Design, Bargaining, and the Law
Chapter 2: Conflicts and risks in joint ventures: premises of incentive bargaining
This chapter discusses risks associated with joint ventures that are derived from the inevitable conflicts between JV partners upon the establishment of a joint venture, and the concerns of JV partners over these risks. Since potential partners are generally aware of the conflicts inherent in joint ventures, they are naturally wary of each other’s intentions. Accordingly, such concern makes partners hesitant to contribute capital. Joint ventures must deal with conflicts concerning self-dealing, corporate opportunity, competition, and disclosure. Each of these can pose corporate law problems relating to conflicts of interest and directors’ fiduciary duties. The main risks faced by prospective JV partners aiming to establish a joint venture include: the risk of being squeezed out, the risk of opportunistic behavior by the other partner, as well as a pair of two-sided risks. The first is the risk of the other partner refusing to renegotiate and, conversely, the risk of being forced to renegotiate to one’s own detriment. The second is the risk of the other partner exiting and, conversely, the risk of being unable to exit oneself. If both partners are hesitant to contribute capital and neglect to alleviate each other’s concerns, their planned joint venture will never become reality. As such, both partners must engage in incentive bargaining over the sharing of control, sharing total return, and methods of exit, so as to ensure their mutual willingness to contribute capital.
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