Five-minute general counsel: What is your share of a joint venture?

“Joint venture” is a sloppy term used to describe a number of different business operations. The important thing to remember is that it is too vague to be meaningful legally.

A project that is called a joint venture might legitimately be structured like any of these:

  • a brand new entity with shared ownership
  • a subsidiary of one partner
  • a ‘project’ with some shared or contributed resources

The differences between these are huge, and yet there’s no right answer without knowing the specifics of any situation. Well, I take that back: the right answer is knowing what you want, what you’re dealing with, and how to figure out if there’s a good fit between the two. If I had to pick a default answer, I’d say always form a new company so that everything that’s in the box is in the box, who owns what’s in the box is easy to figure out, and the rules about the box are well-known and clear to everyone, inside and out.

Someone recently asked “what is an equity share profit interest?” in a joint venture?

The specifics matter greatly, including the language of the terms, the type of entity, if any, that the joint venture is, and what is intended.

Usually, however, someone using the phrase “profit interest’ should mean that there is an interest in a piece of the profits that does not include ownership rights (or responsibilities) in the joint venture entity itself. This type of structure, like phantom equity, shadow equity, or other stock-option equivalents or even dual-classed common stock, is designed to separate the returns on the business from the ownership and control of the business. And most people don’t really care: they want the portion of the money that their stake represents as if it were true equity ownership. But many people don’t vote their shares in big publicly held companies nor do they want to be engaged in day-to-day management. Accenture and KPMG Consulting are two companies that come to mind where stock option equivalents were used as part of employee compensation.

Back to joint ventures: the idea of a profit-only stake might be appropriate when the joint venture doesn’t have a separate existence. It might be a true project operated by two or more companies: there’s no way to give anyone ownership in anything and so profits are all that can be shared. Or someone might be a much smaller participant than others who are determined to control the direction of the joint venture.