Majority JVs as Control Mechanisms versus Minority JVs as Real Options

A long-standing debate focuses on the appropriate level of equity in JVs.* While the logic of having a higher level of equity control in majority JVs is straightforward, its actual implementation is often problematic.* Asserting one party's control rights, even when justified based on a majority equity position and stronger bargaining power, may irritate the other party. This is especially likely in international JVs, whereby local partners often resent the dominance of foreign multinationals. Some advocate a 50/50 share of management control even when one side has majority equity. But a 50/50 JV has its own headacheseverything must be negotiated or fought over. Sometimes it may be better and more efficient to have a dominant partner. In part because of this reason, in 2001, Fujifilm and Xerox reconfigured their long-running 50/50 JV active in Asianamed Fuji Xerox, which started in 1962to have a 75/25 split, with Fujifilm running the show.* In addition to the usual benefits associated with being a minority partner in JVs (such as low cost and less demand on managerial resources and attention), an additional benefit alluded to previously is exercising real options. In general, the more uncertain the conditions, the higher the value of real options. In highly uncertain but potentially promising industries and countries, majority JVs (or M&As) may be inadvisable, because the cost of failure may be tremendous. Therefore, minority JVs are recommended toehold investments, seen as possible stepping stones for future scaling upif necessary. While the real options logic is straightforward in theory, its practicewhen applied to acquisitions of JVsis messy.* This is because most JV contracts do not specify a previously agreed-upon price for one party to acquire the other's assets. Most contracts only give the rights of first refusal to the parties, which agree to negotiate in "good faith." It is understandable that "neither party will be willing to buy the JV for more than or sell the JV for less than its own expectation of the venture's wealth generating potential. As a result, how to reach an agreement on a "fair" price is tricky.

What is the debate? What are some of the drivers to obtain majority equity? What are some of the drivers to obtain minority equity? What would be a helpful real option element in the alliance agreement to manage any equity changes?