WHEN COMPANIES DECIDE to pursue a joint venture (JV), a critical first step is determining the appropriate level of ownership and control. Given a choice, most companies would prefer to be the majority partner, believing such a structure provides greater control and decision-making efficiency. Being a minority partner, however, is also appealing in certain cases by limiting capital outlays, reducing operating responsibility and resource demands, lowering risk exposures, and keeping the joint venture off of the company’s consolidated financials.1 A third option is a 50:50 joint venture.
There are a number of factors that might drive JV partners to an equal equity split. Most simply, such structures reflect the partners making equivalent cash and non-cash contributions to the venture upon formation. Beyond this, equal ownership might be a function of regulatory requirements for local partners to hold at least a 50% ownership stake, or a reflection of neither party wanting to consolidate the venture’s financials. The choice of 50:50 is often the default practical solution for partners when contributions are roughly equal and neither is willing to cede control. Or, companies may favor 50:50 ownership due to a desire to build an independent, long-term sustainable business based on balanced contributions, risks, and rewards between complementary partners.
Our recent benchmarking of key demographic details of the world’s 600 largest joint ventures formed since 1990 shows that 50:50 ventures are the most prevalent ownership structure across industries, compared to asymmetric bilateral and multi-owner JVs, and also have a longer average lifespan (Exhibit 1). In certain circumstances, research shows they can even outperform other structures.2 Notable ventures with 50:50 ownership include Chevron Phillips Chemical, a global chemicals JV founded in 2000 between Chevron and Phillips; Hulu, a media streaming venture founded in 2007 between NBC Universal and News Corp (and now a 67:33 JV between Disney and Comcast); and Dow Corning, the silicon joint venture founded in 1943 and acquired by Dow in 2014.
Exhibit 1: 50:50 JV Prevalence and Lifespan Data
Notwithstanding the above, many companies are justifiably hesitant to enter into 50:50 joint ventures. The principal fear is decision gridlock, with the owners failing to reconcile competing strategies and investment appetites and trapped in JVs with no path forward. Other fears include a lack of clear accountability for either partner to make the venture a success, or to establish adequate controls and manage risk. Companies are also rightfully concerned about JV management emerging as a de facto third partner, playing the owners against each other while promoting its own growth agenda.
Benchmarking of joint venture legal agreements validates some of these concerns. Our review of voting and related terms in 30 JV agreements with 50:50 ownership shows that most equally-owned JVs lack basic contractual protections against decision deadlock and related risks. While creative mechanisms for more efficient JV decision-making do exist, they are not present in the majority of 50:50 JV agreements.
The balance of this article describes key findings from our analysis and provides five creative structuring solutions to avoid decision-making impasses in 50:50 ventures.
1As a general rule, companies that are controlling majority shareholders of JVs consolidate them into their financial statements; companies that own 20-50% utilize equity accounting and report their share of the JV’s net income; and companies that own less than 20% carry the value of their shares as an investment asset. However, the actual ability to consolidate or utilize equity accounting is situation-specific; for example, a 55% own-er with a strong minority partner may not have enough control to consolidate, and an 18% owner with outsized rights may be able to utilize equity accounting. However, this article should not be construed as providing any specific accounting or legal advice or recommendations.
2A 1991 analysis of 49 cross-border joint ventures indicated that 50:50 ventures were more likely to succeed relative to the partners’ objectives, as compared to asymmetrical bilateral JVs. See Joel Bleeke and David Ernst, “The Way to Win in Cross-Border Alliances,” Harvard Business Review, Nov-Dec 1991.