companies involved are not always liable with their contribution. There is also no statutory minimum participation. In addition, the start-up costs are lower. However, in certain circumstances the partners can be held directly liable.

If the partner companies come from different countries, there is an international joint venture. The counterpart to this is the domestic joint venture (all partners are based in the same country).

What legal form can a joint venture have?

Joint ventures can have different legal forms. However, it is customary to set it up in the form of a corporation (e.g. GmbH or AG). On the other hand, it is less common to choose a commercial partnership. When it comes to bookkeeping and accounting, the choice of legal form has a significant impact. The HGB (commercial code) applies to corporations, while there are no specific regulations for the GbR (civil society). It is not uncommon for the company form to be chosen taking tax considerations into account.

How is the joint venture accounted for?

Joint ventures are not subsidiaries within the meaning of the German Commercial Code, as there is no controlling influence and no uniform management. They are therefore included in the consolidated financial statements via two special regulations:

  • Equity method: The value of the investment in the partner's balance sheet corresponds to the equity development in the joint venture
  • Proportional consolidation: Income, expenses, debts and assets are included in the balance sheet according to the participation rate

What does the joint venture contract include?

As a rule, the cooperation partners conclude a joint venture agreement in which they regulate the decision-making, management and termination of the joint project in detail. A partnership agreement is also required for equity joint ventures. There should be synchronization between the two components.

As far as the joint venture contract is concerned, there are some typical areas of regulation in detail. The following points in particular are fixed:

  • Bodies and standardization rights: management, supervisory board, departmental responsibilities
  • Economic goals: mostly multi-year planning of future business operations
  • Financing (including future capital increases)
  • Financial reporting (including information and disclosure rights)
  • Shareholders and supervisory board meetings
  • Conflict resolution procedure
  • Transfer of Shares: Permissions and Restrictions
  • Prohibitions: customer protection, poaching of staff, non-compete obligations
  • Secrecy and confidentiality
  • Compensation upon dissolution of the company
  • Arbitration agreement
  • Licensing and royalties
  • Subscription rights and delivery obligations
  • Regulations in the personnel area (employment and perosanl costs)
  • Education and training agreements
  • Provision of material resources (machines, systems, buildings, etc.)

What alternatives are there to a joint venture?

In addition to the joint venture, there are a number of other forms of cooperation for companies. For example, if one of the partners does not want to take on any financial risk, the conclusion of a so-called management contract is an option. On the other hand, if an investor wants to bring in capital and use synergy effects, but not take on management responsibility, a participation model is interesting.

There are also some other forms of joint venture as an alternative to setting up a joint venture. The following are to be mentioned in particular:

  • Working groups: Association that is limited to a specific project (often in the construction industry)
  • Consortia: Cooperation for temporary projects (e.g. to process large-volume orders)

Both variants are purely purpose-built communities that are founded for short periods of time.

The furthest away from the joint venture are so-called strategic alliances. As a rule, they are limited to the coordination of strategies or goals between two or more companies.

Examples of joint ventures

Several well-known joint ventures have already been implemented in Germany. One example is Volkswagen Autoversicherung AG. It was founded in 2013 by Allianz and VW. The goal of both companies was to get more auto insurance. More than 40 percent of VW vehicles should be sold directly with an insurance contract within five years.

In 2009, the energy companies E.ON and RWE founded a joint venture to build nuclear power plants in Great Britain. Both partners have a 50 percent share. The long-term cooperation serves, among other things, the purchase of locations and the handling of complex approval processes. The joint venture will also build and operate the nuclear power plants themselves. Both partners contribute their expertise, their human resources and also their good knowledge of the UK energy market.