Design, Bargaining, and the Law
For both publicly traded companies and venture companies, the biggest issue related to bargaining over how to share control is the balance between the monetary capital providers’ monitoring rights and the human capital providers’ autonomy with respect to the use of funds. In joint ventures, however, the monetary capital providers and human capital providers are identical because all JV partners contribute both monetary and human capital. Consequently, in joint ventures in which all partners participate in management, all partners want a combination of managerial autonomy as human capital providers and monitoring rights as monetary capital providers. The first step in negotiating a joint venture agreement is deciding how to share equity control (partners’ ownership percentages). In a joint venture between two parties, each partner has three options for dividing up control. First, the partner can assume majority control of the joint venture. Second, the partner can allow the other partner to have majority control and settle for minority shareholder status for itself. Third, the partner can share control equally with the other partner. The option chosen will largely determine the future course of the joint venture. If one partner has majority control and a management disagreement arises between the partners, the controlling partner has the power under corporate law to impose its will by excluding (squeezing out) the other partner from management. Likewise, if a company is a minority shareholder in a joint venture, it is at risk of being squeezed out.
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