Posted by:8 August, 2012
In Le Tour, the Sky Team worked together to deliver the result they had all been working towards, a British winner. The winner was Bradley Wiggins but it was clear to all that without his team mates Bradley was unlikely to have won. The Team worked together on the hills, they threw a protective cordon around Bradley in the Peloton, the Team took the buffeting and strength of the wind and they helped work him back up to the front runners when he was off the pace. The Team was everything and Bradley understood this and he knows that in another year one of his other team-mates may be the Chosen One, to be the beneficiary of all that hard work. The combined strength of Le Team is so great, so confident, that almost any of the individuals within the team would have the capability to take the Yellow Jersey. If Alexander Dumas was writing today then Le Tour could have been the inspiration for his “All for one and one for all”.
Social enterprises trying to win new business need to have regard to the lessons of the Tour. To win the big prizes you need to collaborate with others. You also need to be tough and professional. In Surrey, a £25m health business tendered for what was essentially a £500m contract and lost. It probably did not lose on the basis of its quality of care, but simply that this was something too big to swallow. Collaboration was needed. A team was needed. The tactics of Le Tour were needed.
It is usually obvious when you need to collaborate with others but some examples are as follows:
- Where “scaling up” is needed such as in a bid situations so that you can compete with larger organisations;
- Where sharing knowledge, best practice and creating new innovatory ways of providing the service is needed;
- Where you can make best use of an existing good relationship between the Parties to provide a better integrated service to clients.
- Where sharing, compartmentalising risk and protecting the main organisation is important
Once you know you have to collaborate finding or deciding who to collaborate with can be difficult. However normally if you have a good knowledge of the market place you tend to have some natural friends. If you do then discuss how you might work together well before an opportunity arises because that way you will be ready to take the opportunity when it arises. Tendering these days is all about seizing the moment and scrubbing up well (and quickly!) and we all know that’s easier said than done. Partners do need to be chosen carefully. You are going to be spending time with them, you will be sharing information and know-how and potentially creating future conflicts of interest as well. You do not do this lightly. When you are on Tour, eating, sleeping and working together, it helps if you get on. If the chemistry is there then the desired outcome is more certain.
Corporate Joint Venture
If you find one or more organisations to work with there are two main options for structuring the collaboration; (a) a corporate joint venture which involves setting up a new vehicle; or (b) a contractual joint venture, where the Parties work together through a contractual relationship without forming a new vehicle.
If the Parties decide on a corporate structure, social enterprises working together would often look to use a community interest company or a community benefit society or a charitable company limited by guarantee. These models all have benefits (and disadvantages) but quite often, particularly when there is time pressure, the parties will often use a form they are familiar with. However as the primary objective of many collaborations will be to win tenders/work it is important to have a model that commissioners are familiar with and that they are likely to look favourably upon. For example CICs with their asset lock and their community benefit objectives have been attractive to commissioners setting up contracts with social enterprises in the first place. I set out below some pros and cons of the “corporate” joint venture approach.
- Limited liability of the owners if the legal entity’s business fails.
- Companies allow ring-fencing of investment and protection from any adverse issues at the parent level.
- A company may in time create a stronger “identity” for contracting, as it has a separate legal identity and therefore can bid for and deliver work in its own right.
- There are many options for participants to be involved in a legal entity, including membership/share structures.
- Each Party could provide services to the joint venture company (through an contractual service level agreement) and earn income from the arrangement.
- Depending on compliance with applicable legislation may be subject to favourable tax treatment (e.g. if charitable status can be obtained).
- A company can provide a firm basis for internal management and employee structure. As a legal entity it will have its own finance and governance systems in place with clear lines of responsibility and accountability to its shareholders.
- Flexibility for raising finance as it can hold assets in its own name, issue shares, borrow money, give floating charges as security for external finance and grant charges over future assets such as receivables.
- The shareholders can limit their exposure in respect of the liabilities and losses of the company
- If the joint venture company is subject to legal proceedings or challenges, the Parties as shareholders will be one step removed and therefore its exposure to any publicity, risk or liability may be more limited.
- Incorporating and running a company involves significant administrative set up legal and other costs. Initially a lot of work and consideration is required in establishing appropriate governance and managed arrangements. We recommend legal input in drafting the articles and the shareholders’ agreement.
- It also entails the on-going cost and administrative burden of complying with company law and regulations e.g. various forms and returns need to be filed publicly and audited annual accounts need to be filed with the Registrar of Companies.
- The company will require its own finances, governance, staffing, administration, and this might result in duplication of resources for the Parties, as opposed to using “in-house” resources. However, this will be required for any structure albeit in slightly different forms.
- The newly incorporated company would have no work or financial track record and may as a result be disadvantaged in any tender (although the commissioner may agree to take into account the skills brought to the table by each of its shareholders in their proposals for delivery of the Services).
- The joint venture company’s constitution would be governed by the Memorandum and Articles of Association. These are available for public viewing on the Company register at Companies House and therefore cannot be kept confidential. However, it is common for the detail of the relationship between the joint venture parties to be laid out in a separate shareholders’ agreement. This will not be filed at Companies House and therefore the details can be kept confidential.
- If a company enters into arrangements with significant obligations it may be required to obtain a parent company guarantee of those obligations from the Parties (which would effectively remove the benefit of limited liability protection for the Parties).
- There may be taxation disadvantages as the separate legal entity will be taxed in its own right (unless it is a tax transparent vehicle such as a limited liability partnership).
- Termination or winding up of the entity may have complications. Liquidation of a company may be difficult to achieve in contentious circumstances.
Contractual Joint Venture
The alternative to a corporate joint venture would be for the parties to adopt a contractual joint venture structure. This arrangement will be flexible and would avoid the relative formality and permanency of a corporate structure. If the parties adopt a this structure, you will need to decide whether all parties will enter the service contract as joint lead contractors, or whether one party will take the role of lead contractor and sub-contract with the others. Generally commissioners will require one party to enter into the contract.
Under the Public Procurement Regulations 2006 the exclusion of consortia/partnership bids on the grounds that the partnership/consortia have not formed a legal entity for the purposes of tendering for or negotiating the contract is prohibited. Therefore, the parties do not have to have set up a joint venture company to bid jointly for the services at the early stages but commissioners might require this on award. However, bid submissions usually require partnership/consortia bidders to provide details of the relationship between the parties. A consortium agreement, memorandum of understanding or “shareholders’” agreement (or even a draft) will demonstrate to commissioners that the Parties have a properly regulated relationship. I set out below some of the pros and cons of the “contractual” joint venture approach.
- A simple form of contractual association which avoids the relative formality and permanency of a corporate structure.
- Less formal integration (but more independence) for the Parties.
- Flexibility inherent as the agreement may be changed (by consent) at any time to suit changing conditions.
- Avoids the cost of forming a new legal entity/organisation. No formal registration is required and the agreement may expire on a given date, without the need to formally dissolve a joint venture company.
- The Parties can bid and deliver services in their own name using a lead contractor/sub-contractor arrangement.
- Commissioners may (depending on the circumstances) favour a contractual joint venture because of the clear lines of accountability to the partners themselves and the availability of joint resources to support service provision.
- The Parties will not have statutory responsibility for the liabilities and obligations of the joint venture and for the acts or omissions of its partners. However, the Parties will be exposed to claims and liabilities (which could be unlimited) as a consequence of their own activities and, depending on the contractual arrangements, could also be exposed to claims and liabilities in respect of its partners’ activities where it has expressly assumed responsibility or is vicariously liable under the agreed contractual joint venture arrangements. The extent to which an individual organisation will be responsible for the activity of another organisation will hinge on the authority given to other organisations to bind it and on the indemnities in the joint venture co-operation agreement, and great care should be taken as to the terms of any contract entered into in connection with the joint venture.
- Unlike the constitutional documents for a corporate joint venture, the legal documents do not need to be published and so the parties to, and details of, the joint venture can remain completely confidential.
- Carrying out work and making decisions as a group or partnership can be time consuming and costly. It may be difficult to identify the full cost and scope of consortium working at the outset.
- There will be some set up & running costs including getting a consortium legal agreement and servicing the consortium (however, this is likely to cost less than setting up a joint venture company).
- The lack of a separate legal entity can result in a lack of focus and structure for the joint venture and mean that its operational success is more heavily reliant on the parties’ good will and commitment. It could also depend on certain individuals within the partner organisation and therefore, if they move on this would weaken the consortium. This area of risk can be mitigated by negotiating and agreeing a robust consortium or co-operation agreement at the outset.
- No body of law governs a contractual joint venture, other than contract law itself. Unlike a company, you have to define every aspect of the operation of a joint venture. Instead, the various roles of the parties and the allocation of risk in the contract will be subject to the terms of the contract.
- The joint venture cannot in its own right enter into contracts with third parties. A contract with a third party will have on Party (or some/all of the Parties) as counterparties, and if all Parties are counterparties there will need to be clarity as to whether they will be jointly liable for each other’s actions. If only one of the Parties will contract (i.e. acting as the “lead” contractor with a sub-contractor), then appropriate indemnities will need to be in place.
Whichever structure the Parties decide to adopt, strong governance arrangements, good systems of communication, decision making and accountability are all essential components of a successful joint venture. In Le Tour, if one of the Team felt good on a particular day and just wanted to go for it and ignore Team orders and race on his own for a day he might get some personal glory but the Team effort may suffer, the Peloton may not be able to be controlled and the desired project outcome would be under threat. The same goes for your joint venture, its got to be “All for one and one for all”. And don’t forget to focus on the terms of the legal documentation at the outset as well ! It will help ensure you look at the right issues and understand what is happening, it’s the discipline again, and having a robust contractual base for the joint venture to operate and succeed.
Chris Brophy is a partner with capsticks, specialising in commercial and contractual work for healthcare bodies,social enterprises, mutuals and charities.