Q&A: Joint venture agreements (JVA)
Lawyer Richard Buono answers key questions on setting up a joint venture, and signing an agreement to secure profits
With the present squeeze on practice profits, many practices are thinking of entrepreneurial ways to enhance income - for example, they may consider setting up a pharmacy on practice premises or may wish to provide additional services under the Any Qualified Provider Scheme to fulfil a local need.
Typically the provision of such additional services involves the need to work with another party, for example a pharmacist, another medical practice or other health professionals.
What is a joint venture agreement?
When working with another party on a joint venture, it is important to document this in a joint venture agreement (JVA) to minimise the risk of disputes.
Think carefully about what each of you want to get out of forming a relationship. Then you will need to agree what each party is to contribute to the joint venture, what the duties of each party will be and how profits are to be apportioned between the parties.
Typically, a new company or limited liability partnership (LLP) will be set up in which each party to the joint venture will take a share. The JVA will take the form of a shareholders’ agreement or LLP agreement.
What is the importance of the size of your share in the joint venture? Is a minority share worth having?
The size of your share in a joint venture is important because it usually influences the amount of say you may have in the running of the joint venture and the percentage of profits that you may be entitled to. The size of your share should reflect the contribution you are making to the joint venture at the outset and the contribution you will be making on an ongoing basis.
For example, if you will be doing most of the work or are providing the larger share of capital required to establish the joint venture then you should argue for a majority stake in the joint venture and, in other cases a 50/50 stake or a minority interest may be appropriate.
A minority stake in a joint venture need not mean that you have little decision-making power within the joint venture and that your interests are prejudiced when it comes to apportioning the profits. Your legal advisor will be able to help you negotiate appropriate provisions which should give you veto rights over important decisions affecting the joint venture and can help agree a policy to ensure the fair distribution of profits.
What are the tax liabilities involved in taking part in a joint venture?
What the tax issues are will vary in each case and will depend on the particular circumstances of the parties involved (and even the individual partners’ circumstances within your practice). It is vital that you seek tax advice from a suitable accountant as early as possible when considering establishing a joint venture as this could determine the best form for the joint venture to take (i.e. whether to set up a company or LLP).
Your accountant can also advise you about other steps you can take to minimise your liability for tax which may have a bearing on your discussions with the other parties to the joint venture.
How do you ensure you don’t end up taking on too much work?
You will need to decide at the outset who is doing what work within the joint venture. In a pharmacy joint venture, it may not be necessary for partners in your practice to do too much additional work because the day to day running of the pharmacy may be the responsibility of the other party.
In other cases you will need to assess the local demand for the service to be carried out and put in place adequate arrangements to staff the joint venture.
If partners in your practice need to spend a significant amount of time managing the joint venture then they will need to agree a reduction in their clinical or admin duties within the practice to accommodate this.
Are there any more things to consider?
Yes, in particular:
-Including provisions in the joint venture agreement to prevent the parties from doing anything outside of the joint venture which competes with the joint venture.
-Ensuring that the joint venture agreement (and/or your practice partnership agreement) requires each partner in your practice to transfer his share in the joint venture to the remaining partners if he leaves the practice.
Consider what each party to the joint venture can or cannot do outside of the joint venture. You may wish to ensure that each party cannot do anything on its own which competes with the joint venture. For example, in the case of a pharmacy, the pharmacists in the joint venture should not be allowed to open up another pharmacy nearby.
You will also need to ensure that if a partner leaves your practice he is obliged to transfer any share he might have in the joint venture to the remaining partners. This can be provided for in the joint venture agreement but it may also be appropriate to review the practice partnership agreement to deal with this point.
It is common to overlook this issue and it can be extremely difficult to deal with if overlooked, particularly if a partner leaves your practice in acrimonious circumstances.
Richard Buono is a solicitor in the healthcare department at Blacks Solicitiors LLP.