Entering into a joint venture (JV) is a strategic decision for each partner. However it is quite common for different JV partners to have different strategic objectives for the JV or their role in it. Even when partner strategies are initially compatible this may change over time (here ‘partners’ are shareholders in incorporated JVs or ownership participants in unincorporated JVs).
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For example many years ago I was the shareholder representative in a 50:50 JV that was a major manufacturer of Petrochemicals in Europe. One partner, an oil company with little interest in chemicals, was looking for an outlet for, what was then, a lower value refinery product called naphtha. The other partner was a major chemicals manufacturer that was looking for raw material chemical building blocks for its higher value chemicals production plants. The JV took the naphtha from one partner and converted it into the chemical building blocks used by the other partner.
Such mutually compatible relationships can be very rewarding until one partner decides to change its strategy. In the example above the oil company decided, some time after the formation of the JV, that it wanted to diversify into chemicals and build a major chemicals business of its own. Before long the oil company found it was competing with its own JV and conflicts with its parter started to arise. Eventually I became part of a team that negotiated on behalf of the oil company to buy out the 50% share of its JV partner and make the operation a wholly owned subsidiary of the oil company.
To minimise future conflicts the intended strategy for the JV should be laid down clearly in the JV formation agreements. In particular the relationship between key elements of the JV strategy and the partners’ own businesses needs to be made clear. For example – will the partners be able to compete with the JV and if so in which markets? Often JVs are set up to sell to their local markets but the partners, or other JVs they participate in, may sell into markets in other regions.
Based on my experience of negotiating and running JVs (and of sorting out the mess when they go wrong!) the following are the kinds of questions I would address when auditing JV Strategy:
- Does the partner in the JV have a well documented overarching strategy for its own business? Does it have a clear strategy for its participation in the JV which is coherent with the partner’s own overarching strategy?
- Are the strategies for JV of the different partners complementary (they do not have to be the same – but they should be compatible and certainly not mutually exclusive)?
- Is the strategic intent for the JV clearly articulated in the JV agreements and are any areas of possible conflict with the partners’ businesses addressed (e.g. protected markets, intellectual property rights, marketing and procurement rights for the JV)?
- Has a mechanism been considered in case the strategy for one of the partners (or the JV) changes? This could involve the requirement for special JV Board resolutions or pre-agreed exit mechanisms for partners (which specifically deal with how to evaluate the value of their share in the JV and whether other partners have pre-emptive rights to acquire the share of the exiting partner).
You can use these questions as part of a list of typical key strategic risks of a JV investment. It is these risks that I used as the basis for my risk based auditing of JVs in the Oil and Chemicals industry. Once you are satisfied that you have addressed the risks associated with JV strategy you should move to the next section of this site which deals with JV Governance.
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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