In this third of an eight-part series on “parental controls,” we explore the types of compliance provisions that should be considered for inclusion in a joint-venture (JV) agreement. You can find Part 2 here and Part 1 here.
Screening potential JV partners is essential to JV compliance. This generally involves conducting due diligence regarding the organization itself (assuming that one is investing in an already-existing JV), and of key individuals in management and other major investors, regardless of how indirect their ownership may be as a formal matter.
As with most other compliance measures, screening should be risk-based, which can help avoid costly due diligence “overkill.”
Also, the decision based on the results of the screening need not necessarily be of an all-or-nothing nature, meaning that mixed results might dictate a modest initial investment, additional due diligence or additional controls for the JV.
There are, of course, a large number of compliance-related provisions that can be incorporated into a JV agreement, including:
- Organizations may want to secure the right to appoint those positions in the JV that are particularly important to compliance, such as the Chief Financial Officer and General Counsel positions.
- Organizations can include compliance responsibilities in position descriptions. JV partners should also consider the compliance expertise of those who represent the partner company on the JV Board.
- Compliance oversight responsibilities should be spelled out in the JV Board’s charter.
- To enhance controls where high-risk transactions or conduct are concerned, organizations can create stricter delegations of authority. For example, one might require the head of a business unit to obtain permission from the JV’s CEO before entering into a contract with any government, or require that the due diligence performed on a higher-risk third party be approved by someone outside of the business unit.
- With respect to agents, JV agreements could grant the partners the right to veto a proposed agent if the partner reasonably believes that the proposed agent has engaged in misconduct or otherwise poses a compliance risk.
- Agreements can require super majorities of the Board for potentially sensitive transactions, such as transactions in risky markets.
- Agreements can include affirmations by the joint venture partners and the JV itself that they will not bribe in connection with the JV’s business.
- Agreements can include audit rights too. Such provisions can include audits not only of books and records, but also of compliance and ethics program requirements, such as due diligence and training requirements.
- Agreements should include the right of the JVs to terminate the agreement in the event of FCPA violations.