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Joint ventures: how it ends is settled before it starts

Two businesses that get on well decide to build something together. Both can see the commercial logic, both are keen to begin, and the paperwork is left until the thing is working. That instinct is understandable, and it is why these arrangements tend to end worse than either party expected.

Joint ventures do not fail in interesting ways. They fail in a short and thoroughly documented list of ways: one side comes to believe it is carrying the work, one side changes its own strategy, and a decision arrives that neither party can take alone. Anyone who has watched a few could name those failure modes at the outset, and almost nobody writes them down, because raising them sounds like an accusation aimed at someone you have just decided to rely on.

There is a second pattern, and it is the more useful one. Most joint ventures stop operating well before anybody opens the agreement. Attention drifts back to the businesses that pay the salaries, a launch slips and is not rescheduled, and the venture survives mainly as a set of filing obligations. By the time the document is read, both sides have privately decided what they are owed, and each reads it for support rather than for guidance.

What separates a joint venture from other commercial arrangements is that it has two parents. Each has its own board, its own shareholders and its own quarter to deliver. The venture sits between them without a constituency of its own, and much of what shapes it is decided inside one parent, about that parent, by people who are not thinking about the venture at all.

The structure decides who can commit whom

A joint venture can be run through a jointly owned company, through a contract between independent businesses that each keep their own risk, or as a partnership. Those are different worlds for liability, for tax and for who may commit whom.

The point most often missed is that a structure can arrive without being chosen. In England and Wales, parties who carry on a business in common with a view of profit may be partners whether or not either ever used the word, and partnership brings consequences neither would have accepted if they had been put on a page. Each partner can generally bind the other in the ordinary course of the business, and exposure to the venture's debts is not limited to what each side put in.

The structure also settles questions the parties treat as administrative: whose paper the customer contracts on, whose insurance responds when something goes wrong, and whose employees are doing the work. Unanswered in writing, they are settled by whatever the parties happen to do, which is usually decided by whose systems were easier to use at the start.

The quarrel is almost never about strategy

Parties setting up a venture expect that if they fall out it will be over direction. In practice they fall out over contribution, for a reason that is structural rather than personal. A joint venture is one of the few commercial arrangements in which much of what each side puts in is not money, and the parts that are not money are the parts nobody records.

Cash is contributed once and appears in the accounts. The other contributions do not. Engineering time taken off a parent's own roadmap, access to a distribution network built over years, a brand allowed to stand behind something it does not control, introductions to customers one parent spent a long time acquiring: each has a real cost to the parent supplying it and no agreed value to the venture. Each side measures its stake in a different currency, and the two accounts diverge steadily while both remain internally honest.

What follows is a request to revisit the split, which the other side hears as an attempt to reopen a deal already done. Nothing in the original conversation helps, because contribution was described in the language of enthusiasm rather than of measurement. The questions that would have settled it, what each non-cash contribution is worth and what happens if a parent stops supplying it, are uncomfortable at the outset and unanswerable afterwards. Seconded people are the sharpest version of the same problem, because a person lent to the venture is still employed elsewhere and nobody has decided whose knowledge they are building.

What the venture creates, and who is left holding it

Ownership of intellectual property is usually addressed, if at all, for what each side brings in. The valuable material is what gets made afterwards, once both sides have stopped thinking about ownership: the software written on top of one party's platform, the process worked out jointly, the name the venture trades under, the customer data accumulated by both.

Where that material ends up jointly owned, the parties imagine they each hold half of something. They do not. Joint ownership operates in England and Wales much more like a veto placed in each pair of hands: as a general rule neither owner can license the work to anyone else without the agreement of the other. After a separation, each side holds an asset it can neither use nor sell, and can stop the other using.

The commercial consequence is rarely anticipated. The asset is not divided and it is not sold. It stops being used by anybody, while both parents rebuild their own version, each shaped by the memory of the joint one. That resemblance is where the second dispute comes from.

Deadlock is designed in, usually by accident

An even split of a jointly owned company is chosen because it expresses the spirit of the thing, and it does. It also means that once the parties disagree, neither can carry a decision the other refuses, and the venture stops in place while continuing to consume money and obligations. Requiring both sides to consent to significant matters is a sensible protection that widens the range of subjects on which everything stops.

Deadlock between two parents is seldom the disagreement it appears to be. It is two organisations that have each moved on since the venture was agreed. A parent is acquired, reorganises, appoints a chief executive with different priorities, or starts something that overlaps with the venture. None of that is a decision about the venture, and all of it changes what the venture is allowed to become. The people across the table may be as constrained by their own board as you are by yours, and neither set is free to say so.

Agreements commonly provide that a matter the venture cannot settle is escalated to nominated senior people at each parent. That is offered as the answer to deadlock and tends to operate as a delay, because the people it reaches have less context and a full agenda of their own. Where nothing beyond that was agreed, what remains in England and Wales runs through the courts, and is decided by somebody outside both businesses.

Nor are the mechanisms designed to break deadlock as even-handed as they look. An arrangement under which one party names a price and the other chooses which side of it to take reads as symmetrical on the page. In practice it favours whichever parent can raise money quickly, so whether it protects you is a question about the other parent's balance sheet rather than about drafting.

What leaving is permitted to take

Every joint venture ends. The good ones end because one side buys the other out or the project is absorbed, and the rest because somebody wants their people back. What separates them is whether anyone decided in advance what a departing parent may take.

Rather less of that is settled by the agreement than the parties assume. It is settled by where things sat while the venture was running: which parent's staff held the customer relationships, whose systems the data lives in, and which parent could continue the activity alone if the other withdrew. Two parents that contributed equally on paper are rarely equally able to carry on alone, and the one that could has been negotiating from that position for some time before either notices.

Valuation on exit is the other reliable trap. A holding in a private joint venture has no buyer other than the party on the far side of the table, so a mechanism referring to market value describes a market that does not exist. Whatever figure the formula produces is argued about between two finance functions that reached opposite conclusions in advance.

Then there is the vehicle itself. A venture that stops trading does not cease to exist. It keeps its officers, its filing obligations and whatever it owes, at the point when both parents have lost interest and neither has anybody assigned to it. Abandoned joint venture companies are a recurring source of exposure for people who believed they had walked away.

Where the effort is wasted

A good deal of what is called a joint venture does not need to be one. Where the shared activity is narrow, a supply arrangement, a licence or a referral agreement between independent businesses achieves the same result and can be stopped without unwinding anything. A jointly owned company created to test an idea leaves an entity to dissolve and accounts to prepare whether or not the idea worked.

Nor is an unbalanced arrangement corrected by writing a longer agreement. Where one side contributes far more, or has an alternative partner while the other does not, drafting records the imbalance rather than removing it.

If the relationship has already begun to sour, there is a strong argument for doing nothing visible for now. Putting a position to the other side ends the informal phase permanently, and the matter is thereafter conducted between two organisations rather than between the people who set it up.

The judgement worth making concerns the other parent rather than the drafting: what the venture is presently doing for them, whether the person who sponsored it internally is still in post, and what would happen to their own numbers if it stopped this month. A venture that matters a great deal to one parent and very little to the other is priced accordingly whatever the shareholding says, and that is not an assessment a business makes honestly while it still needs the arrangement to work.

This guide is general information about how these matters usually run. It is not advice, and nothing becomes advice until terms are agreed in writing. Brandleys Legal Ltd delivers reserved legal activities alongside regulated partners.