Designing More Durable JV Agreements: Injecting Elasticity into Exclusivity and Non-Competition Clauses

By Tracy Branding | Tuesday, January 12, 2021

WHEN HONEYWELL restructured its highly-successful joint venture in Japan with Yamatake in 1990, the dealmakers included vaguely-defined scope and exclusivity terms – a decision that ultimately contributed to the end of the 40-year partnership. These terms allowed both Honeywell and the JV to compete in “Other Asia,” a geographic market which included China; the parties felt their history and senior-level ties meant any issues would be quickly resolved. Yet as the business grew and markets globalized, Honeywell and the JV found themselves in repeated head-to-head competition, and personal relationships were no match for potential profits. With customers caught in the crossfire and competitors growing stronger, the partners debated for years over structuring a solution that should have been negotiated at the outset, and the relationship never fully recovered; Yamatake ultimately bought out Honeywell in 2002.1,2

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Governing a Portfolio of Joint Ventures: How Do You Measure Up?

By James Bamford | Monday, December 21, 2020

A DECADE AGO, we established a set of objective tests to allow companies to calibrate how well they are governing their portfolios of joint ventures. At the time, many companies were waking up to the materiality, risks, and untapped performance potential of their joint ventures, especially those that the company did not operate or control. Major HSE incidents at Macondo and Samarco – both joint ventures – and a series of high-profile bribery and corruption scandals and partner litigation further elevated the appreciation for risks in joint ventures in ensuing years. To this day, our Standards of JV Portfolio Governance Excellence remain the only tool for companies to independent-ly calibrate themselves against peers on the journey to excellence.1

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Fixing Flawed Environmental Clauses in Joint Venture Legal Agreements

By Shishir Bhargava | Wednesday, December 9, 2020

COMPANIES IN THE OIL AND GAS, chemicals, and mining sectors are among those with the highest environmental, social, and governance (ESG) risk profile2. Concern about this risk profile is growing significantly among investors, who no longer appear willing to accept certain behaviors as the cost of doing business. For evidence, look no further than the CEO of Rio Tinto and a set of direct reports, who resigned in late 2020 amidst a shareholder revolt over their legal – if not ethical or moral – decision to destroy an aboriginal cave as part of mining iron ore3. A heady combination of growing societal demands, increased regulatory pressure, and investor activism is driving natural resource companies to raise the bar on ESG stewardship – and a reasonable starting point is addressing the fact that natural resource companies contribute more, directly or indirectly, to GHG emissions than all other industries combined (Exhibit 1). Some companies like BP are now shedding GHG-emitting upstream and petrochemical assets and redirecting capital towards clean energy in a self-styled shift from an integrated oil company (IOC) to an “integrated energy company” (IEC).

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Joint Venture Governance Index: Calibrating Joint Venture Governance Strength

By James Bamford | Monday, November 9, 2020

TWELEVE YEARS AGO, we co-authored with CalPERS a set of guidelines for joint venture governance.1 At the time we argued, and still believe, that good governance in joint ventures strongly correlates with sustained financial performance, sound management of risks, and the ability of JVs to adapt to the changing needs of the market and their shareholders. We have asserted that joint venture governance is pound-for-pound more ‘physical’ than corporate governance due to the unique nature of a joint venture’s relationship with its shareholders.2 And while the number of shareholders is far more limited in JVs compared to those of public companies, the interests of the shareholders in JVs are more expansive, dynamic, and prone to conflict – which ultimately makes joint venture governance proportionately more demanding and consequential.

To bring greater transparency into how well joint ventures are governed – and to help investors, owner companies, joint venture boards, and individual JV directors calibrate the strength of the governance of ventures they own or have been appointed to oversee – we have developed a Joint Venture Governance Index. Like corporate governance indices, it defines a set of testable standards for governance that predict performance, and helps boards and other stakeholders calibrate where they are relative to objective standards of governance excellence, peers, and their own historic performance.3 Unlike corporate governance indices, however, the Joint Venture Governance Index is structured to address the unique governance demands of joint ventures – a highly-material class of businesses susceptible to shareholder misalignment, board over-reach, and other ills derived from the nature of the joint venture ownership structure.4

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Running for the Exits: Getting Joint Venture Exit Right

By Gerard Baynham | Tuesday, October 20, 2020

JOINT VENTURE (JV) EXIT is a key issue for dealmakers and corporate executives whose portfolios contain material JVs spanning the globe.

One way or another, companies eventually exit their JV investments – sometimes sooner than expected. Recent analysis of JV lifespan data shows that newer vintages of JVs are undergoing exits more quickly than in the past. For example, JVs formed from 1985 to 1989 tended to last about 15 years, while those formed from 2005 to 2009 lasted only 6 years (Exhibit 1). This contributes to a high volume of exits.

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Shareholder Representatives in JVs: Legal Proxy, Accountable Executive, or Muddying Interloper?

By James Bamford | Wednesday, May 27, 2020

IN CERTAIN INSTANCES, a company will appoint an individual to serve as its “Shareholder Representative” to a joint venture. The basic premise is that the Shareholder Representative is expected to act as the company’s agent with regard to the venture – a role that is empowered but not necessarily limited to signing agreements, amendments, consents, and waivers between the company and the other shareholders and/or the joint venture entity. Although it is not common in all industries, having a designated Shareholder Representative is fairly prevalent in natural resources companies.

Fundamentally, the purpose of the Shareholder Representative is to establish organizational clarity for making legally-binding commitments between the company and other JV parties. A related purpose is to establish legal separation between the company, as a shareholder in the JV with its own interests, and the executives it has appointed to serve as Directors on the JV Board, who will have fiduciary duties to that entity.

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