1. 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.
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2. Joint ventures are one of many forms of alliances
Project based alliances
Supply chain
Continuous relationships
Single point
of contact
Lone ranger
Specialization
Contractual
Multiple points
of contact
Virtual joint venture
Joint teams
Peer-to-peer
Minority holding
Equity
Cross-shareholding
Equal ownership
Joint venture
Majority/minority
General assembly
Lead partner
Multi-partner
Alliance support office
Joint venture
Source: A.P. de Man (2013)
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3. Joint ventures are small in number but important in impact
60
• In most industries joint ventures
constitute about 10% of all alliances
• But jv’s are of higher importance than
contractual alliances
• Reasons for JVs:
60%
–
–
–
–
31%
40
% of
respondents
20
5%
2%
41-60
61-80
2%
0
0-20
21-40
81-100
Percentage of joint ventures
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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4. What is alliance governance?
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
Source: Todeva and Knoke, 2005, p. 125
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5. Alliance Governance: trust or control?
Control
Trust
Problem
Prevent opportunism
Create social capital
Emphasizes
Planning & control
Vision
Contracts
Norms & values
Rules
Intrinsic motivation
Board participates daily
Board at arm’s length
Formal mechanisms
Informal mechanisms
Source: A.P. de Man (2013)
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6. Elements of Alliance Governance
Formal
1. Legal form
2. Financials, property rights
3. Scope and exclusivity
4. Goal, planning, control
Informal
5. Conflict resolution
9. Reputation
10. Personal relationships
6. Decision making
11. Norms/values
7. Communication structure
12. Trust
13. Culture
8. Leadership
Source: A.P. de Man (2013)
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7. Differences in governing an independent company vs. a joint venture
“Independent” company
 Shareholder is investor in the company
Joint venture
 Shareholder is investor and a client or
supplier to the joint venture
 Non-executive or supervisory board
members are employed by
shareholders

Non-executive or supervisory board
members are not 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)
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8. The Obvion joint venture
ABP
Shareholder Agreement
Rabobank
Shareholder
meeting
30%
Supervisory
Board
70%
Obvion
Portfoliomanagement
Additional
funding during
the financial crisis
• 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)
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9. 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
Source: A.P. de Man (2013)
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10. JV ownership structures and their implications
50/50 ownership
Majority/minority
structure
Applicable when:
Less than perfect goal
alignment; partners
make contributions of
equal value; low trust
High goal alignment;
high trust; one partner
makes larger
contribution
Advantages
Equal share of risk,
revenues, and costs is
highly transparent;
possibility to control
partner
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
Disadvantages
Decision making can get
stuck and speed may be
lost
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
Assumption: the shareholding structure is reflected in all other parts of the agreement
Source: A.P. de Man (2013)
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11. 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)
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12. 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
Source: A.P. de Man (2013)
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