Small Stake, Big Voice
Minority partners in joint ventures can still negotiate substantial rights to have a say in business decisions.
Taking a minority stake in a joint venture (JV) can make good business sense. What doesn’t make sense is ceding more control than you have to. With the post-pandemic surge in partnerships, including those with unequal ownership, executives negotiating the deals should understand that they may hold more cards than they realize.
Nearly half of the world’s largest JVs have a minority partner — that is, an owner with an equity interest below 50%.1 Companies may take minority stakes simply due to comparative asymmetries in their contributions of cash and assets to the venture or because they’re selling a majority stake in a previously wholly owned business as the first step in a staged exit. They may want to test the waters before fully committing to a new geography or business, or local regulations may prevent them from having a controlling stake. Regardless of the reason, minority partners often seem to hold an enviable position: They invest less money, have lower reputational risk, and can lean on a majority partner to do much of the heavy lifting.
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Unfortunately, minority partners in a joint venture can struggle to be heard, with their concerns about risks and opportunities going unanswered by venture partners and with no ability to force resolution of their issues. Perhaps not surprisingly, joint ventures with minority partners have lower success rates than 50-50 ventures, thanks in part to minority partners lacking the clout to get their voices heard.2 JVs with minority partners also frequently end in a buyout of the minority partner.3
However, our analysis of 55 JV agreements with a minority partner, combined with our experience over multiple decades serving more than 300 such ventures, shows that minority positions need not be debilitating, and minority partners need not be silent subjects of actions taken by the majority.
Best Practices for Structuring Deals With Minority Positions
In our experience, there are 10 practices that minority partners can use to more effectively negotiate and structure their rights to amplify their voices and better govern and influence a venture.
1. We define a minority partner in a joint venture as one of the following: a partner holding less than 50% in a bilateral joint venture with a single majority partner, a partner in a multilateral joint venture in which one partner holds greater than 50% interest, or a partner in a multilateral joint venture in which no partner holds a majority interest but where one or more other minority partners holds a significantly larger ownership share (for instance, 40-40-20). Our database of 600 of the largest joint ventures announced from 1990-2020 shows that 42% included a minority partner.
2. J. Bleeke and D. Ernst, “The Way to Win in Cross-Border Alliances,” Harvard Business Review 69, no. 6 (November-December 1991): 127-135.
3. Our database of joint venture disposition approaches for 248 ventures that ceased to be JVs as of August 2020 shows that one partner bought out the other in 77% of JVs with a minority partner, compared with in 58% of JVs without a minority partner. These disposition approaches include when one partner buys out the other partners, when the partners sell to a single third party, if the joint venture is dissolved or liquidated, or if JV ownership otherwise changes (for example, the JV goes public or the parent companies merge).
4. We reviewed the percentage ownership of 55 JV minority partners and whether such minority partners were required to approve each of 35 decisions. We then performed a logit regression for each decision to determine whether equity ownership drove whether the minority partner would have such a decision right at a statistically significant level (P value < 0.1).
5. Based on a review of 55 joint venture agreements of JVs with a minority partner in Water Street’s joint venture database.
6. See J. Bamford and S. Bhargava, “Independent Directors for Joint Venture Boards,” The Corporate Board (January-February 2020): 21-25; and M. McGovern, T. Branding, and J. Bamford, “JV Directors Duty of Loyalty,” Harvard Law School Forum on Corporate Governance, Nov. 16, 2019, https://corpgov.law.harvard.edu.
7. For more information on creative mechanisms for future capital investments, see E. Elliott, L. D’Costa, and J. Bamford, “Agreeing to Disagree: Structuring Future Capital Investment Provisions in Joint Ventures,” Journal of World Energy Law & Business 13, no. 1 (May 2020): 12-22.
8. J. Bamford, M. Mogstad, and J. Kwicinski “Non-Operated Joint Venture Asset Teams: Does Size Matter?” Oil & Gas Journal 14, no. 7 (July 17, 2017): 1-7.