Conflicts of Interest in Joint Ventures – the Rights of “Consenting Adults”

This is the second post this week on COIs involving specific types of business organizations – the first post was on non-profits.  This coming weekend we’ll look at some of the COI stories that have been in the news of late and next week we will resume our series on ways to assess COI risks.

In an earlier post on the murky legal landscape regarding COIs we noted that the fiduciary duty of loyalty operates as a “default” in certain circumstances – imposing various COI-related obligations in the absence of an agreement to the contrary.  But when, one might ask, would anyone give up a duty to be treated in a less than loyal way?  One example lies in the area of joint ventures.

The governance and operation of JVs can certainly raise conflict of interest concerns. For an employee of  a JV’s co-owner who is either on the JV’s board or is seconded to the JV whose interests to be treated paramount?  Given the inherent tension in situations of this sort, those involved have good reason to clearly articulate applicable duties and expectations.

Indeed, as noted in recent Gibson Dunn publication Recent Trends in Joint Venture Governance : “Partners negotiating joint ventures are spending increasing amounts of time developing codes of conduct and policies regarding conflicts of interest.  These codes and policies are intended to legislate how business dealings between the joint venture company and a venture partner or its affiliates will be conducted and define the rights and responsibilities of the joint venture company and the venture partners regarding corporate opportunities.  They often reflect the nature of the industry in which the particular joint venture will operate.  In technical joint ventures, for example, the focus of conflict of interest policies is often the ownership, use and commercialization of intellectual property rights.”

Additionally JV agreements sometimes directly address – and waive – fiduciary duties.  As the Gibson Dunn publication further notes: “The managing boards of joint venture companies also owe fiduciary duties to the venture partners under applicable law.  But venture partners generally have a direct voice on the board.  In addition, when they enter into the venture, they have the opportunity to negotiate specific contractual rights designed to protect their interests.  In fact, in many circumstances, they will waive their common law or statutory fiduciary protections, relying instead on a set of negotiated contractual protections.”

Bottom line: JV owners are considered “consenting adults” who can not only waive individual COIs but the right to be treated in a loyal way by their directors and employees.

I should emphasize that there is a whole host of compliance risks in JVs beyond COI ones.  And this recent post in Corporate Compliance Insights  –  “Joint Ventures and Compliance Risks: The Under-Discovered Country”  identifies  three categories of measures that companies should take to promote C&E in JV’s in which they invest: screening the contemplated JV partners; structuring the JV agreement to promote compliance; and once the JV is operational, having a C&E officer work on an ongoing basis with key company personnel who serve as JV board members or seconded employees in senior positions to manage compliance.

Also, this week Compliance Week is running a story “JV Compliance Takes Varsity Skills”; it is for subscribers only so I can’t link to it, but mention it as further indication that C&E issues surrounding JVs are a hot topic these days.

Finally, related to the issue of COIs and JVs is this post concerning COIs arising from serving on another company’s board of directors.