Structuring Joint Venture and Partnership Transactions: The Top 10 JV Ownership and Control Models
OWNERSHIP AND CONTROL are pivotal terms in negotiating a successful JV agreement. The simplest way to structure these provisions is by using what we refer to as the Standard Form JV or Proportionate Model — i.e., where each party’s ownership and control are proportionate to the value of its initial and planned future contributions, and where each company’s level of control (e.g., number of board seats, voting and veto rights, management team slots) is directly proportionate to its ownership level. It’s simple, predictable and, in our experience, the easiest model to communicate, consummate, govern, and manage.
For example, in Adwen, a JV between Areva and Gamesa to combine their offshore wind turbine businesses, each partner’s contributions were valued equally, which translated into a 50:50 split of ownership and control. In another example, Verizon and Hearst formed a 50:50 JV, Verizon Hearst Media Partners, to create and launch digital-video channels with original programming aimed at younger, mobile-phone oriented consumers. To reach that desired ownership split, both parties invested the JV with a mix of capital, personnel, and other resources — i.e., Verizon brought technology, ad sales, and distribution reach, while Hearst brought digital video content and production capabilities.
Unfortunately, the reality is usually more complicated.
As companies negotiate new JVs, they often confront differences related to ownership and control that make the Proportionate Model unpalatable or impossible. For instance, a company’s contributions may have a lower implied valuation than those of its partner, yet the company seeks an equal or controlling position. Or negotiations reveal that the counterparties have opposing views about how to handle JV financing or future investments — for instance, one partner is more willing to fund future capital investments in certain assets, technologies, or markets, eventually throwing out-of-balance initially equal contributions. Or local regulations prevent a foreign partner from holding a majority interest in the JV — but that partner seeks control of key aspects of the business, such as technology development or supply chain management.
In these situations, the Proportionate Model is not an option — and companies must get creative.
TEN COMMON OWNERSHIP AND CONTROL MODELS
The beauty of joint ventures is the flexibility to overcome constraints and differences via creative deal structuring. Our database of more than a thousand JVs and analysis of public filings shows ten common JV ownership and control models (Exhibit 1). As companies enter deal negotiations, it is worth understanding these ownership and control models and knowing which (if any) best fits the needs of the situation. [Note: These models are focused on ownership and control and do not depict or incorporate other major clauses, such as authorized scope, legal form, holding and operating company structures, economic model, operating model, or exit rights and triggers.]
The ten common ownership and control models are:
- Model 1: Standard-Form JV (Proportionate Model)
- Model 2: Majority-Owned JV with 50:50 Control
- Model 3: Contingent-Ownership JV Based on Performance
- Model 4: Twin JVs with Different Ownership and Control
- Model 5: Umbrella JV with Sub-JVs
- Model 6: Phased-Ownership Escalation JV
- Model 7: JV Plus Direct- or Cross-Equity Investment
- Model 8: True-Up to Equal Ownership JV
- Model 9: Non-Legal Entity JV (i.e., Virtual JV)
- Model 10: 50:50 Style JV with Lead Partner or Operator
Consider two models that deviate from the standard approach:
Model 3: Contingent-Ownership JV Based on Performance. Under this construct, the parties structure the venture as a contingent contract where JV ownership has the potential to change, depending on future performance or some event. For example, if one partner is contributing a nascent technology to the venture or allowing the venture to access its sales force, rather than arguing about valuation of these hard-to-value assets, the parties might make venture ownership contingent upon the performance of those contributions in, say, the first three years. To do this, the parties define performance milestones and metrics tied to future adjustments to ownership — e.g., if the partner’s contributed nascent technology receives regulatory approval within three years, then its ownership increases from 30 to 50%. Or if the other partner’s sales force sells 500,000 units for the JV in the first three years, then its ownership stake increases from 70 to 75%. If both events happen, then the first partner’s stake only increases from 30 to 45%.
Model 4: Twin JVs with Different Ownership and Control. Here, the parties establish two or more separate joint ventures with different ownership and control profiles for each. Goodyear Tire & Rubber and Sumitomo Rubber Industries deployed this structure when they formed a global partnership to consolidate their tire manufacturing, distribution, and sales operations. The initial structure was centered around four regional joint ventures — including separate JVs in North America and Europe (in which Goodyear held a 75% stake), and two JVs in Japan (which were majority owned by Sumitomo), one focused on OEM clients and the other on the replacement or aftermarket. The benefit of this structure is that it affords greater control to one partner in key markets or businesses (e.g., a home country market), and it also makes exit easier. Similar Twin JV structures can be found around the world (e.g., DuPont and Teijin when they consolidated their polyester film businesses, BP and Mobil when they combined their refinery and lubricants businesses in Europe).
PICKING AMONG THE MODELS
Picking the right ownership and control model is a creative, iterative, and experience-based process. For starters, it needs to be anchored in a deep understanding of key inputs and constraints — e.g., how the venture fits with parent company strategies, regulatory requirements related to ownership and control, tax implications, valuation of planned partner contributions, partner desires for control, and the willingness and ability of each partner to fund future investments. To the extent that the proportionate ownership and control model is challenging — and the parties are exploring more creative structures — it is essential to think about what complexities these alternate models introduce and how they might be mitigated.
So, which ownership and control structure is right for you?
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Originally published at www.waterstreetpartners.net.