By Alan S. Gutterman of Gutterman Law & Business
Successful management and operation of a joint venture (JV) is a difficult achievement that requires a substantial amount of planning, and often long and candid debate between the parties, and it is important for the attorneys involved in the process of drafting agreements, policies and procedures to ensure that parties address as many of the contingencies as they can early in the process. In order to facilitate all of this, attorneys should pose the following key questions to their clients regarding JV management and operation:
1. What governance structure model should be selected for the JV?
Devising an appropriate structure for the management and control of the JV is one of the most important matters to be negotiated between the parties. In general, there are three basic governance structures from which the parties can choose when deciding upon how to manage the business operations of a JV-- operator, shared and autonomous -- and the attorney should be prepared to discuss each of these alternatives with the client.
2. How should control of the board initially be allocated?
Obviously, one of the most important issues for the parties to resolve is the initial allocation of control of the board and the parties may choose from among several commonly used structural forms: one party controls the board with no restrictions on the rights of the controlling party; one party controls the board but certain actions cannot be taken without the consent of all of the directors; one party controls the board initially but provisions are made for a shift in control upon the occurrence of one of several events specified in advance by the parties; the parties share control of the board but provisions are included in advance for resolving deadlocks and/or shifting control to a single party upon the occurrence of one of several events specified by the parties; and provision for one or more mutually selected independent directors (i.e., directors not affiliated with either party who have relevant experience in the activities being addressed by the JV) accompanied by voting procedures which vest final decision-making authority in the independent directors in those situations where the parties are unable to reach a consensus.
3. What procedures should be implemented for shifting control of the board?
At the same time that initial allocation of board control is being determined consideration should be given to providing a mechanism for shifting control to one party after the passage of a specified period of time or upon the occurrence of one of several events to be agreed upon by the parties. While such "vote-switch" procedures will allow one of the parties to elect a majority of the board of directors, they need not alter the respective interests of the parties in the profits of the JV. Depending upon the circumstances, a change in control of the board may be accompanied by corresponding changes in the scope of authority provided to the body in the charter documents of the JV. Apart from a change in the primary business activities of the JV, it is most common to see the parties provide for a shift in control when the JV fails to achieve certain performance objectives, thereby placing the success of the JV in jeopardy, or when the activities of the JV are subjected to the effects of one or more specified external events. For example, a party engaging in the JV in order to improve distribution of its existing products in the local market may seek control of the enterprise in the event that the level of sales does not meet certain specified minimum amounts. Once control has been achieved, the party may initiate appropriate changes in local personnel, modify the business and marketing plans of the enterprise, or even suggest that the local party cannot provide the anticipated amount of distribution support. Also, not surprisingly, a party may be required to surrender its ability to control the actions of the board when it defaults in its contractual obligations to the JV.
4. What matters should require approval of both parties?
The parties need to strike an appropriate balance between permitting the officers and managers of the JV to make appropriate decisions regarding the operation of the enterprise and reserving the right, as the owners of the JV, to review and approve certain matters. The matters subject to the "shared control" of the owners, thereby requiring approval of both JV partners, should be limited to those items that are material to the performance of the JV, sinc
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