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The governance of joint ventures

Hasselt, 8 november 2013

Ard-Pieter de Man

Source: This presentation is based on chapter 6 in:

A.P. de Man (2013), Alliances: An executive guide to

designing successful strategic partnerships,

Chichester UK, Wiley.

Supply chain

Contractual

Virtual joint venture

Equity

Multi-partner

Project based alliances

Continuous relationships

Specialization

Joint teams

Peer-to-peer

Minority holding

Cross-shareholding

Joint venture

General assembly

Lead partner

Alliance support office

Joint venture

Equal ownership

Majority/minority

Multiple points

of contact

Single point

of contact Lone ranger

Joint ventures are one of many forms of alliances

Source: A.P. de Man (2013) - 1 -

Joint ventures are small in number but important in impact

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20

40

60

0

0-20 21-40 41-60 61-80 81-100

Percentage of joint ventures

% of respondents

60%

31%

5% 2% 2%

• In most industries joint ventures

constitute about 10% of all alliances

• But jv’s are of higher importance than

contractual alliances

• Reasons for JVs:

– Economies of scale

– Create new business

– Combine assets

– Integration under one

management

– Long-term commitment necessary

– Taxation

• Drawback:

– Often major investment

– Inflexible, difficult to sell shares

– Takes long time to create a jv

Source: A.P. de Man (2013)

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Alliance governance refers to combinations of legal and social control

mechanisms for coordinating and safeguarding the alliance partners

resource contributions, administrative responsibilities, and division of

rewards from their joint activities

What is alliance governance?

Source: Todeva and Knoke, 2005, p. 125

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Alliance Governance: trust or control?

Problem

Emphasizes

Prevent opportunism

Planning & control

Contracts

Rules

Board participates daily

Formal mechanisms

Control Trust

Create social capital

Vision

Norms & values

Intrinsic motivation

Board at arm’s length

Informal mechanisms

Source: A.P. de Man (2013)

Formal Informal

6. Decision making

4. Goal, planning, control

1. Legal form

2. Financials, property rights

3. Scope and exclusivity 12. Trust

11. Norms/values

13. Culture

10. Personal relationships

5. Conflict resolution

7. Communication structure

8. Leadership

9. Reputation

Elements of Alliance Governance

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Source: A.P. de Man (2013)

Differences in governing an independent company vs. a joint venture

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“Independent” company Joint venture

Shareholder is investor in the company Shareholder is investor and a client or

supplier to the joint venture

Non-executive or supervisory board

members are not employed by

shareholders

Non-executive or supervisory board

members are employed by

shareholders

Board members oversee strategic

decisions

Board members also manage conflicts

between shareholders and monitor

transactions with parents

Management team is neutral and

represents interests of all shareholders

Management team is not neutral and is

(or was) employed by one of the

shareholders

Broad scope Limited scope

Source: partly based on Bamford and Ernst (2005)

Obvion

ABP Rabobank

70% 30%

Shareholder Agreement

Supervisory

Board

Portfoliomanagement Additional

funding during

the financial crisis

Shareholder

meeting

The Obvion joint venture

• Start 2001

• ABP: mortgages non-core, but wants them

as investment; Rabobank: indirect channel

• 70/30 ownership; but 50/50 dividend

sharing; 50/50 voting (but decisive vote by

chairman Supervisory Board, who comes

from Rabobank)

• Obvion manages (not: owns) ABP

mortgages

• Obvion CEO hails from Rabo

• Possible conflict of interest between

Rabobank and Obvion managed via

Supervisory Board membership

• Parents brand names important for Obvion

to attract funding

• Credit crisis and need for ABP to have liquid

investments, led to Rabobank acquiring

Obvion in 2012

Source: A.P. de Man (2013) - 7 -

Guidelines for board membership

• Add a neutral third person

• Don’t skimp on board size, especially not for large

joint ventures

• Ensure seniority of board members to instigate

change or dissolve the joint venture

• Ensure board members are knowledgeable about

the joint venture’s business

• Separate a client-supplier relationship from board

membership

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Source: A.P. de Man (2013)

JV ownership structures and their implications

Assumption: the shareholding structure is reflected in all other parts of the agreement

Applicable when: Advantages Disadvantages

50/50 ownership Less than perfect goal

alignment; partners

make contributions of

equal value; low trust

Equal share of risk,

revenues, and costs is

highly transparent;

possibility to control

partner

Decision making can get

stuck and speed may be

lost

Majority/minority

structure

High goal alignment;

high trust; one partner

makes larger

contribution

For the majority

shareholder: more

control; ability to steer

alliance in its direction;

financial consolidation

For the minority

shareholder: less

investment in the joint

venture and the goal can

still be achieved; less

risk

For the majority

shareholder: higher

investment, higher

responsibility; partner

may free-ride; less

knowledge transfer from

partner to joint venture

For the minority

shareholder: partner may

act opportunistically; no

consolidation

Source: A.P. de Man (2013) - 9 -

Exit clauses about shareholding

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- Right of first refusal. If partner A wants to sell its shares in a joint venture to a third party,

it first has to offer them to partner B against the same conditions the third party offered to

partner A. If B decides not to buy the shares, they may be offered to the third party.

- A right of first offer exists when partner A wants to sell its shares, but no third party has

been approached yet. In that case, partner B may make a first offer on A’s shares. If A

deems that offer too low, A may offer the shares to a third party.

- Texas shoot out: The partners in a joint venture each make a sealed bid for the shares of

the joint venture. The highest bidder wins.

- Russian roulette: Partner A has the right to make an offer for the shares owned by partner

B; however, as soon as A has made the offer, B has the right to buy A’s shares for the price

offered by A. This mechanism forces A to offer a good price in its initial offer.

- Drag along: If partner A owns the majority of the shares in a joint venture and wants to sell

the shares to a third party, the minority shareholder B is obligated to offer its shares to the

third party against the same conditions.

- Tag along: The right of a minority shareholder B to require a third party that wants to buy

the shares of partner A—which owns the majority of a joint venture’s shares—to extend the

same offer price per share to B.

- Lock-up: The obligation of a shareholder not to sell his shares during a certain period.

Based on: Ariño, A., J.J. Reuer and A. Valverde (2005) ; Freshfields Bruckhaus

Deringer (2003)

Common misconceptions and when not to use joint ventures

• 51% does not mean you have control

• Shareholding does not reflect the benefits partners have

(Toyota-GM-NUMMI)

• Control in joint ventures is not easier than in contractual

alliances

• In most cases joint ventures are too inflexible to use for

innovation

• Don’t use joint ventures when competences are

complementary

• If speed is required a joint venture may not be the best

choice

• Joint ventures require integration with the parents, even

though they are separate companies

• Think twice about collaborating with a company without

an alliance culture

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Source: A.P. de Man (2013)