Joint Ventures: What are the key governance issues?

Note: The focus in this guide is on JVs structured as incorporated companies (rather than contractual partnering or limited liability partnerships). However the themes will be relevant for each type of JV structure.

Joint ventures (JVs) are largely built on trust and there is a fine balance between safeguarding interests and ensuring that the JV operates as smoothly as possible on a day-to-day basis.

It is important to establish a clear framework of governance that sets out which party or parties control the venture on a day-to-day basis and which actions cannot be taken without the buy-in from a significant portion or even all the parties.

Here we outline the key aspects of JV governance to consider when setting up a joint venture.

Who has control of a Joint Venture?

There are usually two or three different tiers of control in any JV:

• Board of directors
• Management team (if different to the board)
• Shareholders

Which of the above can exercise control and to what extent will vary according to the nature of the matter in issue.

What are the considerations at board/management team level?

Early discussions will be needed to agree the board configuration, including on:

• What will the minimum/maximum number of directors be?
• Who can appoint a director/who is eligible to become a director?

Commonly shareholders that have a certain percentage interest (e.g. 10% or 25% depending on the number and negotiating position of the parties) in the JV would get a right to appoint a director to the board.

Once the composition of the board has been agreed the focus turns to the practical arrangements for board meetings, including:

• How often will the board meet?
• Who must attend (i.e. must there be at least one representative for each JV party) for the decision to be valid/binding?
• How will decisions be made?

Director decision making is most commonly taken on a simple majority basis. However, JV parties should consider whether there are any matters, for example an area within only one party's expertise, which would benefit from a weighted vote giving a particular party more say on that matter. The directors could also agree that certain decisions must be taken on a unanimous basis though these decisions should be considered carefully. Unanimous decisions increase the likelihood of deadlock and may delay the day to day running of the JV's operations.

Deadlock situations may arise even on a majority vote and the parties should think about how this could be resolved most efficiently. What happens if an action is not voted through? Does this mean that the action does not take place (i.e. the status quo continues) or does it mean that a deadlock is triggered? Please read our guidance here for more detail on deadlock situations.

Whilst the board will carry out the operations of the JV it may defer all or certain day-to-day functions, essentially executing the business plan, to a management team.

The board may review the business plan on an annual basis allowing the JV's business to evolve over time and this may be subject to periodic review by the shareholders who can set new objectives or milestones, providing the management team with a roadmap for the coming period.

How do JV parties protect key actions/issues?

Matters put to shareholders are usually limited to the more fundamental or sensitive issues relating to the joint venture. Rather than the decision making on these matters sitting with a JV party's appointed board member, this allows each JV party to consider the matter at their own corporate level.

This may include decisions around the issuing of new shares, changing the business of the joint venture, entering into a large contract or entering into litigation proceedings. These are often referred to as 'reserved matters'. The list of reserved matters will ultimately depend on the negotiating position of each party but will be of key importance to any JV party that has a minority representation on the board.

The voting threshold required to pass a 'reserved matter' will be subject to negotiation. This could be fixed at a specific percentage (for example 75% or 80%) or a particular party may be granted veto rights over certain major matters.

As with voting at board level, deadlock situations can arise at the shareholder level. Therefore, consideration needs to be given to what happens if the vote does not go through. Does it mean the action does not take place (i.e. the status quo continues) or does it mean that a deadlock is triggered? Please read our guidance here for more detail on deadlock situations.

How can a joint venture deal with conflicts of interest?

Conflicts of interest may be relevant at board and/or shareholder level and could arise in many different instances. One example is where the JV is to enter into a transaction with one or more of the JV parties. It will also be relevant if any of the JV parties will be contributing assets or services to the JV.

In any conflict scenario directors of companies must consider their statutory duties in respect of conflicts and duty to act in good faith to promote the success of the JV company for the benefit of the members as a whole (i.e. not just their appointing shareholder) whereas shareholders can vote in their own self-interest.

The JV parties should consider various potential conflict situations and establish a clear process that enables operations to continue, including. can conflicts be authorised? should a conflicted director be counted in the quorum and what if quorum requirements cannot be met without him or her doing so? Is a connected party able to vote on the matter giving rise to the conflict?

What are the other governance issues that should be considered?

Other issues related to the interaction of the JV parties that should be considered include:

Sharing of information between the JV parties. Consideration should be given to:

• Who is responsible for providing this and how often?
• Who has access to the information and are there any confidentiality issues?
• What information can be shared by a JV party and to whom can it be shares (for example, its investors)?

Restrictive covenants. What restrictions should be implemented to prevent any of the parties from competing with the JV? Should these apply to the JV's customers, suppliers, employees?

What happens in a deadlock situation?

Please read our guidance here for more detail on resolving deadlock situations.

In summary:

The above provides insight into key governance issues in a JV. For details on other key considerations when entering into a joint venture please refer to our guide 'Joint ventures: what are the key considerations when entering into a Joint Venture'.