Strategic Considerations in Designing Joint Venture Contracts

Wednesday, January 1st, 1992 at 12:00 am by Steven R. Salbu, Richard A. Brahm
Steven R. Salbu, Richard A. Brahm, Strategic Considerations in Designing Joint Venture Contracts, 1992 Colum. Bus. L. Rev. 253

In recent years, joint ventures have emerged as a meaningful option as organizations attempt to negotiate the distance between the more traditional choice between markets and hierarchies. While the joint venture form can confer advantage over both market contracting and acquisition, it may also be the source of a number of disadvantages, including conflict regarding control, conflict regarding strategy, lack of trust, incompatibility of management styles, lack of cooperation, and opportunistic behavior. Many of these potential problem areas can be addressed during the negotiation and development of the joint venture agreement. By studying the joint venture contracting process from an industrial viewpoint, lawyers can develop strategic advantage in their design of the venture agreement.

This article is an examination of strategic contracting issues associated with utilization of the joint venture form. [FN4] Sections II through VII address six important strategic considerations upon which the contracting process should focus. Section II examines the effects of restrictions of legal scope on joint venture operations. It discusses the ways in which the venture’s authorized businesses can be circumscribed, and the tradeoff between coordination and flexibility inherent in these decisions. Section III addresses the varying strategic motives behind joint venture formation, and the contracting challenges and opportunities associated with these motives. The discussion focuses on joint ventures created for the following strategic purposes: vertical coordination; geographic expansion; expansion into new product lines; dilution of risk; cost sharing; rationalization of markets; and the intra-industry coordination. Section IV examines the contractual mechanisms that can enhance compatibility of the parent companies and maintain goal congruence to support the venture. Section V concerns contractual choices regarding management of the venture, again focusing on the ways in which these choices affect coordination and flexibility. Section VI identifies contractual tools that one can employ to create incentives for the parties to comply with the terms of the venture agreement. Finally, Section VII notes the importance of extracontractual, relational incentives which enhance the quality of venture dynamics by exploiting organizational interdependence.

Author Information

Salbu (Assistant Professor, University of Texas at Austin); Brahm (Assistant Professor, University of California at Irvine)