So, you’re interested in partnering with another organization or individual (or maybe a group of organizations/individuals) to jointly operate a health care facility, provider, supplier, services organization, etc. You must be asking yourself many questions, such as: What will the joint venture do? How much funding will we need? Where will such funding come from? How will we split ownership? What will be the respective roles and responsibilities of the venturers? On and on…
Often times, a sticking point in negotiations is how to divide voting rights, representation and other governance/decision-making responsibilities. Below are a few (hopefully) helpful points that might allow the venturers to better customize the joint venture’s governance structure to meet their specific needs and avoid common pitfalls/omissions:
- Voting percentages do not necessarily need to match ownership percentages.
In most cases, whether the joint venture is structured as a partnership, limited liability company or otherwise, venturers’ ownership percentages do not need to match their voting percentages. In other words, venturers can fund, contribute to, and share in the profits/distributions of the joint venture on a disproportionate basis (e.g., 80%/20%) irrespective of their voting rights. This type of flexibility allows venturers to, perhaps, split voting rights equally (50-50), while contributing to the joint venture and sharing in its profits/distributions at different percentages.
- In many cases, decisions can be made by a board, committee, officer, the venturers themselves, or some combination thereof.
Except as mandated by law, decision-making authority can generally be vested in, or delegated to, one or more individuals, entities or bodies, as applicable. For some joint ventures, a “corporate structure” (i.e., whereby decisions are made by the owners and/or a representative governing body) is more appropriate while, in other cases, it may make more sense to delegate authority to one venturer, officer, manager or third party or to allow the venturers to directly govern without any authority delegated to individuals or a board/governing body.
- Representative board/committee members can be equal in number but with unequal voting rights.
Just because venturers want to install the same number of representatives on a board/committee, that does not require that the venturers’ voting rights be equal (especially if their ownership percentages are not equal). Similarly, if the venturers want equal voting rights but desire different numbers of representatives, it is often possible to allow the venturers to appoint any number of representatives (or a number of representatives within a range) and simply require such representatives to vote together with a total voting percentage equal to their respective venturer’s percentage interest (regardless of how many representatives are in attendance).
- Don’t ignore the specifics of quorum requirements/voting rights provisions.
The quorum/voting rights provision is often an afterthought or is overlooked altogether, but many potential sticking points can be avoided with a well thought-out quorum/voting rights provision. Is a representative from each venturer required for a quorum? If so, is there a mechanism to deal with one venturer’s representatives neglecting to attend and thereby preventing a quorum? Must representatives of the same venturer vote together or can they disagree and dilute the venturer’s total voting percentage? If representatives are required to vote together, how are disagreements resolved? Can a representative of a venturer exercise the venturer’s full percentage vote in the absence of other representative members?
- Don’t underestimate the efficiencies in delegating day-to-day operational decision-making to one or more managers.
Often times, venturers bring different benefits to the table. While one partner may be better equipped to contribute financially or provide existing technology/infrastructure, another may have operational expertise and may be more capable of managing the venture’s day-to-day operations. Therefore, many joint ventures delegate varying degrees of operational authority to one or more “managing” members/partners or even to a third party manager (via a management agreement) in order to most efficiently conduct the venture’s activities.