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August 01, 2022 Articles

Double Duty: Fiduciary Duties of Joint Venture Directors

Structurally reducing the number of conflicts, incorporating appropriate fiduciary duty contractual language, and introducing proactive company practices all are viable means to reduce the zone of conflict.

By James Bamford, Tracy Branding Pyle, Lois D’Costa Fernandez, and Meghan McGovern

Many joint venture (JV) directors find themselves in a perceived state of conflicted interest: deference to their nominating shareholder versus loyalty to the JV. The dilemma is a difficult one—directors often receive conflicting guidance as to whether they should vote based on what is best for the venture or what is in their shareholder’s interests.

JV directors likely owe certain fiduciary duties to the venture, notably a duty of care and duty of loyalty. The duty of loyalty is tricky in JVs, given that directors who are employees of one shareholder are simultaneously a fiduciary to their employer and to all other shareholders. This mutual agency introduces three types of conflicts: business opportunity conflicts, self-dealing conflicts, and information disclosure conflicts.

Balancing such conflicts is a regular occurrence on JV boards. For instance, the board of a media JV was asked to grant permission to negotiate a minority investment in a technology company, which, unbeknownst to management and other directors, was being separately evaluated by one shareholder. In another instance, the board of a JV was asked to approve an investment in an adjacent attractive market, but the directors from one owner wanted to reject the opportunity because the JV’s proposal was not central to their own business, which needed the capital to grow elsewhere.

While the law does not treat JVs differently from entities with other ownership structures, the notion that a director’s loyalty is “undivided and supreme,” as the courts have held in other ownership structures, does not reflect the reality on the ground with JVs. See Meinhard v Salmon, 164 N.E. 548 (N.Y. 1928). After all, JV shareholders likely have direct board representation and the opportunity to negotiate specific contractual rights to protect their interests. This creates at least an implied understanding that directors will advance their own shareholder’s interests over those of other shareholders whose directors also serve on the board. Indeed, when freed to do so, such as in Delaware limited liability companies (LLCs), co-venturers will often “contract out” of the duty of loyalty. JV counterparties rarely undertake—and courts are generally not sympathetic to—direct legal action against one partner or its directors for a breach of the fiduciary duty of loyalty.

Nonetheless, directors serving on JV boards could be exposed to liabilities and are often gravely warned by legal counsel about such exposures. At the very least, most JV directors are understandably confused.

Four Contractual Approaches

Today, companies routinely enter into joint ventures to access capabilities and markets, gain scale, and share costs and risks. Many companies hold interests in a dozen or more JVs and depend on these structures for a material share of their overall revenues or income.

To better understand how directors should approach the duty of loyalty in JVs, an analysis of 50 equity JV legal agreements—drawn from across industries, geographies, and formation years—found four basic approaches:

  1. Explicit affirmation. Some venture agreements are drafted to explicitly establish a director’s duty of loyalty to the JV and, directly or indirectly, not to the shareholder. The JV agreement of a large oil and gas JV makes this singular duty of loyalty clear: “The duty of a director is that of a fiduciary and accordingly the directors on the Board must act and vote in the interests of [the JV] and not in the interest of the Shareholders.”
  2. Implicit affirmation. Other agreements make no mention of director fiduciary duties. In most situations, silence implicitly means that directors remain subject to fiduciary duties, given that most jurisdictions impose fiduciary duties on directors by default.
  3. Qualified waiver. Qualified waivers are present when the agreements provide for blended loyalties or subject a director’s duty of loyalty to specified limitations. Three potential types of qualified waivers are loyalty carve-outs, dual loyalties, and legal waiver with a policy caveat. In loyalty carve-outs, the agreements stipulate that for certain matters a director may solely reflect the interests of his or her nominating shareholder, while in other matters the director must vote based on the venture’s interests, even at the expense of the director’s nominating shareholder. Under the dual loyalties structure, the agreements affirm a director’s loyalty to both the venture and the nominating shareholder. Under the legal waiver with a policy caveat, the legal agreements waive the duty of loyalty, thus exculpating directors from legal liability for a breach of the duty of loyalty, while the venture’s governance policies (e.g., governance framework, director role descriptions) state that the directors should balance the interests of the venture and a shareholder, with the intent of promoting a cohesive board culture.
  4. Complete waiver. Full waiver refers to agreements that completely waive all JV director duties of loyalty. For example, one healthcare JV agreement provides: “Each Member irrevocably and unconditionally waives, and acknowledges that the other Members irrevocably and unconditionally waive. . . any fiduciary duty that could be deemed to be owed to any Member or to the Company by it, any Member or any director.” The effectiveness of this drafting approach ultimately depends on whether the applicable jurisdiction permits parties to waive such duties.

Implicit affirmation is the most common (52 percent of agreements analyzed) and complete waiver is second most common (34 percent of agreements) approach to defining director duties of loyalty. Notably, some two-thirds of JVs structured as LLCs include a complete waiver. This suggests that LLCs may provide greater flexibility and potential protections for parties concerned about liabilities arising from director conflicts of interest. Outside of LLCs, 81 percent of ventures structured as corporations and 86 percent of those with other corporate forms remain silent on this matter (i.e., implicit affirmation).

Beyond corporate form, jurisdiction appears to play a role in which approach parties take to fiduciary duties. No JVs outside the United States included a complete waiver, potentially because many jurisdictions do not allow such a waiver. Thus, it appears that U.S. companies are much more likely to waive fiduciary duties.

Practical Guidance

JV partners should take three steps to address the conflicts JV directors face regarding the duty of loyalty:

Step 1: Structurally Reduce Director Conflicts

Those negotiating and structuring JV agreements should consider various methods to reduce “the zone of conflict” between the partners and within the JV board, including the following:

  1. Noncompete provisions. Covenants not to compete delineate the authorized scope of the venture from that of the shareholder companies, reducing the potential zone of conflict and relieving pressure on directors to balance dual loyalties. For instance, conflicts are less likely if the JV is the exclusive vehicle for a shareholder to compete in the venture’s particular product, customer, or geographic scope and when the venture is contractually restricted from operating in areas where the shareholder currently operates or has the potential to operate.
  2. Reserved shareholder matters. Certain foundational decisions related to the shareholders or the JV are reserved for the shareholders of the JV to decide as opposed to the board, such as amending the JV agreement, selling the company, or bringing in new owners. Unlike directors on a board, shareholders do not have fiduciary duties. Expanding the list of reserved shareholder matters to include approvals of more business matters can take potentially conflict-ridden decisions outside the board, reducing any potential duties of loyalty to the venture.
  3. Independent directors. Roughly 22 percent of JVs have at least one independent director—i.e., an individual who is not an employee of any shareholder. The presence of independents can implicitly or explicitly reduce conflicts by allowing these nonpartisan directors to drive the discussion (and, in some cases, the voting) on decisions where a shareholder has a conflicted position.
  4. Non-board decision forums. The governance system of JVs can be structured to include non-board governance forums to handle certain shareholder or high-conflict decisions. Various JVs establish a shareholders committee, often composed of the senior business sponsors from the owners (who may or may not be directors), to decide major decisions pertaining to strategy and investments. Alternatively, the governance system might include a commercial committee composed of non-board directors to handle terms related to supply and purchase agreements with the shareholders.
  5. Presence of shareholder representatives at board meetings.  Shareholder representatives can reduce board conflicts by solely representing shareholder interests. Shareholder representatives serve as outside observers specifically designated to voice shareholder interests, therefore alleviating pressure on directors to represent both shareholder and the JV interests.
  6. Delegations to management. Shareholders and the board can reduce board conflicts by putting more decision power in the hands of the JV chief executive officer and management team. Practically, this is likely to mean increasing overall fiscal sign-off authority or allowing management to enter into affiliated party contracts up to a certain financial threshold.

Even if dealmakers use one or more of these methods, in almost all cases, potential conflicts will confront a director. Furthermore, parties may determine that some or all of these methods are not appropriate in the venture’s specific circumstances. Therefore, dealmakers must then determine how fiduciary duties should apply to directors who may be conflicted—albeit with a reduced number of conflicts.

Step 2: Determine which Contractual Approach to Apply to Director Duties

Next, JV partners should determine which contractual approach to codify in the JV agreement regarding the duty of loyalty. Implicit affirmation is not recommended as an approach because it leaves directors without guidance about how to behave if they do not know the default law in the applicable jurisdiction.

A suggested way to determine the preferred approach is to work through four questions:

  1. Does the jurisdiction impose a fiduciary duty of loyalty on the directors of the JV in its likely corporate form? Whether fiduciary duties apply to a specific JV will depend on the JV’s jurisdiction of organization and type of entity. Most jurisdictions impose fiduciary duties on directors. For example, all U.S. states impose such duties on the directors of corporations. Whether a jurisdiction imposes such duties may depend on what type of entity is involved, i.e., whether the entity is a corporation, LLC, or partnership.
  2. Can the parties contract out of these default fiduciary duties? Although most jurisdictions impose fiduciary duties, jurisdictions vary in the extent to which parties can contract out of these duties. Some jurisdictions, such as Arkansas, historically have not allowed parties to opt out of fiduciary duties. On the other hand, Delaware allows parties to waive specified fiduciary duties, specifically the duty of loyalty with respect to corporate opportunities. Whether or not parties can waive fiduciary duties may vary by the JV’s jurisdiction of organization and the JV’s corporate form.
  3. Is one company more or less likely to be conflicted than its partners in the JV? The shareholders of a JV often have asymmetric potential for their directors to have conflicts of interest, typically when one shareholder has a higher degree of interdependence with the venture than the other. A shareholder’s level of interaction with the JV—and thus potential likelihood for director conflicts of interest—stems from a multitude of factors, such as the extent to which the parent company provides services to the JV, the JV’s role in the parent’s supply chain, the amount of shared assets and infrastructure, the prevalence of secondees and synergies in the JV, and the shareholder’s level of ownership and control.

    The asymmetric potential for director conflicts is important in determining whether to waive the duty of loyalty. A shareholder with a higher degree of interdependence with the JV, whose director is likely to be more conflicted, would typically want that director to be able to vote however is best for the shareholder, not the JV, and thus should consider a complete waiver. By contrast, the less interdependent shareholder, whose director is likely to be less conflicted, should consider the opposite—explicit affirmation—to emphasize the counterparty’s obligation to the venture.
  4. Do other factors—including growth, funding, and risk considerations—favor a particular approach? If the shareholders are equally interdependent, a shareholder should look to other factors to determine whether to waive or affirm fiduciary duties. Some of these factors relate to JV growth and funding considerations such as the JV’s potential to issue an IPO, the need for third-party financial investors, and the JV threat to entrenched internal shareholder interests. If such potential, need, or threat is high, shareholders should consider affirming the duty of loyalty. Other factors relate to risk considerations, such as the natural likelihood of conflicts at the board level, the materiality of such conflicts, and the potential legal risk to directors. If these scenarios are likely, the JV partner should consider waiving the duty of loyalty. A final factor to consider is the impact that waiving the duty would have on board culture. If the waiver would undercut a cohesive board, parties may opt to affirm the duty of loyalty.

Parties should review all of these questions. However, the relative weight of each factor should be determined based on the judgment of the applicable shareholder with guidance from counsel.

Step 3: Establish Practices to Support Understanding and Implementation

Once shareholders have narrowed the scope of director conflicts and determined a contractual approach to the duty of loyalty, shareholders should establish practices to support directors’ understanding of their rights and obligations to facilitate implementation of the selected approach. Doing so will ensure directors appointed by different shareholders or at different times have the same understanding of how to behave. The following are some practices to develop this understanding:

  1. Director training and development. Director training and development educates directors about whether they have fiduciary duties and any limitations on these duties. Directors should receive such training when joining a JV board and periodically thereafter. Engaging in this training with the entire board can help drive a common understanding and develop board culture.
  2. Conflict-of-interest protocols. A second practice to drive understanding is the development of conflict-of-interest protocols. These protocols establish procedures to follow in the event of a conflict of interest. Such protocols should enable individuals to recognize situations that may involve a conflict and provide guidance on how to resolve the conflict.
  3. Director indemnification. Shareholders may also indemnify JV directors for breach of fiduciary duties in the JV agreement. Such indemnification entitles the director to be reimbursed by the JV for losses incurred as a result of the director’s service to the JV, subject to limitations such as the director’s bad faith. Many JVs purchase director and officer insurance to insure against this potential loss. Such indemnification lessens the personal risks to directors in that only egregious breaches will result in personal financial liability.


These practices can be combined to ensure directors have a common understanding of their duties, tools to assist with conflicts, and latitude to make good-faith mistakes about how to behave as a JV director.

James Bamford is a senior managing director, Tracy Branding Pyle is a managing director, and Lois D’Costa Fernandez is a senior director at Ankura in its Washington, D.C., offices. Meghan McGovern is with Capco in New York City, New York.

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