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THEIR FAILINGS, OUR LEARNINGS

WHEN BUSINESS RENDS PARTNERS ASUNDER

Context:

As this automobile major experienced, Joint Venture agreements tend to fray over time, giving rise to possible Corporate Governance issues. The context could necessitate tough decisions. Could the Board have anticipated the way this would play out?

  • In a large listed public Company in the automobile sector, the Indian promoter group and a foreign company formed a Joint Venture (JV) with each of them having 26% of the shareholding. The JV was formed in 1984.
  • The Indian group was responsible for the marketing of the products, while the foreign partner was responsible for providing the technical know-how.
  • The relative rights and responsibilities of the JV partners, inter alia, envisaged that the foreign company shall not market, in India, its products in the segment where the Indian Company is present in the market.
  • The Company had 16 Directors in its Board, including 8 Independent Directors (IDs). As per the Shareholder Agreement, the Indian promoters and the foreign company had 4 Directors each on the Board. Also, the Company had an Executive Chairperson (Indian promoter).
  • There were the following conflicts between the 2 partners, that started surfacing in 2008-09–
    • The JV was only for domestic production and consumption. However, the listed Company became world’s biggest player in its segment. The JV agreement was subsequently modified to allow exports of limited products to a few countries. In 2008, competition in other countries, with subsidiaries of the foreign company in those countries, became an issue since the foreign company mentioned that it would not influence its subsidiaries into buying products from the listed Company.
    • Of the 4 representatives of the foreign company on the Board of the listed Company, one was the head of its Indian operations, to whom the Indian subsidiary of the foreign company reported. A second was working in Bangkok and represented the foreign company’s two-wheeler business in Asia. The other 2 were nominated by the foreign company. As Directors on the Board, all of them had access to its plans and strategies.
    • The technology tie-up was till 2014, and the listed Company wanted to have an independent R&D unit for manufacturing its own products. This was not liked by the foreign company.
    • The listed Company was not comfortable with the high payouts to the foreign company.
    • The listed Company refused to merge the Company’s spare parts business with the Indian subsidiary of the foreign company.
    • The foreign company wanted to enter the Indian markets since the market was growing drastically.
  • The Board was sensitised to the growing concerns of the Company in 2008-09 and the Audit Committee, which comprised only IDs, actively discussed these matters also.
  • The IDs played a very active role in questioning the foreign company on the possibility of the growth of the listed Company, without being dependent on the foreign company.
  • When the foreign company refused to help, the IDs strongly advised that the listed Company should go to the next growth phase independent of the foreign company.
  • Many of IDs felt that there was a risk for minority shareholders. But they agreed that complete elimination of risk was not possible and the Company could only mitigate them through its actions and strategies.
  • In 2010, the JV ended, and the Indian promoters bought out the foreign company.