When is a joint venture the right structure and when does it create more risk?

A joint project does not always require a separate company with a shared board and profit distribution. Sometimes a commercial agreement can achieve the same goal faster, at a lower cost, and without giving a partner control over strategic decisions. A joint venture is useful only when the parties must jointly manage assets, funding, and long-term operations. If the objective is limited to supply, technology licensing, or distribution, a complex corporate structure may create unnecessary costs and liabilities. In this article, we explain how to choose between a joint venture and contractual cooperation and which risks to assess before launching a joint business.

What is a joint venture?

A joint venture is an arrangement in which two or more independent parties jointly carry out a specific business project and share control, resources, risks, and expected returns. There is no universal legal form. The structure depends on the partners’ objectives, applicable law, tax regime, and business activity.

An incorporated JV is established as a separate company, partnership, or other legal entity. The partners own shares, appoint directors, and make decisions through corporate bodies. This model separates the JV’s assets and liabilities from those of its participants, although shareholders may provide guarantees, loans, or additional funding commitments.

A contractual JV does not require a new legal entity. The agreement directly allocates rights to assets, revenue, expenses, and liabilities. This structure may suit a limited project, joint development, or tender participation, but it requires clear rules on each party’s liability to customers and third parties.

Under IFRS 11, joint arrangements are classified as joint operations or joint ventures. In a joint operation, the parties have rights to assets and obligations for liabilities. In a joint venture, they have rights to the separate structure’s net assets. This accounting classification does not replace local corporate and contract law analysis, but shows why the document’s title alone is insufficient.

The key feature of a JV is joint control. Decisions on relevant activities require the partners’ consent. If one party can determine strategy, budget, and management alone, the arrangement may be a subsidiary, minority investment, or ordinary commercial cooperation rather than a true joint venture.

When a joint venture is the right choice

A JV is justified when the parties must do more than exchange services. They need to jointly own resources, fund operations, and make strategic decisions. The structure should create an advantage that the partners cannot achieve independently or through a standard contract.

A joint venture may be suitable when the parties need to:

1. Enter a new market. A local partner provides market knowledge, a distribution network, staff, or access to customers.
2. Combine complementary assets. One party contributes technology or IP, while the other provides manufacturing capacity, licences, or commercial infrastructure.
3. Share major costs. The partners jointly fund research, construction, product development, or market entry.
4. Allocate project risk. Each party assumes a defined share of financial, operational, and regulatory exposure.
5. Create a separate business line. A new entity separates the project’s management, accounts, and liabilities from the partners’ main operations.
6. Meet local ownership requirements. In some jurisdictions, a foreign investor may operate only with a local partner or under foreign ownership limits.
7. Pursue a long-term objective. A JV suits a project that requires ongoing coordination, a shared team, and regular decisions rather than a one-off transaction.

The partners should contribute comparable strategic value, even if their financial contributions differ. A company providing only funding can usually use a loan or minority investment. A party providing only a specific service can enter into a service agreement.

A JV makes sense when joint control is necessary to achieve the intended result. If shared management adds no value, it increases administrative costs, delays decisions, and raises the risk of conflict. Before creating the structure, the parties should compare it with licensing, distribution, outsourcing, and other contractual models.

When a joint venture creates more risk

A JV becomes problematic when the parties create a joint structure before agreeing on the business model, governance, and exit. A formal allocation of shares does not resolve differences in objectives, resources, or willingness to fund the project.

Key warning signs include:

• No measurable objectives or agreed business plan;
• Equal voting rights without an effective deadlock mechanism;
• Dependence on IP or a licence held by only one partner;
• Different expectations about funding and investment return periods;
• Competition between the partners and the JV for customers or employees;
• No practical way to transfer shares or exit the project;
• Major differences in compliance standards and risk appetite.

If a company only needs access to technology, a licence agreement may be sufficient. Sales through a partner’s network may require a distribution agreement, while joint development can be governed by a development contract with clear IP allocation. A minority investment provides financial participation without mandatory joint management. An acquisition is more suitable when the investor needs full control over strategy and assets.

A JV may also create unnecessary risk for a short-term project. Incorporating an entity, opening accounts, corporate reporting, tax compliance, and liquidation may cost more than the expected benefit. Contractual cooperation is usually simpler in such cases.

A structure is particularly risky when one party provides a critical asset but cannot control its use. For example, a technology partner may lose influence over product development, while a local partner may depend on funding that the other participant can stop.

A joint venture should not be used as a compromise when the partners cannot agree on an acquisition or a comprehensive contract. Unresolved disagreements do not disappear after incorporation. They move into the board, budget approval, and daily operations. If the parties cannot agree on key scenarios in advance, joint control only increases the risk.

Governance, funding and deadlock risks

Joint control requires rules that protect the partners’ interests without disrupting daily operations. The more decisions require unanimous approval, the greater the risk of paralysis.

Governance and reserved matters

The shareholders’ agreement and constitutional documents should divide powers between shareholders, the board, and management. Daily operations are usually delegated to the management team. Partner approval is reserved for matters such as changes to strategy or budget, major debt, share issues, key executive appointments, and related-party transactions.

The documents should define board composition, quorum, voting thresholds, and the procedure when one partner’s representative is absent. A casting vote may speed up decisions but can effectively give one partner control. It is therefore rarely used for matters that change the JV’s economic balance.

Future funding

Initial contributions rarely cover the project’s entire duration. The documents should specify whether additional funds will be provided through equity, shareholder loans, third-party financing, or a combination of these methods.

They should also define the consequences if a partner refuses to join a funding round. Possible mechanisms include dilution, default interest, a priority shareholder loan, or the other partner’s right to buy the interest. Automatic forfeiture of shares may be unenforceable or disproportionate, so any sanctions must be checked under the governing law.

If parent companies provide guarantees, the liability limits and duration must be agreed separately. Otherwise, a formally limited liability JV will not limit the partners’ actual financial exposure.

Deadlock resolution

A deadlock arises when a required decision fails to receive the necessary majority. The process usually begins with another board meeting, followed by escalation to senior executives or shareholders.

If negotiations fail, the parties may use mediation, an independent expert, or a buy-sell mechanism. Russian roulette and sealed-bid procedures allow one partner to buy out the other, but favour the party with greater financial resources.

A forced sale or liquidation should remain a last resort. For an operational deadlock, a temporary mechanism can keep the approved budget and mandatory payments in place until the dispute is resolved. Otherwise, a shareholder conflict may quickly lead to breaches of contracts, licence conditions, and obligations to employees.

IP, customers and competition law

A JV often combines assets that its participants continue to use in their own businesses. Without clear limits, the joint project may obtain overly broad rights to one partner’s technology, data, or customer relationships.

Before operations begin, the parties should define:

• Ownership of background IP created before the JV;
• Rights to foreground IP and joint developments;
• The scope, territory, and duration of granted licences;
• Use of improvements after the JV ends;
• Ownership and portability of customer data;
• The right to work with customers after exit;
• Confidentiality and employee non-solicitation obligations.

If one partner retains the IP, the JV must receive a licence sufficient to perform its business plan. Its termination should not depend solely on the owner’s decision. Otherwise, the other participant may invest in a business that can lose its key asset.

Data arrangements should define controller and processor roles, processing purposes, security obligations, and procedures for returning or deleting data. Participation in a JV does not allow customer information to be shared freely between parent companies.

Competition risks

The participants may remain competitors outside the joint project. Sharing prices, customer lists, future strategy, and other commercially sensitive information can create antitrust risk, even if the JV has a legitimate business purpose.

Access to information should follow the need-to-know principle. Clean teams, aggregated reports, and information barriers may be used for sensitive data. Non-compete clauses must be necessary for the JV and limited in scope, territory, and duration.

In the EU, a full-function JV operating as an autonomous business on a lasting basis may fall under merger control. Other forms of cooperation between competitors are assessed under horizontal cooperation rules.

Competition analysis should be completed before sensitive information is exchanged and binding documents are signed. A notification requirement identified later may delay closing, while unlawful coordination between the partners may lead to an investigation and fines.

Full-function JVs backed by significant non-EU financial support may also trigger a separate notification under the EU Foreign Subsidies Regulation, in addition to standard merger control. This applies where the JV's EU turnover reaches at least EUR 500 million and the parties received an aggregate of at least EUR 50 million in foreign financial contributions over the preceding three years. The two review processes run in parallel and can reach different conclusions on the same transaction, so the timeline for closing should account for both. 

How to structure and exit a joint venture

JV documents should govern not only the project’s launch but also its operation when circumstances change. Leaving exit terms for future negotiations is risky because the partners’ interests may already conflict by that point.

The structure should cover:

1. Purpose and scope. Business activities, territories, products, and limits on the JV’s authority.
2. Contributions. Cash, assets, IP, personnel, licences, and contribution deadlines.
3. Governance. Board composition, reserved matters, quorum, voting, and management authority.
4. Funding and distributions. Future capital, shareholder loans, guarantees, dividend policy, and loss allocation.
5. Performance and default. KPIs, reporting, audit rights, material breach, and consequences of non-performance.
6. Share transfers. Lock-up, pre-emption rights, permitted transfers, tag-along, and drag-along provisions.
7. Deadlock and exit. Escalation, mediation, buy-sell procedures, put and call options, trade sale, or liquidation.
8. Dispute resolution. Governing law, court or arbitration, seat, language, and interim measures.

The exit price should be calculated using a predetermined method. A reference to fair market value is insufficient unless the documents define the valuation date, assumptions, debt, discounts, and procedure for appointing an independent valuer. A discount may apply to a defaulting party, but it must be proportionate and enforceable.

The parties should also determine what happens to contracts, employees, customer data, licences, and IP after the JV ends. Technology rights may expire, but the parties may need a transition period to meet their obligations to customers.

Termination does not always require immediate liquidation. The partners may sell the JV to a third party, divide its assets, or transfer the business to one participant. A pre-agreed mechanism preserves value and reduces the risk that a corporate conflict will destroy a viable project.

How Key2Law helps structure joint ventures

The Key2Law team advises international businesses on the formation, review, and termination of joint ventures. We help select a structure that supports the commercial objective, allocates control, and avoids unexpected regulatory or operational risks.

When structuring a joint project, Key2Law can:

• Compare a JV with contractual cooperation and an acquisition;
• Choose between an incorporated and contractual structure;
• Define contributions, ownership, and funding obligations;
• Develop governance rules and reserved matters;
• Allocate IP, data, and customer rights;
• Assess competition and regulatory requirements;
• Prepare deadlock and exit mechanisms;
• Draft the shareholders’ agreement and related contracts.

If you are considering a joint venture or already face a conflict between partners, contact the Key2Law team. We will help assess the risks, protect the participants’ rights, and create a mechanism that allows the project to operate, raise funding, and end without losing key assets.

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This article is provided for general informational purposes and does not constitute legal, tax or financial advice. Applicable requirements depend on the jurisdiction and specific circumstances; professional advice should be obtained before making legal or business decisions.