Joint Venture

Conflicts of Interest
Types of Conflict of Interest

Types of Definition Example

Conflict
Self-dealing • When a transaction is favorable • (Over)pricing of a parent company’s
conflicts for the JV and unfavorable for materials, which it supplies to the JV
the parent company or vice-
versa
Corporate • When a JV and one of its parent • Opportunity to enter a new product or
opportunity companies compete for the geographic market
conflicts same business opportunity • Opportunity to obtain a legal right
Disclosure • When an interlocking director’s • Information critical to the competition
conflicts or officer's disclosure of (when the JV and parent company
information benefits a JV or one compete)
of the parent companies, but • Information critical to the transaction
harms another of the companies (when a parent company sells its
products to the JV as well as to non-
related companies)
• Information on business opportunities
Source: “Conflicts of Interest and Fiduciary Duties in the Operations of a Joint Venture”, Berkeley Law
Possible Solutions to Conflict

Types of Proposed Solutions

Conflict
Self-dealing • Fairness test (arm’s-length principle)(1)
conflicts • Parent companies can agree on a list of mandatory disclosures for self-
dealing transactions expected to occur in the future (2)
• Addition of an independent director(3)
Corporate • Parent companies create an express agreement (declaring intentions) prior
opportunity to creating a JV, thereby restricting the scope of the JV’s corporate
conflicts opportunity(1)
• Parent companies have the option to contractually agree in in advance to
mutually waive their respective rights to claim damages on the grounds that
the other partner usurped a corporate opportunity from the joint venture (2)
Disclosure • No solution that can be proposed to JV partner [Matter of balancing the
conflicts interests of a JV and its parent companies – Interlocking directors or
officers should consider the characteristics of the information, the interests
of other parent companies, and the degree of disclosure necessary] (1)
Sources:
(1) “Conflicts of Interest and Fiduciary Duties in the Operations of a Joint Venture”, Berkeley Law
(2) "Joint Venture Strategies: Design, Bargaining, and the Law", Shishido (Hitotsubashi University), Fukada (Solar Frontier
K.K.), Umetani (Fuji Xerox Co. Ltd.)
(3) Recent Trends in Joint Venture Governance”, Harvard Law
 Mediation Methods

• A joint venture agreement may provide methods for deadlocked partners to resolve
conflicts, allowing the joint venture to continue to exist.

 Cooling-off mechanism
 Dispute review panel
 Escalation of disputes to executive level
 Independent director’s swing vote
 Alternative dispute resolution methods such as mediation or
arbitration

• Partners may also grant alliance managers or "gatekeepers" the authority to solve a
particular issue.

Source: "Joint Venture Strategies: Design, Bargaining, and the Law", Shishido (Hitotsubashi University), Fukada (Solar
Frontier K.K.), Umetani (Fuji Xerox Co. Ltd.)