Structuring a Joint Venture Before the First Deadlock Could Happen

The situation

Diego and Eitan met at work more than a decade ago. Both are air traffic controllers, and both had put money into a friend's startup on the side — a company supplying specialized equipment and parts to airport ground operations across the region. Rivka, the friend, ran the business full time. Diego and Eitan stayed hands-off, checking in a few times a year and trusting Rivka to run things well. She did. By the time the three of them came to Treadstone Law, the company was generating roughly $9 million a year in revenue, with Rivka holding the largest share and Diego and Eitan each holding a smaller stake they had never formally documented beyond an early handshake and a one-page capital contribution note.

That informality had never mattered much, because the company had never needed outside partners. That changed when a much larger logistics firm approached them about a joint venture — a shared entity that would let the two companies jointly bid on a multi-year regional equipment supply contract worth several million dollars a year. It was the kind of opportunity that could roughly double the Oakville company's revenue within a few years. The larger firm's lawyers had already drafted a joint venture agreement and sent it over, along with a proposed signing date about three weeks out. Rivka wanted a second set of eyes before anyone signed anything, and Diego and Eitan agreed.

What the review found

A joint venture is a separate arrangement — sometimes its own company, sometimes a contractual partnership — created by two or more existing businesses to pursue a specific project together while each partner keeps its own separate operations outside the venture. The document the larger firm had drafted set up exactly that structure: a new jointly owned entity to hold the contract, with profits split according to each side's ownership percentage. On the surface it looked reasonable. Read closely, it had three problems that would only become visible once something went wrong.

The first was control. The draft gave each side an equal number of votes on the venture's management committee, which sounds fair until a decision needs to be made and the two sides disagree. With no mechanism to break a tie — no casting vote, no independent chair, no process to escalate a stalled decision — a genuine disagreement over pricing, staffing or how to handle an underperforming part of the contract could freeze the venture indefinitely while the underlying supply obligations kept running.

The second was exit. The draft said almost nothing about what would happen if one partner wanted out, or if the relationship between the two companies broke down. There was no buy-sell mechanism, no formula for valuing one side's interest, and no process for an orderly wind-down if the venture simply stopped working. Without that, either side would be relying on general partnership law and litigation to unwind the arrangement — a slow, expensive, and uncertain path.

The third problem sat closer to home. Diego, Eitan and Rivka had never signed a shareholder agreement for their own company — the document that governs how co-owners make decisions, handle disagreements, and separate if one of them wants to leave. That gap had been tolerable when the company's affairs were simple. It was not tolerable once the company was about to commit itself, through the joint venture, to a multi-year contract that would consume a large share of its capacity. If Diego or Eitan disagreed with a major decision Rivka wanted to make on the venture's behalf, there was no internal mechanism to resolve that either — the outside deadlock risk and the inside one were connected.

What we did

1. Reviewed the draft joint venture agreement clause by clause. Our team went through the larger firm's draft against what the deal was supposed to achieve, flagging the deadlock, exit and liability gaps in a summary the three owners could actually read and discuss, rather than a marked-up contract full of legal shorthand.
2. Negotiated a deadlock resolution mechanism. We proposed, and the other side accepted, a tiered process: unresolved disputes would first go to the two companies' senior leadership for a set period, then to a defined mediation step, with a narrow list of fundamental decisions — taking on debt beyond a set threshold, admitting a new partner, terminating the contract early — requiring a supermajority rather than a simple tie vote that could freeze routine operations.
3. Added a buy-sell mechanism with a defined valuation formula. We negotiated an exit clause allowing either side to trigger a buyout after a minimum term, using an agreed valuation method tied to the venture's audited financial statements, so that leaving the joint venture would not require litigation or an expensive independent appraisal fight to even begin.
4. Capped and clarified liability exposure. The original draft made each side jointly responsible for the venture's obligations without a clear ceiling. We negotiated language limiting each partner's exposure to its proportional share of the venture's liabilities, and confirmed which company's insurance would respond to which category of claim.
5. Clarified ownership of intellectual property and client relationships. The draft was silent on who would own supplier relationships, pricing data and processes developed specifically for the joint venture if it later dissolved. We added terms specifying that each partner would retain its pre-existing relationships and that jointly developed materials would be split by an agreed method on exit.
6. Drafted a shareholder agreement for the Oakville company itself. Separately from the joint venture, we prepared a shareholder agreement between Diego, Eitan and Rivka covering voting rights on major decisions, what happens if one of them wants to sell their shares, and a right of first refusal so a stake could not be sold to an outsider without the other two having a chance to buy it first. This gave the company a stable internal foundation before it took on an external partner.

The outcome

The revised joint venture agreement was signed roughly five weeks after the first draft arrived — a little later than the larger firm's original timeline, but well within the window before the underlying contract bid was due. Because the changes were framed as protecting both sides rather than favouring one, the larger firm's own lawyers agreed to most of them without significant friction; a company that size generally prefers a joint venture with a working deadlock mechanism too, since a frozen venture costs them just as much.

Roughly a year and a half later, the deadlock clause was tested for the first time — not catastrophically, but exactly as intended. The two companies disagreed over whether to bring on a third subcontractor for part of the contract. Under the old draft, that disagreement would have had nowhere to go. Under the negotiated version, it went to the defined escalation process, was resolved within a few weeks at the senior leadership stage, and never reached mediation. Diego and Eitan, still working full time as air traffic controllers, learned about the disagreement and its resolution secondhand from Rivka, exactly as the structure was designed to let them. Nothing about their company's ownership, or their standing inside the joint venture, was ever in question — because the mechanism that would have mattered in a worse dispute was already sitting in the agreement, unused until it was needed.

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