Joint Venture (JV) governance risks can be assessed from two view points:
- either from outside the JV – as a partner (e.g. the JV shareholder’s or ownership participant’s own internal governance processes)
- or from within the JV (the JV’s internal governance processes).
JV internal governance processes should be clearly laid down in the JV formation agreements and this should include a process for partners to regularly audit that the governance processes are still appropriate and working correctly. In order to audit a JV the partners must have ready access to relevant information from within the JV.
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For the purposes of this description I will use the following definition of an organisation’s Governance: The system of rules, policies, practices, laws and regulations by which that organisation is directed and controlled
JV Governance Risks outside the JV – as a partner
Before a JV partner assesses the governance processes within its JV the partner’s own governance processes for overseeing its participation in the JV should be reviewed. Within the partner’s own organisation the following questions should be addressed:
- Who in your organisation is accountable for overseeing the performance and results of the JV?
- Who in your organisation is able to influence the JV and how?
- Which positions in the JV will be occupied by people in your organisation?
For all of the above people: the capabilities for their JV related roles should be defined and relevant JV specific training should be given (e.g. covering fiduciary obligations of the JV of secondees and board directors). A JV influencing plan/procedure should be drawn up (in compliance with the relevant laws) to ensure the partner receives appropriate governance information and can influence the JV to ensure it follows good governance practices. These people need to have appropriate delegations of authority within the partner companies which are aligned with what they need to do in relation to the JV.
JV internal governance processes
Key JV governance instruments are the JV formation agreements. The negotiation of these presents the best opportunity for partners to agree on appropriate JV control processes and procedures. They should define the structure, responsibilities and rights of the management of the JV and its governing bodies like the Board of Directors/Shareholders meetings. Ideally a delegations of authority table for the JV should be included in the formation agreements (e.g. who in the JV can make which decisions or spend upto what amount of money – and which additional partner approvals are needed for significant decisions or communications on behalf of the JV?).
The structure and content of the JV formation agreements should be drafted by experts familiar with drawing up such agreements and knowledgeable about the relevant laws (those applicable to the partner organisations, the JV organisation and other relevant jurisdictions – for example sometimes JVs are incorporated in countries which are different to those in which they or their partners operate). It is not possible to specify every detail of a JV agreement in this website – the last JV agreement I negotiated in Asia comprised 12 contracts of over 800 pages of legal text – in English and Chinese!
Clearly much of the content of JV formation agreements will be specific to the type of venture under consideration and the relationship between the partners and the JV entity. The following list highlights some key generic governance areas which should be addressed in JV formation agreements:
- Governing Law and language for the agreement
- Arbitration for the case of disputes relating to the agreement
- Agreement amendment process
- Management of the JV (e.g. organisational structure, partner representation, decision rights)
- JV Management approval limits/Delegations of authority
- Committees of the JV (purpose, structure, partner representation, decision rights)
- Decisions requiring partner unanimity?
- JV Financing (How will it get loans and under what conditions)?
- Accounting rules and policies for the JV
- Policy for JV profit/cost distribution to the partners
- JV Operation (e.g. is the JV operated by its own management or by a partner and under what conditions)?
- How will the JV get feedstocks/raw materials (Who does the procurement – one of the partners)?
- How will the JV sell its products (Itself or via one or more partners and under what conditions)?
- Secondment to the JV of staff from partners (e.g. to do what, who decides, who pays)?
- Technology and know-how (how will the JV acquire this and who owns any know-how developed by the JV)
- Audit schedule, rights and provision of JV information (for both JV and partner audits)
- Confidentiality of JV and Partner information (security of intellectual property)
- Termination/Exit conditions (e.g. pre-emption rights and price if a partner wants to sell its JV share)
- JV HSE Policy
- JV Code of Conduct/Ethical behaviour policy
- JV IT and Communications Policy (e.g. in a crisis who has authority on behalf of the JV to talk to the press)?
Including this information in the JV agreements is only useful if the partners then ensure that they obtain and use the relevant information and that the various policies, processes and rules are actually applied and functioning correctly in the JV. This can be done in part by regular well structured partner (or shareholder) meetings with the JV, meetings of the JV’s Board of Directors and audits of the JV carried out by the partners. Clearly such oversight should not be so onerous that it prevents the JV from conducting its normal activities but it should be sufficient to give the partners assurance that their investment is being safeguarded and put to the use that they intended in a manner that is compatible with their own governance and ethical policies.
Once the risks relating to JV Governance have been addressed take a look at the section of this site that deals with how the partners secure Value from the JV.
The JointVentureRisk.com website and its author, Chris Duggleby, are not qualified to provide legal advice and therefore any questions in relation to the legal liability of a joint venture or its partners should be addressed to suitably qualified, competent legal advisers.
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