What is in this article?:
A joint venture may make sense for lots of reasons, but how it is established is critical to its success. Partnership is a big step. Look before you leap!
- Defining governance, control
- Defining partners’ obligations
- Documenting the exit strategies
Next come the definitions of each JV partners’ obligations to each other and to the venture. The governing body, particularly of a JV organized as a corporation, LLC, or partnership, has a fiduciary duty not existing in an arm’s length commercial relationship. This duty means that a member of the JV governing body must do more than watch out for the interests of the party who appointed him or her. Instead, that person (and the partner that he or she represents) has a duty to look after and demonstrate loyalty to the JV itself, and must act with good faith and integrity in dealing with their partner. Although fiduciary duties can be waived or modified under certain state laws (and this should be considered in drafting the JV agreement), in general joint venturers must assume that they owe a fiduciary duty to the JV and to each other, and act accordingly.
One example of breach of JV fiduciary duty claims in the news recently involved a 2007 JV between Tiffany and Swatch to jointly develop and sell watches. Swatch initiated legal proceedings against Tiffany in 2011, claiming among other things that Tiffany breached its fiduciary obligations, in that Tiffany did not in good faith try to sell the watches. Swatch won an arbitration award of approximately $419 million against Tiffany. In March 2015, Tiffany announced that a Dutch court overturned the arbitration award.
Undoubtedly, the battle will continue. The lesson from this example is that JV partners must recognize that if their individual goals deviate from the goals of the JV or the other partner, discussion, negotiation and compromise must follow. A JV partner that follows its own goals to the detriment of the JV or its partner risks a serious legal challenge that it breached its fiduciary duty.