When two businesses set up a joint venture, they usually agree on the big idea and leave the detail of who decides what for later. Later tends to arrive as a disagreement. The governance provisions in the joint venture agreement are what settle it, so they are worth getting right while everyone is still on good terms.
Start with the structure
How decisions are made depends a lot on what form the joint venture takes. There are three common options in England and Wales.
A contractual joint venture. The parties co-operate under a contract without creating a new entity. This suits a single project or a limited collaboration. Governance is whatever the contract says, often a steering committee of representatives from each side. The contract should state clearly that it does not create a partnership, because two parties carrying on a business in common with a view to profit can be treated as partners under the Partnership Act 1890, with each potentially liable for the other's debts.
A joint venture company. The parties become shareholders in a new limited company. This is the most common structure for a longer-term venture. Governance sits in two documents: the articles of association, which are public, and a shareholders' or joint venture agreement, which is private. The Companies Act 2006 sets default rules that apply unless the documents change them.
A limited liability partnership (LLP). The parties become members of an LLP. It has separate legal personality and limited liability like a company but is taxed broadly like a partnership. Governance is set by the LLP members' agreement, and where that is silent, default rules in regulations made under the Limited Liability Partnerships Act 2000 apply. Some of those defaults (for example, that every member may take part in management and that profits are shared equally) are rarely what commercial parties want, so the members' agreement needs to deal with them.
The rest of this guide focuses on the joint venture company, but the same questions apply to the other forms.
Who sits on the board
Each party normally has the right to appoint and remove a number of directors, often in proportion to its shareholding. In a 50/50 venture each side might appoint two. In a 60/40 venture the majority might appoint three and the minority two.
The agreement should also cover the quorum for board meetings (typically at least one director appointed by each party must be present, with a fallback if one side repeatedly stays away), who chairs, and whether the chair has a casting vote. The model articles give the chair a casting vote, which is usually disapplied in a 50/50 venture because it would hand control to whoever holds the chair.
One point that surprises people: a director appointed by a joint venture partner owes their duties to the joint venture company, not to the partner that appointed them. The duties in sections 171 to 177 of the Companies Act 2006 apply in full, including the duty to avoid conflicts of interest. The agreement can authorise certain conflicts and allow nominee directors to pass information back to their appointor, but it can't remove the core duties. If you expect your appointee to vote in your interests on everything, that expectation needs managing.
Board decisions and reserved matters
Most joint venture agreements split decisions into two groups. Day-to-day running is left to the board or to a managing director under a delegated authority. A list of reserved matters needs the written consent of each party (or of parties holding a stated percentage of the shares) before the company can act.
The reserved matters list is where a minority partner's protection really sits. It commonly includes changing the articles, issuing or buying back shares, borrowing above a set limit, selling the business or major assets, approving the annual budget and business plan, entering into contracts outside the ordinary course of business or above a value threshold, paying dividends, starting or settling significant litigation, and any transaction with a party or its group. If you are the minority, check that the matters you actually care about are on the list and that the thresholds are set at sensible levels. If you are the majority, check the list isn't so long that you can't run the business.
Some changes need a special resolution of shareholders (75% of votes) under the Companies Act 2006 whatever the agreement says, including changing the articles. A party holding more than 25% can therefore block those resolutions on its own.
When the partners can't agree
Giving each side a veto creates the risk of deadlock. The agreement should say what counts as a deadlock (usually a reserved matter or board resolution failing at two properly called meetings) and what happens next. Typical steps, often used in sequence, are:
- escalation to senior executives of each parent for a fixed period
- mediation with an independent mediator
- expert determination, if the dispute is about a figure such as a valuation rather than strategy
- a buy-sell mechanism, such as a Russian roulette or Texas shoot-out clause, or put and call options at an expert valuation
- as a backstop, a solvent winding up of the company
Arbitration is sometimes included for disputes about the agreement itself (for example, whether one party is in breach). It is binding and private, but it decides legal disputes rather than commercial disagreements about what the company should do next. Our guide to deadlock clauses explains how each mechanism works and where each can go wrong.
Funding and further capital
Joint ventures often need more money than the parties first expect. The agreement should say whether either party has to contribute more, and on what terms. Common approaches include no obligation to fund beyond the initial contribution, an obligation to fund up to a cap if the board calls for it, or an option to fund with dilution for the party that doesn't.
Dilution clauses need care. If one party can call for new capital at a low price when it knows the other can't afford to contribute, it can reduce the other's stake cheaply. Look for a fair price mechanism for new shares, a reasonable time to respond, and clarity on whether a party that falls below a threshold loses its board seat or its veto rights.
Restrictions on the partners
Most agreements stop each party from competing with the joint venture, and from soliciting its customers or staff, while it is a shareholder and for a period afterwards. These restrictions are enforceable only if they go no further than reasonably necessary to protect a legitimate interest, and between competitors they also need to be checked against competition law, including the Competition Act 1998. A restriction that covers a partner's whole existing business, rather than the joint venture's field, is more likely to be challenged. Make sure the definition of the restricted business matches what the joint venture actually does.
Information rights
As a shareholder you are entitled to a copy of the annual accounts, but that is about all company law guarantees, and it arrives well after the event. The agreement should give each party regular management accounts (monthly or quarterly), the annual budget, and access to the company's books and records on reasonable notice. A minority partner without a director on the board depends entirely on these rights to know what is going on.
Key people and change of control
If the venture relies on particular individuals or on the identity of a party, the agreement can deal with that directly. A change of control of one party (for example, if it is bought by a competitor of the other) is often a trigger allowing the other party to buy its shares at a fair value. The loss of a named key person can be handled in a similar way, though clauses that force a sale at a heavy discount can be challenged, so they should reflect a genuine commercial interest.
Reviewing your agreement
If you are negotiating a joint venture, settle board rights, reserved matters, deadlock, funding and exit before the venture starts trading. If you already have an agreement, read the reserved matters and the deadlock clause against the decisions you are likely to face over the next year or two. You can upload it for a joint venture agreement review, which flags gaps in the governance provisions and explains what each one means for you.
Related: what the joint venture agreement review covers, and a complete sample report.