Decent exit clause can save JVs from mess

As the debris of failed joint ventures piles up, experts quote the old adage of prevention being better than cure.

Consultancy firm McKinsey says the foreign partner must insist on management control at the time of drawing up the shareholders agreement and have a clear path to eventual ownership. The best option however, according to the firm, is to go solo if possible.

Other management gurus advise against any prolonged bickering between the partners. If you can't get along with your partner, buy its holding or sell yours.

"I think the selection of the partner is crucial for the success of a joint venture. The agreements should be made tighter and there should be an exit clause under which the partners re-visit the agreement every five years," says Ajay Arora, partner, Ernst & Young.

With half of the joint ventures falling apart even before a year has passed, management consultants say a promoter must vet its partner and understand its needs.

"The best thing to do is to have a conflict of interest clause in a joint venture agreement," says Bobby Parikh, partner, BMA and Associates. "If a new business conflicts with the present business, the other partner should have the right to get out at fair valuation."

The hostilities between the Wadias of Bombay Dyeing and French dairy major Groupe Danone, their equal partner in biscuit-maker Britannia, may subside in the short run but control over Britannia may remain a ticklish issue.

"Although there are many good joint venture examples, it is best that one partner buys the other's holding at a fair and independent valuation," says a Mumbai-based investment banker.

In the case of Hong Kong's Hutchison and the Ruias of Essar, the Indian partner wanted to buy Hutchison's holding in their joint venture, Hutch-Essar, and offered to match UK-based Vodafone's $11.1 billion offer.

But, in the absence of a clear exit clause, they were denied that option by the Hong Kong company.

"If they agree in letter and spirit, such situations can be averted," says Sanjiv Krishnan, executive-director with PricewaterhouseCoopers.