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The use of trusts in Joint Venture transactions

Joint Venture transactions

This article is intended to highlight specific areas where Joint Venture partners can employ Trusts to effectively run a business or manage a project as partners. Therefore parties who are already in joint ventures or contemplating going into joint venture arrangement, may find this article useful as it provides insights into how best they can use Trusts to manage their relationships to achieve set objectives rather than go solo.

As starting point, it is imperative first to understand what constitutes a Trust and a Joint Venture (JV).

What is Trust?

There are several and varied definitions of what constitutes a Trust, and most of the definitions are essentially similar in context. According to Investopedia, a Trust is a legal entity with separate and distinct rights, like a person or corporation. To constitute a Trust, a party known as a Testator, (Testatrix), Trustor or Settlor (depending on your preference), essentially surrenders his rights to another party, called the Trustee, the right to hold title to and manage property or assets for the benefit of a third party, called the Beneficiary. Kindly note that the creation and administration of trusts are governed by specific legal principles and regulations that vary by jurisdiction.

In Nigeria, we have regulations made pursuant to The Trustee Investment Act, CAP T22 LFN 2014, The Investments and Securities Act,2007 and the Rules made pursuant thereto, the Companies and Allied Matters Act, (CAMA), 2022 etc. Essentially, the agreements entered by partners (Trust Deed) are equally important and partners must be abreast of their respective responsibilities as contained in the Trust Deed.

Joint Venture partners must equally understand that the application of trusts in joint ventures requires careful consideration of legal, tax, and business implications. Parties need to know what rights, assets, information etc., they are parting with.

What is a Joint Venture (JV)?

A Joint Venture (JV) is typically a business arrangement, and it is deemed constituted when two or more parties come together to collaborate on a specific project, business activity, or a series of related activities. The parties involved, often referred to as joint venture partners, pool their resources, expertise, and capital to achieve a common goal while retaining their separate identities and interests. Joint ventures could therefore be for a specific purpose or purposes and may or may not have specific durations. It serves as powerful vehicles for collaboration, allowing businesses to combine strengths, resources, ideas, and expertise to pursue shared objectives. Again, let us see how Investopedia defines this concept: It says, a Joint Venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. Each of the participants in a JV is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.

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Why a joint venture?

This question is germane, because entities could decide to go alone rather than form alliances with other entities to achieve set tasks or businesses . In addition to the several advantages the use of joint ventures engenders, the joint venture arrangement is good for businesses as it offers a range of benefits that can contribute to growth, innovation, and strategic advantage.

Additionally, some of the reasons partners prefer to explore Joint Ventures are as follows:

Faster Entry into new or emerging Markets:

Setting up operations in a new market can be time-consuming and challenging. Joint ventures provide a faster route to market entry, as partners can leverage existing infrastructure, distribution channels, and local knowledge. Since one of the JV Partners already has a good knowledge and foothold on the market, other partners can enter the market faster.

Risk sharing:

While agreeing that risks cannot be totally avoided in business, the use of joint ventures can help to mitigate the risks that Joint Venture Partners carry. Sharing risks is therefore very fundamental in Joint Ventures. An entity entering a new business carries the risks usually associated with that business alone. Instead of bearing the entire burden or risks of a new project or venture, the use of joint ventures enables partners to distribute the risks among themselves. This can be particularly valuable when entering unfamiliar territories or industries.

Resource pooling:

Where partners opt to enter into Joint venture arrangement, they can do so by combining their resources, whether it be financial capital, technological capabilities, intellectual property, or distribution networks. The massive resources pooled together are deployed to the project resulting in a more robust and competitive entity.

Cost efficiency:

When joint venture Partners share costs associated with the business, especially for capital-intensive projects with long gestation periods, they tend to be more cost-efficient than an entity that undertakes the activity alone.

Access to new markets:

Joint ventures provide an avenue for companies to enter new markets or expand their presence in existing ones. By partnering with a local or established entity, businesses can leverage the partner’s knowledge of the market, regulatory environment, and consumer behaviour. The challenges usually associated with penetrating a new environment or market is therefore avoided as partners can leverage on the joint venture partner that already has a very strong foothold on the environment or market. Other joint venture Partners can therefore provide their other resources to complement that of the entity already entrenched in the system.

Strategic alliances:

Joint ventures can serve as strategic alliances that enhance a company’s overall competitiveness. Partnering with entities that have complementary strengths can create synergies and improve the ability to respond to market dynamics.

Technology transfer and innovation:

When Joint Venture partners Collaborate together, they are more likely to have a better exchange of ideas in areas such as technology, expertise, and best practices. This would in turn result in innovation and the development of new products or services that an individual entity would not have been able to achieve independently.

Application of trusts to Joint Venture transactions

Having agreed that Joint Venture is very important for companies wishing to quickly make their presence felt in a new and emerging market, I would equally provide some insights into how Joint Venture partners can explore the use of Trusts in their Joint Venture transactions. I have accordingly highlighted below some ways trusts can be applied to joint ventures:

Profit Distribution:

Trust agreements can specify how profits generated by the joint venture are distributed among the partners. This allows for flexibility in determining the allocation of profits, ensuring that the distribution aligns with the agreed-upon terms and goals of the venture.

Confidentiality:

The use of Trusts ensures confidentiality in the joint ventures. Assets or aspects of the joint venture business can be held in trust, providing a level of privacy and protection for sensitive information. This is particularly important in industries where trade secrets or proprietary information are critical.

Tax Planning:

Although the Nigerian tax system is plain vanilla and hardly shields Trust arrangements against tax, the Trust structures can offer tax advantages depending

on the jurisdiction and the nature of the joint venture. By carefully designing the trust arrangement, parties can optimise the tax implications of the joint venture, potentially reducing tax liabilities.

Risk Mitigation:

Trusts can be established to take away the risks usually borne by partners as the trust may be charged with handling specific risks or contingencies within the joint venture. For example, a trust might be created to hold funds for unforeseen liabilities through the creation of escrow accounts or to manage risks associated with the project. The trust structure therefore provides a clear mechanism for addressing unexpected events that may impact the joint venture.

Asset Protection:

Since Joint Venture Partnerships usually involve pooling of resources including physical assets together, Trusts can be used to protect those specific assets contributed by each party to the joint venture. The joint venture may decide to divest partners from control of the assets contributed by the joint venture Partners during the duration of the project. By placing assets in a trust, they may be shielded from the claims of creditors or other liabilities associated with the joint venture. This is particularly important in high-risk industries or ventures.

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Management of Real Estate Assets:

In joint ventures involving real estate, trusts can be used to hold title to the property or even manage the property. Where the Joint Venture involves the development of Real Estate, Trusts can be used to divest the landowner and developer of the title documents to the land where the property is to be built. This structure provides the trustee and partners with a clear legal framework for ownership, use, and potential asset sale, minimising disputes and streamlining decision-making.

Control and Management:

The Joint Venture can be structured in such a way that separates legal ownership from control. The trustee, acting as the legal owner, manages the assets according to the terms of the trust agreement. This separation can be beneficial in joint ventures where one party wants to retain a degree of control without direct legal ownership.

It is imperative to state that for Joint Venture partners to effectively use Trusts in their relationship, they must be able, not only to create the necessary environment for the Trusts to work, but they must also trust themselves. Joint Venture partners must equally understand that the application of trusts in joint ventures requires careful consideration of legal, tax, and business implications. Parties need to know what rights, assets, information etc., they are parting with. It is therefore imperative that parties are well guided by legal experts and professionals, experienced in creating trust structures and joint venture transactions such that the chosen approach aligns with the specific objectives of the parties involved and complies with relevant laws and regulations.

BUNKAYA BITRUS GANA, ESQ, is the Managing Director/CE, Greenwich Trustees Limited and can be reached on 08033335436 or [email protected]