Joint ventures remain one of the most powerful tools in the modern business arsenal. In this five-part series, we will explore how, in a climate of geopolitical uncertainty and economic volatility, joint ventures have proven particularly resilient, with many executives believing they offer greater strategic value than traditional mergers and acquisitions.
Whether you’re looking to enter a new market, develop breakthrough technology, or share the risks of a capital-intensive project, a well-structured joint venture allows you to combine complementary strengths while distributing both costs and risks. However, with failure rates hovering around 50%, success requires more than good intentions — it demands careful planning, clear agreements, and robust governance from day one.
This five-part guide walks you through the essential elements of structuring a successful joint venture, from choosing the right legal framework to anticipating what happens when things don’t go as planned.
Define Clear Objectives, Scope, and Duration
Vague goals are the enemy of successful joint ventures. Your agreement should answer these questions with precision:
- What is the finish line? Define measurable success metrics — whether that’s achieving a specific market share, reaching revenue targets, launching a product by a certain date, or completing a construction project within budget.
- What’s in and what’s out? Clearly delineate the JV’s scope: which products, which territories, which customers. This prevents “scope creep” and reduces potential conflicts of interest with the parent companies’ ongoing businesses. For example, if you’re forming a JV to sell products in Southeast Asia, explicitly state whether that includes Australia, whether it covers all product lines or specific ones, and whether e-commerce sales are included.
- What’s the exit plan? Joint ventures should not be perpetual. Define a term (e.g., five to 10 years) and specify clear trigger events for termination. These might include:
- Achieving the stated objective
- Failure to meet defined performance milestones
- Material changes in law or market conditions
- Mutual agreement of the partners
- Deadlock on critical decisions
Specify Contributions and Capital Structure
Initial Contributions – Be explicit about what each party is contributing. Contributions can include:
- Cash
- Physical assets (equipment, real estate, inventory)
- Intellectual property (patents, know-how, trade secrets)
- Human capital (dedicated personnel, expertise)
When contributions are non-cash, establish a fair valuation methodology upfront. This valuation determines ownership percentages and voting rights, so it’s critical to get it right. Consider using independent appraisers for significant asset contributions.
Future Funding – Most ventures will require additional capital beyond the initial investment. Your agreement must address:
- Capital Calls – The process for requesting additional contributions from partners
- Timing and Notice Requirements – How much advance notice must be given before capital is due?
- Consequences of Non-Contribution – What happens if a partner fails to meet a capital call? Common remedies include:
- Dilution of the non-contributing partner’s ownership stake
- Allowing the contributing partner to make the shortfall and receive a preferred return
- Buy-out rights triggered by the failure to fund
Establish Governance and Decision-Making Framework
This is where many joint ventures succeed or fail. Poor governance leads to deadlock, frustration, and value destruction.
1. Management Structure
Define who runs the day-to-day operations. Options include:
- Appointing a dedicated JV CEO or general manager
- Rotating leadership between partners
- Designating one partner as the operating partner with defined authority
Clarify reporting lines: Does the JV CEO report to a board? To one of the parent companies? Having a clear management structure prevents operational paralysis.
2. Board or Steering Committee
Most equity JVs are governed by a board of directors or managers, typically with representatives from each partner. Your agreement should specify:
- Board composition (how many seats or votes does each partner get?)
- Meeting frequency and procedures
- Approval thresholds for different types of decisions
3. Decision-Making Tiers
Not all decisions are created equal. Establish different approval thresholds:
Day-to-Day Operations (Simple Majority or Delegated to Management):
- Routine operational matters
- Hiring non-executive staff
- Entering into contracts within approved budgets
Material Decisions (Supermajority or Unanimous Consent):
- Approving annual budgets
- Making capital calls
- Incurring debt above a specified threshold
- Selling substantial assets
- Changing the fundamental business plan
- Entering new markets or business lines
- Making distributions to partners
Minority Protections: Even in ventures where one partner has majority ownership, the minority partner should negotiate veto rights over a narrow set of truly critical matters. This protects the minority from having the venture radically changed without their consent.
Conversely, a minority participant with absolute veto rights can hold the project hostage and create an unfair advantage.
4. Staffing
Will the JV hire its own employees, or will parent companies second personnel to the venture? If using seconded employees:
- Who remains the employer of record?
- Who pays salary and benefits?
- What happens if performance issues arise?
- How are these individuals incentivized to prioritize JV success?
This article provides general information and should not be construed as legal advice. Joint venture structures involve complex legal, tax, and regulatory considerations that vary by jurisdiction and circumstance. Consult with experienced legal and tax advisors before entering into any joint venture arrangement.
