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Where joint ventures go wrong

Recent high-profile collapses of a number of joint ventures (JVs) should prompt corporations to wonder how it could all have gone wrong. Corporate lawyers might worry privately whether their advice on JV structures and exit provisions has been up to the mark.

Marriage can, of course, be a wonderful union, surviving the many challenges that emerge over time. If both parties are committed to a lasting relationship, a prenuptial agreement might be seen as an invidious distraction.

When JVs are put together, dealmakers, too, often focus on the upside, salivating at the prospect of their creation’s potential profitability. The voice asking what happens if things don’t work as planned is drowned by the sound of popping champagne corks. Provisions of the JV agreement that deal with disputes and exits are often considered too difficult, expensive and time-consuming to be paid the attention that they deserve.

Not to sound the voice of gloom, but despite euphoria and heady optimism, proper analysis must be made of the areas where the JV could go wrong. Agreement should be reached on what will happen in the unfortunate event that something does go wrong. Some trouble spots are more difficult to foresee than others.

At the root of most JVs is a desire for partners to access – or pool – markets, capital, technologies or skills. The fact that each party wants something the other already has means that although they will enter the deal for similar reasons, they will want different things out of it. If one party’s aim is to access technology or skills, what happens once they have got what they need?

JVs often find that they need more capital than originally planned, and arguments commonly occur about who should provide this additional capital. The agreement needs to anticipate this possibility. If capital is to be provided by way of assets – plant and machinery, for example – then consideration needs to be given to how such assets are valued.

By their nature, JVs have to satisfy more than one master. Differences in corporate of national culture might affect how each party measures and rewards success and how management deals with undesirable outcomes. Such differences often create stumbling blocks, which again need to be anticipated. Misunderstandings caused by language differences are all too common and can exacerbate problems.

Problems can also be caused by the way in which management control is structured and exercised. Does one party have management control of the JV or are decisions made by discussion and agreement between the parties? Senior management may not be used to running a venture by consensus and may not always agree with its partner. If neither party is able to outvote the other at shareholder or board level, there is a real risk of deadlock. And where this occurs, the JV’s inability to make decisions can cause significant operational difficulties, or at worst even a collapse.

Accounting issues also cause problems. There are other ways of reporting results; this is particularly true of multinational JVs, where treatment of items in accounts may differ, notwithstanding the development of international accounting standards.

If the JV does fail, it is in neither party’s interest for assets to be locked up while lengthy litigation ensues to determine financial severance. Mediation or commercial negotiation are often the speediest and most sensible ways of arriving at terms on which the JV can be divided up.

In an ideal world, disputes would not arise because the principles on which the JV is dismantled would have been agreed from the start. This requires lateral thinking at the outset and an unyielding commitment to confront all the painful possibilities that may confront the JV during its lifespan. The parties should understand each other’s motivation and objectives and make sure they are compatible. There is no perfect solution – no one has a crystal ball – but serious consideration of the issues can save much grief in the end.

Far from indicating a lack of faith or commitment to a joint venture, a prenuptial agreement is an essential part of making it work.

Andrew Palmer – PricewaterhouseCoopers in “The Lawyer” 17 September 2001