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Pooling resources and risk: Key considerations for retail joint ventures

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17/04/2019

Walker Morris risk series stampTo survive – even thrive – in uncertain times and in a challenging market, retailers need to be open-minded to opportunities for improving efficiency and targeting growth. One option that many high street names are choosing in the current market is the joint venture.

James Crayton and Gwendoline Davies offer a quick checklist of some of the key practical points for any retailer considering pooling resources and risk with a potential partner.

Retail joint ventures – practical considerations

Marks & Spencer with Ocado; Walmart with Eko and MGM; Burberry with Coty; H&M with Jimmy Choo, Versace and others; Debenhams and Li & Fung… they’re all doing it – should you?!

There’s no doubt that there can be significant advantages for retailers who decide to pair up with suitable partners, whether that be in terms of increased buying power improving supply chain efficiency (à la Debenhams and Li & Fung); the pooling of infrastructure and marketplace resources and risk (M&S and Ocado); or the reinvigoration and expansion of a brand (H&M with luxury fashion labels, and multiple retail/celebrity collaborations), to mention just a few.

Joint venture arrangements can, however, also involve real risk. If a joint venture partner doesn’t turn out to be the right ‘fit’, or if financial, strategic and/or operational interests and objectives diverge and differ over time, the consequences to the balance sheet and to the brand can be devastating.

If you are wondering whether a joint venture might be a viable option for your retail business, check out our list of some key points to consider.

Checklist

  • First and foremost, the selection of the right joint venture partner is critical. Detailed research and due diligence of all aspects of a potential partner’s business and ethos should be undertaken.
  • There is no specific meaning of ‘joint venture’ in English law. The parties therefore need to decide, at the outset, on the form that the venture will take. Will the arrangement take the form of a new legal entity (such as a limited company, a partnership or a limited liability partnership), or will it be a purely contractual arrangement (which might take the form of a co-operation agreement or which might involve licensing or franchising arrangements)? As well as specialist legal advice, advice on the tax implications of the various different possible structures may be needed.
  • What assets/resources will each party bringing to the venture and how can they be safeguarded? For example, what existing data and intellectual property rights will be used and are they adequately protected? What warranties and indemnities will be given in relation to assets/resources contributed, and to whom? What will be the impact on the partners’ respective existing businesses of sharing resources such as employees, IT, real estate and contacts? Are any external funding arrangements required?
  • What exactly are the returns on their investment that each party expects? For example, how will newly generated IP rights be utilised and protected; and how are any profits to be dealt with – re-invested; shared; in what proportions?
  • Are there any wider legal or regulatory issues to consider? For example, is there any risk of the new venture falling foul of UK and/or EU competition/merger control? Is it a cross-border venture and if so have all jurisdictional/international aspects to the deal been properly considered and covered off? Are there any listing rules or industry-specific regulations with which the new venture must comply? Are there any TUPE [1] implications if employees are being transferred to the new venture; and how are any share scheme or pension scheme arrangements to be dealt with?
  • Are the parties entirely clear, and in agreement, about how key decisions relevant to the joint venture and all aspects of its business are to be made and by whom? Clear governance/deadlock provisions will be needed and can minimise the potential for dispute.
  • In case disagreements do occur, dispute resolution provisions should govern the resolution of any issues that arise both during the life of the joint venture and potentially for a specified time thereafter.
  • The soon-to-conclude Ocado/Waitrose partnership is unusual in that it has continued successfully for nearly 20 years. Joint ventures are most often successful when they are relatively short-term, as short-term arrangements can have immediate impact and remain relevant in a fast-moving market, plus the risk of diverging interests giving rise to commercial or operational disputes is minimised. The parties should, ideally, agree at the commencement of any joint venture its duration; and should, at the very least, include suitable arrangements for termination at the instigation of either party.

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[1] Transfer of Undertakings (Protection of Employment) Regulations 2006

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