Joint Venture Boardroom Information - Disclosures to Appointing Shareholders

   

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joint-venture-board-information-disclosures-to-appointing-shareholders-723507-edited.jpgDIRECTORS SERVING ON the Boards of joint ventures are entrusted with several important responsibilities, including shaping the venture’s strategy, monitoring its performance, ensuring adequate management of risks and, in most instances, representing the interests of their shareholder company. In the course of fulfilling these responsibilities, JV Directors receive access to all sorts of information – performance and customer data, insights into long-term strategy, potential investments, new product and technology developments, and the like – about the JV and potentially other shareholders.

JV Board Directors have a natural temptation and, in some cases, the need to share information gained from their JV Board position with others in their own shareholder company.

The desire stems from multiple sources. First, some decisions are reserved shareholder matters, and thus require shareholder (not Board) approval. Second, other decisions are Board decisions but exceed the delegated authority of an individual Director. Third, JV Directors may lack needed subject matter expertise on certain issues they are called upon to deliberate and decide – and that expertise may be readily available to them inside their companies. Fourth, certain information, if shared, could flag potential venture risks to an appointing shareholder company, enabling prompt shareholder action to limit any adverse legal, financial, and reputational exposure to their companies.1  And finally, an ongoing dialogue between JV Directors and others within their companies can be an effective ‘quick dip’ clarification of the shareholder priorities relative to the JV and forthcoming Board decisions. 

But to what extent are JV Directors free and safe to indulge this desire, and disclose information gained from their JV Board position to others within their shareholder companies?

FUZZY GUIDEPOSTS

Unfortunately, few JV legal agreements and policies or regulatory regimes provide Directors with explicit guidance on what information can – and cannot – be disclosed within their appointing shareholder.

Legal Agreements and Policies: Most JV agreements, company bylaws, and corporate governance documents, including applicable shareholder confidentiality policies, do not expressly cover Board information and its disclosure to the appointing shareholder.

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Regulatory Guidance: Merely a handful of countries stipulate restrictions on shareholder disclosures by “nominee” Directors (including Directors on the Boards of incorporated joint ventures)2. For example,

  • Australia does not allow any disclosure unless there is a provision in the company’s constitution or shareholders’ agreement (or a resolution in an early Board meeting) to the contrary.
  • Canada prohibits shareholders from directly accessing Board minutes and records containing Board resolutions.
  • Singapore requires Directors to declare, at a Board meeting, the name, office, and position held by the person to whom information will be disclosed, specify the particulars of the information, and ensure that the declaration is recorded in the Board minutes.
  • New Zealand requires that the Board sign-off on any disclosure to the appointing shareholder, and that the Director enters particulars of the disclosure in an “interests register”.
Delaware, and many other jurisdictions, simply permit all disclosures to the appointing shareholder provided the disclosure doesn’t harm the company.

Absent explicit regulatory guidance in most jurisdictions (and guidance covering joint ventures that are not incorporated), there is only a generally accepted standard – implied through case law – that a Director has the right to pass information along to the appointing shareholder provided one or more of the following conditions are not met: (i) there is compelling evidence of a conflict of interest (i.e., making a disclosure will harm the company); (ii) the disclosure is expressly forbidden by the company’s bylaws, or other governing documents; (iii) the disclosure contravenes procedural requirements imposed by company policy documents (e.g., the Board does not sign-off on the disclosure where such a sign-off is mandated); and (iv) the disclosure violates anti-trust or anti-competition laws (i.e., the disclosure would reveal competitively sensitive information about the company).

The absence of clear contractual, policy, or regulatory guidance most certainly does not give a JV Director carte blanche to make internal disclosures – but implies that JV Directors are left to exercise their ‘business judgment’ before making any disclosure.  

PROBLEMS FROM THE ABSENCE OF EXPLICIT GUIDANCE

The lack of clear guidance on internal shareholder disclosures, and an excessive reliance on the ‘business judgment’ of Directors, can create problems for the venture, the shareholder companies, and individual Directors.

Business judgment is easily exercised if the information is unequivocally sensitive (for example, specific and detailed data on costs or profit margins, commercial and trading terms in customer or supplier contracts, market forecast assumptions, and research and development plans). But less so for information that is only a potential source of competitive or commercial advantage to the shareholder relative to the JV or another shareholder.

Such information, for example, could reveal the JV’s or another shareholder’s evolving view on a major strategic initiative, or could hint at another shareholder’s market expansion plans or product development pipeline, or could be combined with proprietary information that the appointing shareholder possesses to establish the viability of opportunities that the JV did not know even existed.

The possibility of an inadvertent lapse in business judgment, which could result in information of this nature being disclosed and subsequently used by the appointing shareholder to secure a competitive advantage relative to the JV or another shareholder, can have adverse consequences. Specifically,

  • JV Directors may risk breaching their fiduciary duty of loyalty to the JV, and may face legal liability3
  • The JV’s performance, future prospects, or even viability may be threatened if one shareholder uses such information to compete with, or close down future opportunities from, the JV
More subtly, the fear of such disclosures may lead other JV Directors to show less candor – creating less frank and open Board discussions, and thus less robust governance overall. More generally, limited or no joint understanding as to what information can and cannot be shared makes life more difficult for JV Directors.

HOW AND WHEN TO PROVIDE GUIDANCE

Greater clarity on shareholder information disclosures can contribute to JV Director peace of mind, trust and alignment within the JV Board and among the shareholder companies, and the long-term viability of the JV...  (Continue reading this article by clicking the download link below).

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  There is a clear body of evidence that negative events, especially those related to legal violations and HSE incidents, that occur within a JV, including non-controlled JVs, can have a material impact on a shareholder company. For example, Brazilian courts have held Vale and BHP accountable for the 2015 tailings dam failure at Samarco, their 50:50 JV in Brazil, which killed 19 and caused extensive environmental damage. Similarly, the European Commission held DuPont and Dow Chemical, partners in DuPont Dow Elastomers, an independent 50:50 JV, as jointly liable for competition law infringements within the JV despite the fact that neither shareholder directly participated in any wrongdoing.

2    A nominee Director (also called a constituency Director, designated Director, or representative Director) is a Director appointed to the Board by shareholders who have the contractual right to control one or more Board seats – and regulatory guidance on nominee Directors is applicable to Directors on the Boards of incorporated joint ventures.

3   See, “JV Directors and Conflicts of Interest”, The Joint Venture Exchange, August 2009