Small Stake, Big Voice

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.

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. Don’t let your ownership interest define your decision rights. Our analysis of joint venture contracts with a minority partner shows that minority decision rights are not correlated with ownership interests.4 Instead, a company’s ownership interest is determined by its formal contributions to the venture (for instance, capital, assets and intellectual property, and commercial contracts), while its voting rights and protections are driven by its negotiating leverage and informal contributions. Examples of informal contributions include privileged access to technology, brands, financing, government relationships, and customer markets. Companies may also gain negotiating leverage when there is a scarcity of viable alternative partners.

This finding carries profound implications for companies considering a minority position in a JV. Companies should not assume or be willing to accept counterparty assertions that just because the company will have, say, a 20% interest, its voting and veto rights should be limited to a few decisions — and that this somehow represents the market norm in deals with similar equity splits. Rather, companies should aggressively negotiate voting rights using a confident understanding of what leverage and contributions they bring to the JV.

Minority partners should not limit their pursuit of approval rights to decisions that fundamentally alter the joint venture’s business or legal agreements, such as admitting new owners. Our analysis shows that minority partners were no less likely to be able to approve fundamental matters, such as termination of the JV or declaration of bankruptcy, than to approve more regularly addressed business matters, such as the declaration of dividends or approval of material contracts with third parties. (See “Minority Partners Can Negotiate to Be Decision Makers.”) Therefore, minority partners should push to obtain rights related to more regular decisions, such as approval of the venture’s annual plan and budget, in addition to the approval of fundamental events.

2. Be willing to consider exceptions, thresholds, and other terms that limit decision rights. Minority partners often do not have the unhindered ability to exercise their decision rights. These rights might be contingent — that is, either triggered or fall away — only when certain thresholds are crossed or conditions are fulfilled. We believe that the judicious use of contingencies that limit the minority partner’s decision rights can, counterintuitively, be a positive for the minority partner. With the minority partner having a vote only under extraordinary situations, the majority partner should be more willing to consider giving the minority stakeholder these decision rights in the first place.

Many decisions in the ventures we looked at were subject to such conditions. For instance, consider Alcoa World Alumina and Chemicals (AWAC), a multibillion-dollar 60-40 joint venture between U.S.-based Alcoa and Australia’s Alumina that accounts for roughly one-tenth of the global alumina market. In AWAC, minority partner Alumina has to approve acquisitions and divestitures that are likely to result in a change of mining or refining production above certain levels, or those with a price tag of $50 million or greater.

In other instances, minority decision rights can disappear under specified conditions, such as if a target or milestone is not met. This was the case in Solae, a 72-28 soy ingredients JV between DuPont and Bunge that became a world leader in developing soy-based ingredients and was fully acquired by DuPont in 2012. In that venture, minority partner Bunge’s right to appoint the CFO was contingent on the venture operating within 80% of its business plan with respect to operating income and ROI. If this target was not met, the board, by majority vote, could replace the CFO.

3. Allow for a loss of rights upon a drop in ownership. A minority partner might consider agreeing to an automatic reduction in decision rights if its ownership interest falls below a threshold. This reduction can be used to address anticipated future ownership changes — including dilution, the transfer of some of its ownership to a third party or another owner, or the exercise of a right to purchase another partner’s interests. Limiting the minority partner’s rights if its interest in the venture drops provides comfort to the majority partner that future decisions will not be held hostage by a minority partner with a marginal ownership interest.

As a practical matter, the loss of rights can be implicit and a logical result of the minority partner’s ownership dropping. For example, if the partners must approve the annual budget by a vote of 90%, a minority partner has no meaningful vote or ability to veto the decision when its ownership falls below 10%. In other cases, the loss of rights is explicit, such as when the agreement specifically states that the minority partner will lose some or all rights when its ownership drops below a certain level.

A little less than half (44%) of the ventures we reviewed included an explicit loss-of-rights provision. Of these, 38% had a cutoff of 10% — the most common tipping point we observed. For example, in the case of Cingular Wireless, a joint venture that was majority-owned by SBC Communications, the minority partner BellSouth would lose its representation on the strategic committee that made all JV decisions if its ownership interest fell below 10%. Other common cutoffs were 20%, 15%, and less than 10%.

4. Pre-agree on key decisions. Prospective minority partners should seek to gain pre-agreement on certain matters, such as an initial business plan, a product road map, a year-one budget, a dividend policy, and the initial management team for the venture. Our analysis shows that pre-agreement was most frequent when it came to the venture’s dividends policy. More than half of the JVs we reviewed had a pre-agreed-upon distribution policy, such as requiring the venture to distribute 100% of its free cash flow.

Pre-agreement might also be selectively sought for other decisions. For example, in the Pfizer-GlaxoSmithKline joint venture, the parties agreed that up to 25% of the estimated $600 million in annual cost synergies from creating the JV were to be reinvested to support innovation and other growth opportunities. In other instances, especially in JVs in developing countries with state-owned companies as the minority partner, the parties will often pre-agree on the number or percentage of JV employees or suppliers that must be locals as opposed to from abroad.

Pre-agreement on certain plans and decisions establishes the balance of power, at least during the initial partnership period, to a more equal footing for the minority partner.

5. Find creative ways to resolve deadlocks to increase a majority partner’s comfort. Majority partners may fear a deadlock if a minority partner has a blocking right on key decisions. Minority partners should consider mitigating this risk, and thus increasing the likelihood that the majority will agree to grant additional rights, by building in deadlock-breaking mechanisms. Some deadlock-breaking mechanisms may favor the majority, while others may protect minority stakeholders in areas of particular importance to them. For example, the majority may be able to cast a deciding vote to break a deadlock, but doing so would trigger a put right — that is, the right to sell its interest — for the minority.

For instance, in a bio-based chemicals joint venture with BioAmber, minority partner Mitsui had a right to sell 100% of its interest if BioAmber made certain third-party contractor payments above a dollar threshold despite Mitsui’s disapproval. Rosemont Copper, a development-stage open-pit copper mine in the United States that was a joint venture until 2019, had an equally creative deadlock mechanism: The minority partner negotiated the right to prepare an alternative budget if it rejected the budget prepared by the majority partner, with an independent expert choosing between the original and alternative budgets.

6. Seek participation rights to gain voice rather than added vote. Rights to participate in the JV board and committees give minority partners the opportunity for more active involvement in the venture’s governance and more strident representation of their interests. Since rights to participate in the venture’s governance structures are not necessarily linked to the minority partner’s voting rights, they might be easier to negotiate.

Participation rights that minority partners should consider advocating for include board representation disproportionately higher than ownership interest (present in 17% of JVs reviewed); quorum requirements mandating the presence of the minority’s representative (present in 38% of JVs reviewed); rights to decide who leads or attends board meetings, such as the right to appoint an independent director or board observers (present in 15% of JVs reviewed); and guaranteed representation on committees (present in 27% of JVs reviewed).5 Such participation rights can be powerful, potentially swaying conversations and thus decisions.

In the case of Glad, an 80-20 food container and storage products venture between Clorox and Procter & Gamble, minority partner P&G has two nonvoting observer positions on the board in addition to its official board representatives. This gives P&G a larger collective voice beyond its voting representation.

7. Negotiate terms that reinforce the best interests of the joint venture versus the majority partner’s interests. Minority partners should seek to establish contractual terms and practices that promote the collective interests of the partners and thus provide some protection from majority overreach. For example, the JV board may have an independent director (voting or nonvoting) who can provide an objective view on JV decisions rather than one colored by the majority partner’s strategic objectives, or the agreements might explicitly affirm the director’s duty of loyalty to the JV, reducing the likelihood that decisions will be made solely in the majority partner’s interests.6 The JV may also have an independent management team with significant delegations who can act in the interest of the venture and are better insulated from the pressures and whims of the majority.

8. Secure enhanced information, audit, and compliance rights. Minority partners should evaluate the opportunity to see into and evaluate how a JV is performing beyond baseline expectations, such as the right to receive audit reports and quarterly financials.

One-third of the minority partners in our data set had such enhanced rights. For example, Vodafone — a 45% owner in cellular telecommunications venture Verizon Wireless until it was bought out in 2014 — had the right to a detailed monthly report of operating and financial statistics (including number of subscribers, minutes of use, average revenue per subscriber, and other metrics) even if its equity interest dropped to 5%. In the JV combining the brokerage operations of Wachovia and Prudential Financial, minority partner Prudential had a special right to designate areas for audit, within limits.

9. Build in protections against dilution. Minority partners risk being diluted when they are dragged along into capital investments proposed by the majority partner that they are unwilling or unable to fund. As one layer of added protection, companies should consider securing the right to veto material investments — a right that more than 40% of minority partners in our data set held.

Beyond such veto rights, minority partners might look to additional protections, including the right to opt out of capital investments, limitations on capital contributions (that is, there are caps on the minority partner’s required contributions), limitations on dilution (that is, the minority partner cannot be diluted below a specific percentage), and retention of control rights in the event of dilution.7 Just under a third of the JVs we reviewed (29%) included some form of additional protection against dilution for the minority partner.

In AWAC, minority partner Alumina is not required to contribute to capital calls that are above $1 billion. If Alumina chooses not to contribute, it will not be diluted; instead, the agreements establish that the partners will agree on a mechanism, such as a disproportionate allocation of returns, to compensate majority partner Alcoa for its excess contribution.

10. Protect the value of your investment at exit. Finally, minority partners should look to secure exit rights beyond standard exit provisions such as a right of first refusal, right of first offer, tag-along rights, and drag-along rights. These rights do not uniquely protect the minority partner’s ability to exit the JV freely and at a fair price.

Additional protections that a minority partner might consider include pre-agreed-upon pricing methodologies upon exit, favorable minority put rights (for instance, if the JV misses a milestone or if the majority partner is in breach of the JV agreement), a right for the minority to freely transfer its interests to a third party under certain circumstances (for instance, if the JV loses its government license), and a shorter noncompete duration post-exit for the minority partner than for the majority stakeholder.

We found that 56% of minority partners negotiated at least one of these added layers of protection. For instance, in the case of ACNielsen eRatings.com, a JV to develop and maintain audience measurement panels, minority partner NetRatings — which held a 19.9% interest — could require the majority partner to purchase its equity interest at fair market value if the joint venture did not have an initial public offering within five years.

Maintaining Ongoing Influence

Beyond negotiating favorable contractual rights and protections, the most influential minority partners are deliberate about how they approach using their formal and informal powers to influence the majority partner and management. In our experience, translating these powers into influence is built on four essential actions.

1. Put the right people on the board, with a lead director. The most persuasive minority partners organize themselves to enable influence. This starts with placing the right people on the board and ensuring that these company directors have clear expectations for the role, including the ability to dedicate sufficient time (at least 15 to 20 days per year).

Companies often think too narrowly and quickly when selecting directors and would be better off starting with a candidate pool and evaluating potential directors based on set criteria. Such criteria should take into consideration their functional skills mix, passion for the business, prior governance experience, ability to serve for a number of years, communication skills, and informal influencing skills. Companies then need to ensure that directors have the training and incentives to perform the role; this includes assessing their previous performance as members of a board. To drive added accountability, the company should designate a single executive to serve as the company’s lead director — essentially, a first among equals — with clear accountability for the venture’s strategy, performance, and risks.

2. Establish a sufficiently resourced owner governance team. Influence is also built on an appropriately resourced and configured team to support the company directors. Such non-operating owner governance teams collect and review information received from the JV (for instance, financial information and audit reports), identify trouble spots (such as corporate social responsibility issues, excessive JV risks, or areas for operational improvements), prepare board members for meetings, obtain resources from the parent company for the venture, and seek to influence JV partners and the JV management team.

These teams vary in size based on industry, the complexity of the venture, and the partner’s desired level of involvement. We have observed companies that spend little to no time on JV governance to companies with up to 76 full-time equivalents working on a JV.8 However, each of these is an extreme; the median non-operator governance team size is 7.2 full-time equivalents in large oil and gas ventures and 4.9 full-time equivalents in other large natural-resources ventures, such as mining and chemicals.

3. Understand your sources of leverage, currencies, and tradable goods. To exercise influence, minority partners need to understand what tools are at their disposal. These will include — but likely go well beyond — the company’s negotiated contractual rights. Does the company have indirect commercial influence over the venture as a supplier, service provider, technology licensor, or customer of the venture? For example, U.S. agricultural giant ADM recently entered into a 30-70 JV with the Brazilian company Marfrig to create a plant-based proteins company, PlantPlus Foods. ADM will provide key technology to the JV through a technology licensing agreement, potentially securing a level of influence exceeding that of a financial investor with a similar ownership interest. Companies can also use the renewal of such agreements as a source of significant influence and leverage in other areas of the business.

Minority partners should also consider other sources of influence. For instance, a minority partner might possess a close relationship with a key regulator or access to other business opportunities that could be used as a carrot to drive action. And minority partners always have the option of using negative influencing tactics, such as threatening to litigate or to exit the venture over a dispute. These tactics may be detrimental to the long-term health of the relationship but can succeed as a last-ditch effort if other means of influence have failed.

4. Organize work around an annual influencing plan. Minority partners need to be strategic in where they focus. A powerful tool to drive discipline and impact is an annual influencing plan. The idea is simple: The minority partner’s governance team accountable for the JV identifies a few areas of high value or risk where it believes the majority partner and management lack sufficient focus or skills and where the minority partner is in a position to influence outcomes.

Having identified, say, three to five such key focus areas, the minority partner then develops an organized plan covering each area, with clear accountabilities, timing, and tactics. This plan, which is internal to the minority partner, is used as the basis for managing the parent company team working on the venture. This plan should leverage formal contractual rights and use other influencing techniques, such as offering to provide expertise in areas where the majority needs help. At its best, an influencing plan in action has a campaignlike quality — that is, a focus on a select set of concrete outcomes over a specific time period.

Negotiating strong minority rights and protections and having ongoing influence over a venture can be critical to a minority partner’s ability to steer the venture as it sees fit. However, in reality, this is only half the battle. The other half is in relationships — with both other partners and the JV management team itself — and in the ability to understand the business’s strengths, weaknesses, and needs.

So minority partners should indeed seek to have structurally sound rights, but with a caveat: They should not do so at the cost of burning bridges with partners or JV management. Severed relationships can have rippling effects for years. It’s crucial to weigh the value of obtaining desired rights with the costs of using hardball tactics. After all, what’s the use of having a big voice if no one is listening?