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Equity Joint Ventures
When a client seeks representation on an equity joint venture, there are eight primary structural considerations that provide the framework for documenting the venture: 1) initial capital contributions; 2) future capital needs; 3) cash distribution waterfall; 4) governance; 5) transfers; 6) exit rights; 7) restrictive covenants; and 8) affiliate transactions.
This article briefly discusses key issues in each of these areas by using the following illustrative joint venture transaction. Manufacturer, LLC (Manufacturer) has a division that manufactures auto parts and seeks an equity infusion to expand its operations. Supplier, LLC (Supplier) is a key supplier to Manufacturer and is willing to make a minority equity investment in concert with the execution of a long-term supply agreement. Manufacturer employs a key manager (Employee), who is critical to the success of the venture and seeks an equity incentive tied to future profits as consideration for entering into a long-term employment arrangement. The parties have agreed to form Newco, LLC (Newco) as the joint venture vehicle. Newco is organized as an LLC because of the structuring flexibility, pass-through tax treatment and limited liability protection offered by a limited liability company.
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