The mission to innovate can bring entrepreneurial minds together in the form of a partnership or joint venture. However, it’s not always easy to get great minds to think alike, which is why the decision-making in a partnership or joint venture can sometimes be complicated.
What is a Joint Venture Agreement?
A joint venture agreement is an agreement between two or more individuals or companies in which the parties come together geared towards a common goal with rights and responsibilities of the parties determined by the contributions made to the venture, and often for a limited period of time.
It is important to note that the parties exist as separate legal entities and continue to be separately responsible for debts they accrue during the joint venture. The proportion of liability held by each party can be determined by provisions in the joint venture agreement.
Who makes the decisions in a Joint Venture?
When looking at joint ventures, we consider the differences in the decision-making standards between unincorporated joint ventures and incorporated joint ventures. This may first lead to the question of the difference between the two types of joint ventures.
To put it simply, an incorporated joint venture is one which is registered as a new company (or incorporated entity) through which the venture is operated. In this case, the joint venture parties are shareholders of the new company and will appoint directors. Meanwhile, unincorporated joint ventures are set up through a joint venture agreement between two companies who decide to work together with no formal external corporate structure.
For incorporated joint ventures, the Shareholders’ Agreement of the new company will typically provide the detailed mechanics for how the joint venture will be carried out. This will set out key decision-making processes including how deadlocks should be addressed.
Similarly, in the case of unincorporated joint ventures, a joint venture agreement itself will be set up to provide guidance on how decisions are to be made in carrying out the joint venture.
Before you formalise your joint venture, avoid future problems by deciding:
- the powers of the management team;
- business practices;
- governance arrangements that promote flexible decision-making;
- how to deal with a shareholder deadlock;
- the information that is to be given to shareholders; and
- the involvement of shareholders in the joint venture business.
How is it different in a Partnership?
In a partnership, two or more parties come together to form an ongoing relationship in which responsibilities, profits and risks are shared. In contrast to a joint venture, a partnership results in the parties being jointly and severally liable for debts and obligations of the partnership.
Like a joint venture, partnerships are generally governed by a partnership agreement which sets out the structure of the business, rights and obligations, and most importantly to this discussion, the decision-making and dispute resolution mechanisms (which are further supplemented by statutory guidelines provided by legislation). Understanding the terms of the partnership agreement is the key to recognising how you as a partner will have your ideas weighed up in the decision-making process of the business.
It is also important to recognise that a partnership creates a fiduciary relationship between the parties in which each partner must act in good faith and in the best interest of the partnership. These elements also tend to influence the decision-making approaches of the partners as they are obligated to act in the best interest of the partnership when contributing ideas and acting as members of the partnership.
For the question of “How are decisions made in a joint venture or partnership?”, the answer lies in the arrangement made between the parties by executing the agreement.
You can ensure the smooth sailing of your joint venture or partnership by understanding what key features of these two arrangements dictate the decision-making process. The procedures of decision-making and overall governance of joint ventures and partnerships are set out in the respective agreements set out between the parties, so it is important to make sure you understand the agreement and do not come across any surprises in the future regarding the decision-making mechanisms in place and the weight of your input on the direction of the venture.
Talk to us, your technology lawyer, and we can help you get your joint venture agreement or partnership agreement set up to reflect your expected involvement, agile decision making, and ultimately the decision-making processes including how deadlocks should be addressed. Don’t let your desire to grow be hampered by your agreement structures.