Business cooperation agreement and joint venture (JV): what it must include

Service page: Commercial contracts lawyer: drafting, review and enforcement.

A joint venture: a collaboration that can turn into a lawsuit

Two entrepreneurs, a handshake agreement, a project that looks promising. A year later: lawyers, dual management and court. Not because the project failed. Because they did not agree in advance what happens when one wants to leave, who decides when there is no agreement, and who owns what they developed together.

A JV (joint venture) is a business collaboration between two or more companies for a defined project. Unlike a merger or a permanent partnership, a JV is meant to be limited in time or in purpose, but in practice the disputes that arise from it are usually expensive and exhausting.

What separates a JV that works from a JV that ends in a lawsuit: a detailed agreement, drafted while everything still looks great, so it is worth reading it alongside the drafting principles of commercial contracts.

A cooperation agreement, a joint venture and a partnership are not the same thing

In business language, every tie-up is called a “cooperation agreement”, but the law has three different boxes, and the difference between them is who pays when something goes wrong.

• A contractual cooperation agreement. Each party remains a separate business, there is no new entity, and the relationship is set entirely by the contract and by general contract law: the Contracts (General Part) Law, 5733-1973.
• A joint venture (JV) through a corporation. A joint company is set up under the Companies Law, 5759-1999 (חוק החברות, התשנ״ט-1999), with a separate legal personality and limited liability of the shareholders, unless they gave personal guarantees or parent-company guarantees.
• A partnership. It does not need to be declared. The Partnerships Ordinance [New Version], 5735-1975 defines a “partnership relationship” as the relationship between persons who carry on a business together for the purpose of making profits. A collaboration conducted as a joint business for profit may be regarded as a partnership even without registration and without intention.

Why this matters: under section 14 of the Ordinance, each partner is an agent of the partnership and of the other partners for any matter of the partnership’s business, meaning that your partner may bind you to an obligation you did not approve; and under section 20(a), each partner is liable, jointly with the others and severally, for all the obligations of the partnership. Even without a partnership, section 54 of the Contracts Law sets a presumption that two persons who owe one obligation are liable for it jointly and severally. Wording that declares “nothing in this agreement creates a partnership” is not magic, since the court looks at the substance, but leaving it out certainly does not help.

Which legal structure suits you?

The first question in any JV is not “how much each party puts in”, but “how we are organized”. In Israel there are three main tracks:

A joint company: the two parties set up a new company to run the project. It has a bank account, a board of directors and separate liability. This is the most common structure when the project is significant and long-term.

A contractual agreement only (without a corporation): the two parties sign an agreement that governs the collaboration, without setting up a new company. Simpler, but also less protected: a contractual collaboration conducted as a joint business for profit may be regarded as a partnership under the Partnerships Ordinance [New Version], 5735-1975, and then each partner is liable jointly and severally with the other partners for the partnership’s debts, even if they did not intend this.

A parent company with subsidiaries: a complex structure that suits large JVs between public or international companies, where each party wants to keep separation and control.

The choice between the structures depends on practical questions: are there assets that will be transferred to the JV? For how many years is the project planned? Is there a risk that a party will stop paying its debts? These are questions your lawyer should ask before drafting.

What must a JV agreement contain?

A properly written JV agreement contains six clauses that cannot be left out:

Contributions and division of ownership: how much each party puts in: money, equipment, time, contacts, intellectual property? How does this translate into ownership percentages? If one brings technology and the other brings capital, what is each one worth?

Management and decision-making: who manages day to day? Which decisions require the consent of both parties? What happens when it is 50/50 and each blocks the other? (see below: a deadlock mechanism)

Division of profits: is it in proportion to ownership? Does one of the parties have priority? When are profits distributed? What happens when the JV needs to raise more capital?

Intellectual property: the clause people forget most. What is created during the JV: who owns it? If one of the parties brings existing technology, does the JV receive only a license to use it, or ownership? What happens to the new intellectual property created jointly?

Confidentiality and non-competition: what may the two parties not do with the information they receive? Can a party set up a competitor after the JV ends? For how long?

Exit and dissolution: the clause that saves you from court. What are the terms of dissolution? How are the assets valued? Who buys the other’s share, and at what price?

Who decides when there is no agreement?

In a 50/50 JV, deadlock is the real nightmare. Two equal parties, both blocking, the project frozen. Without an orderly mechanism, it ends in court.

Texas shootout: one party offers a price to buy the other’s share. The other party chooses: buy the first party’s share at the same price, or sell to it. A mechanism that forces a decision and prevents drawn-out proceedings.

An arbitrator or a deciding expert: a third party agreed in advance decides defined questions. Suitable for professional disputes in which objective criteria can be set.

Staged escalation: an attempt at mediation first, then arbitration, and only at the end, termination of the JV with a dissolution according to an agreed formula.

If your JV does not include a deadlock mechanism, it is missing a critical clause.

What happens when one of the partners wants to leave?

One of the big risks in a JV: a party that wants to leave but cannot. An agreement without an exit mechanism creates a trap for both parties.

Common exit mechanisms: a right of first refusal (ROFR): before selling to a third party, you must offer to the partner. A tag-along right: if one sells, the other can join the same transaction. A drag-along right: if the majority sells, it can force the minority to sell as well.

In addition, define what happens on an exit because of a breach: if one of the parties breaches the agreement in a fundamental way, does it lose benefits in the dissolution? Are there liquidated damages agreed in advance?

Intellectual property in a joint venture: what goes in, what is created, and what comes out

It is customary to separate background IP, the know-how and technology each party brought with it, from foreground IP, what is created during the venture. The first usually stays with whoever brought it, and the venture receives a license to it that is defined in scope, territory and time. The second is the question that brings agreements down.

Here it is important to correct a common mistake: Israeli law has no provision that sets “equal ownership” in a work created jointly. The Copyright Act, 5768-2007 defines a “joint work” as a work created by several authors jointly, where the share of each of them cannot be distinguished, and section 33 provides that the author is the first owner of the copyright. Section 34 gives the employer ownership of a work created by its employee for the purpose of their work and in the course of it, unless agreed otherwise; and under section 35(a), in a commissioned work the first owner is actually the author, unless agreed otherwise, expressly or by implication. In other words: if the venture commissions development from a subcontractor and you wrote nothing, the right may stay with the contractor.

And two practical provisions: under section 37, copyright can be transferred and licensed, in whole or in part, and the transfer can be limited to a particular place, period or act, and a contract to transfer copyright or to grant an exclusive license requires a written document. In a cooperation agreement, an intellectual property clause that relies on oral understandings is not a clause. Also add a license-back mechanism: if the venture ends, each party receives a license to continue using the results, even if ownership was vested in one of them. Details on protecting business information at the negotiation stage are in the guide to non-disclosure agreements (NDAs).

Who is liable if something goes wrong?

Each party is liable for its own acts: that is the principle, and its limits are set in the limitation of liability clause in the agreement. But when a JV operates without a separate company, or when the parties guaranteed the debts of the joint company, creditors may turn to both parties. A proper JV agreement defines who bears the costs of legal defense, what happens if one party caused damage, whether there is mutual indemnity, and what insurance is required as a condition for the activity.

Frequently asked questions

What is a business cooperation agreement?

An agreement in which two or more businesses combine resources (money, know-how, staff or contacts) for a defined project or purpose, without any of them ceasing to exist as a separate business. It can be contractual only, or take shape as a joint company. If it carries on a joint business for profit, the law may regard it as a partnership, with everything that follows from that.

What is the difference between a cooperation agreement and a joint venture (JV)?

In practice, “joint venture” describes a more institutional arrangement, usually a joint company with a board of directors, a bank account and governance mechanisms, while a “cooperation agreement” often remains contractual only. Legally there is no sharp dividing line: what decides is the structure actually chosen and what is written in the agreement, not its title.

Who is liable for the debts of a joint venture?

In a joint company, the company, and the shareholders’ liability is limited unless they gave guarantees. In a contractual arrangement or a partnership, section 20 of the Partnerships Ordinance sets joint and several liability for all the obligations of the partnership, and section 54 of the Contracts Law creates a similar presumption when two persons owe one obligation. An internal arrangement between the partners governs indemnity between them, but does not change what the creditor may demand.