Managing Competitively Sensitive Information in Joint Ventures

   

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The risk of anti-competitive practices is ever-present in JVs ♦ Grey-zone issues pervade Joint Venture Boards ♦ How should Joint Venture Directors respond when the answer is not obvious?

GettyImages-683808432_blackand_white_squared.pngFEW, IF ANY, COMPANIES ENTER INTO joint ventures with the explicit purpose of infringing on anti-competition laws. But even while the parties may not intend to fix prices, divide up markets, limit production, or engage in other collusive behavior, joint ventures nonetheless present an environment rich in anti-competition risk. The most common risks emanate from the inappropriate exchange of routine information through which JV Board Directors and other owner company representatives govern their interests in the JV, especially when the venture is between competitors.

Many companies require executives to go through legal and compliance training prior to serving on a JV Board. In our experience, this training tends to focus on bright-line violations of anti-competition laws. And because it is performed separately by individual owner companies, it will naturally vary across director groups. As a result, such training usually fails to address and align directors around how to handle “grey area” anti-competition issues that JV Directors face every day.

Consider a comment from a JV Director:

I sit on the Board of a JV that provides components to the owners. Each owner assembles the JV-supplied components into competing products that we separately brand and sell. During JV Board conversations, it is possible to infer our partner’s future strategy and plans for the product. Is it okay for my inferences to inform my insights and comments in internal product strategy and planning discussions within my company?

The purpose of this note is to make the case that companies need to take a more holistic approach to training their JV Directors in how to apply anti-competition laws into a JV context. And it argues that JV Boards should collectively develop, debate, and endorse a protocol for managing competitively sensitive information that includes not only bright-line issues, but also provides guidance on how to manage grey area scenarios.

USING SCENARIOS TO TRAIN JV DIRECTORS  

Overview. When we design and run trainings for JV Directors, we usually include several scenario-based interactive sessions to help directors think through real world “grey-zone” issues that JV Directors might confront. These modules relate to conflicts of interest, business ethics (including anti-bribery and corruption), and anti-competition.
An interactive training session on competition risks works like this: First, we develop seven to ten real-world scenarios that introduce situations where JV Directors and other parent company employees might have legitimate questions about whether an anti-competition risk is present. These scenarios are not bright-line issues (i.e., whether to engage in price fixing, or to share parent company price lists), which are generally covered in separate legal training. Rather, these scenarios are focused on common issues with less clear answers. For each scenario, we define four to six potential responses, arrayed from the most conservative to the most forward leaning.  

When training JV Directors, we then present the scenario and the range of potential responses, and use an online voting technology to have participants indicate which response they would choose. With the aggregated responses displayed, we then have an interactive discussion about why individuals picked different responses. After a few minutes, we ask legal counsel to share their views, including what degrees of freedom directors have. Typically, each scenario takes 5-10 minutes, including discussion – and provides directors with a much greater understanding of the risks and practical options than a typical legal training.  

Example Scenarios. Done well, each scenario will be specific to the company’s business, and introduce a situation where the right answer is not obvious. For example, in a natural resources company some of the scenarios sounded like this (Exhibit 1):

Exhibit 1: ‘Grey-area’ Scenarios Faced by JV Directors

‘Grey-area’ Scenarios Faced by JV Directors.png
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Scenario 1: Contract Negotiations with a Common Supplier.


Situation: “I sit on the Board of a 50:50 JV in the U.S. where we consolidated mature positions in a particular region. The shareholders have recently approved a major capital expansion, and the JV management team is currently negotiating a large
contract with two engineering firms to deliver the project.  Given the materiality of the contract, Board approval will be required for contractor selection and key commercial terms. The Board has asked management to provide regular updates on the contractor selection and negotiations. As an executive of my Company, I have gained significant experience in negotiating with the two engineering companies the JV has asked to bid.”

Question: “What information and insights from my other experiences is it okay for me to share with the Board and JV Management?

Scenario 2: Advice to Shareholder based on JV Analyses.

Situation: “I sit on the Board of an industrial JV that manufactures, sells, and services industrial products, which are close substitutes of a product range sold by my Company. In a recent Board meeting, a consulting firm engaged by the JV management presented a strategy report containing market forecasts, and analyses on future customer trends for the JV’s products (e.g., pricing, contract terms, segment profitability). The analyses and conclusions drawn by the report could have serious implications for how my Company views the market for its substitute product – including which customer segments should be higher priority, and product features and contract terms that are more desirable.” ... (Click below to download the full version of this article).

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