Confidential and Proprietary
Structuring a JV – Audit, Information, and
Reporting Rights
Guide
Part of the Structuring the JV Agreement Series
January 2012
These materials were developed by Water Street Partners LLC. They are intended for the
exclusive use of our clients. These materials contain underlying approaches, methodologies,
frameworks, practices, data, perspectives and other intellectual property that are the exclusive
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Washington DC USA
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EXECUTIVE SUMMARY
• Many JV agreements do not appropriately address the issue of information,
reporting, and audit rights, either (1) defining rights too narrowly, leading to
tensions with partners or (2) defining right too broadly, creating real costs by
taxing management with numerous overlapping requests that take time (and
additional staff) to manage
• Dealmakers who structure a robust, well-defined set of information, reporting, and
audit policies will encourage increased alignment with partners, prevent tensions,
and limit the associated costs to management
• Dealmakers should also think holistically about where formal information rights fit
into the broader slate of levers available to maintain visibility into the JV, including
committee participation, use of Company secondees, extending Company
financial systems to the JV, etc.
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1
DOCUMENT AT-A-GLANCE
Purpose:
• To provide dealmakers and others involved in JV
negotiations and restructurings with an overview of issues,
deal terms, sample contract language with regard to
information and audit rights in a joint venture agreement
Audience:
• Dealmakers drafting a joint venture agreement
• JV Board members and CEOs looking to benchmark how
their JV agreement and policies line up against other
ventures
How to use:
• For ventures under consideration, consult guide as deal
progresses to ensure issues are considered and addressed
at the right time with the appropriate depth
• For operational ventures, use guide as a benchmark for
current policies, and a reference for potential options to
change approach in JV agreement (if needed)
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2
WHERE INFORMATION AND AUDIT RIGHTS FIT WITHIN THE JV AGREEMENT
Joint Venture Agreement
Article 1: JV organization and structure
Article 2: Purpose of the JV
Article 3: Shareholder rights and obligations
What dealmakers need to solve for:
Article 4: Capital contributions and financing
Article 5: Board structure and operations
Article 6: Management structure and duties
Article 7: Venture operations and processes
Article 8: Distributions and allocations
Article 9: Accounting, records, and audits
Article 10: Dispute, deadlock, and resolution
Article 11: Restrictions on transfers
Article 12: Defaults and remedies
• What risks do we face from participation in a joint
venture?
• Given those risks, what audit and information
rights do we need to structure into a term sheet
and/or JV agreement to protect our interests?
• How should the venture structure its accounting
and information management practices to enable
the exercise of our audit and information rights?
Article 13: Term, terminations, and dissolution
Article 14: Confidentiality
Article 15: Representations and warranties
Article 16: Non-competition
Key Appendices and Ancillary Agreements:
A. Technology licensing agreement
B. Master shared services agreement
C. Secondment agreement
D. Year 1 budget/plan
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3
CONTENTS
A. Introduction
B. Guidance on key information and audit decisions
1.
Information rights and processes
2.
Audit rights and processes
3.
Related policies for execution
C. Related resources
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4
WHAT ARE WE TALKING ABOUT?
Information rights
Audit rights
• Right of partners to access data related to the
• Right of partners to call for detailed, in-depth
joint venture
audit of venture performance and practices
• Can be limited to financial controls and
• Can be limited to financial performance and
results, or expanded to cover any and all
aspects and activities of the JV (e.g.,
operational data, safety performance, etc.)
controls, or expanded to cover any and all
aspects and activities of the JV (e.g., HSE
audits, contract reviews)
• Can encompass data that JV management is
• Either done on ad hoc basis at request of a
required to share on a regular basis, as well
as information that is available upon request
by partner
partner, or required on a regular schedule
• Performed by internal JV audit function, by
the partners, or by an independent third-party
(i.e., “Big Five” auditing firm)
• Can be raw, real-time information, or highlevel summaries, insights, and assessments
Audit and information rights critically interconnected:
• Basic information provided on regular basis by JV may trigger need to audit -- but can also provide partners
with enough knowledge to comfortably assess risks without performing audit
• Scope of audit will be constrained by topics partners have right to access
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OPTIONS FOR KEY DEAL TERMS COVERED IN THIS DOCUMENT (Page 1 of 2)
Information rights and processes
Audit rights and processes
Key term:
Options:
Key term:
Options:
1A. Types of data
available to
Company
• Only basic “books and records”
clause
• Basic “books and records” clause
with additional specifics
• Expansive “books and records”
clause only
• Expansive “books and records”
clause with additional specifics
2A. Nature of
required JV
audits
• Audit of financial records and internal
controls
• Audit of financial records plus other
defined topics (operational
performance, HSE, etc.)
2B. Choice of
auditors and
accounting
policies
• Define specific auditor and key
accounting policies in JV agreement,
and allow Board to change in future
• Require Board to select auditor and
key financial policies when JV
established
2C. Executing
required JV
audits
• Need to develop process based on
Company needs and unique context
of JV
1B. Timing of
required
reporting
• Real time access
• Periodically (i.e., weekly, monthly,
annual)
• Upon request
• Event-driven (i.e., within specific
timeframe after defined event occurs)
1C. Access to JV
facilities and
staff
• Generally defined broad access
• Access to specific facilities and / or
JV staff
1D. Governing
regulations
for books
and records
• Standard accounting principles
• Modified accounting principles
• Compliance with Sarbanes-Oxley
2D. Scope of
• Solely financial information and
additional
related controls
audits
• Financial information and specific
Company can
additional elements of the JV
request
• Any element of JV business,
operations, etc.
2E. Executing
additional
audits
requested by
Company
• Need to develop process based on
Company needs and unique context
of JV
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OPTIONS FOR KEY DEAL TERMS COVERED IN THIS DOCUMENT (Page 2 of 2)
Organizational structures
Key term:
Options:
3A. Audit
• Determine if JV should be required to
committee on
establish an audit committee – and if
JV Board
so, how it should be structured to
meet unique needs of JV
3B. Internal audit
function in
JV
• Determine if JV organizational
structure should include an internal
audit function – and if so, how it
should be structured to meet unique
needs of JV
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7
WORKFLOW – TYPICAL SEQUENCING FOR AGREEING ON TERMS
Define the
Strategy
Select
a Partner
Run the
Negotiations
Develop Deal
Concept
Structure
Agreements
Plan and Run
Implementation
Key activities and terms
Preliminary talks:
Detailed discussions on key
issues for interim documents:
Structuring the final
agreement:
Preparing for JV launch:
• Information and audit
• Stipulate basic rights of each
• Define in JV agreement:
• Develop management
rights not typically
covered in preliminary
discussions on JV (but
choices here will
shape information and
audit needs)
party to audit books and access
financial information
• Based on venture concept /
corporate needs / risk
assessment, define specific
additional rights or principles
critical to deal (e.g., guaranteed
facility access, rights to
engineering data, etc.)
– Information access rights
and requirements (e.g.,
types of data, timing of
required reporting)
– Audit rights and
requirements (e.g., timing of
required audits, scope of
additional partner-requested
audits, etc.)
– Core supporting policies
(e.g., use of audit
committee, cost allocations)
policies to implement
required practices (i.e.,
submission of required
reports)
• Define audit committee
charter (if required)
• Establish format for
information reports and
audits
• Clarify secondee policies
related to information
sharing
• Finalize JV audit plan
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IMPORTANCE OF CAREFUL APPROACH IF COMPANY WILL BE MINORITY
If your Company is a minority partner, basic legal rights may not be enough to balance the
risks of participation in a JV
Example:
Minority shareholder rights relative to ownership
stake in UK limited company
Single share:
5% or more:
10% or more:
25% or more:
50.01% or more:
• Right to vote
• Right to call a
general
meeting
• Right to have
the Company’s
annual
accounts
audited
• Right to block a
special
resolution
(required for
specified set of
changes to
company legal
structure)
• Right to pass
ordinary
resolutions
(covering
routine
business,
removal of
Director, etc.) at
general
meeting
• Right to receive
notice of
shareholder
meetings
• Right to
dividend if one
declared
• Right to
circulate written
statement prior
to general
meeting
•…
• Right to copy of
annual financial
statements
•…
Source: UK Companies Act of 1985, 2006
Minority protections in law can be general
and limited – important to specify additional
minority rights (like detailed information and
audit rights) in the JV agreement
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FORMAL INFORMATION AND AUDIT RIGHTS PART OF A BROADER EFFORT
Company should think holistically about how to negotiate a variety of levers to secure
and maintain visibility into JV operations
Use of Company systems (e.g.,
IT, financial management)
• Can provide real-time
electronic access to
information on JV
performance and operations
Board voting
• Can require JV provide
information needed to
properly weigh options
Audit and Information Rights
Use of Company secondees
• Topic of this module
• Can give Company visibility
into operations from on-theground perspective
Provision of Company
technical and administrative
services
Role of Board
Committees
• Can provide insight into how
JV is functioning by
monitoring how services are
used
• Can be scoped to
require greater Board
oversight, and thus,
information access
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CONTENTS
A. Introduction
B. Guidance on key information and audit decisions
1.
Information rights and processes
2.
Audit rights and processes
3.
Related policies for execution
C. Related resources
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11
1. INFORMATION RIGHTS AND PROCESSES – KEY TERMS TO NEGOTIATE
Key terms
Information
rights and
processes
1A. Types of data available to
Company
1B. Timing of required reporting
1C. Company access to JV staff and
facilities
1D. Governing regulations for
maintaining books and records
Key questions for dealmakers:
• What information rights do we need to structure into a term
sheet and/or JV agreement to protect our interests?
• How should the venture structure its accounting and
information management practices to enable the exercise of
our information rights?
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1A. TYPES OF DATA AVAILABLE TO COMPANY
Term
Options
When to consider
What types of data
will the JV make
available to
Company?
A.
Only basic “books and records”
clause: right to access JV financial
records and statements (i.e., P&L, balance
sheet) reflecting the minimum required by
law; typically seen in standard shareholder
/ partnership agreements
• JVs with limited risk, minor investments from
Company, etc.
B.
Basic “books and records” clause with
additional specifics: right to access JV
financial records and statements required
by law, plus limited additional access to
specific kinds of operational and/or
technical data
C.
Expansive “books and records” clause
only: broadly defined right to access any
element of the JV’s business, including
financial, technical, operational, or other
kinds of data
D.
Expansive “books and records” clause
with additional specifics: broadly defined
right to access any element of the JV’s
business, including financial, technical,
operational, or other kinds of data, plus
additional definition of specific types of
information to be made available
• JVs that are material or pose significant risks to
Company, e.g.:
– Company providing significant investment
capital for construction (ask for engineering
reports, finance updates, etc. from project
manager)
– JV or partner located in an emerging market
with high corruption risks (ask for details on all
contracts with vendors and third-parties,
including due diligence performed)
– JVs between competitors (consider anti-trust
issues raised by information access, e.g.,
sharing of pricing and supplier info) (See page
15 for more)
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BENCHMARKING OF APPROACHES TO DEFINING DATA ACCESS IN THE JVA
Level of depth in defining rights to types of information in JV agreements
(N=25)
Preferred approaches
Least-desirable approach
Basic “books and records”
clause with additional specifics
Basic “books and
records” clause only
16%
28%
44%
Expansive “books and records”
clause only
12%
Unlikely to provide level of
information needed to properly
assess risks and ensure
transparency into JV operations
Source: Water Street Partners case library; and analysis
Expansive “books and records”
clause with additional specifics
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BROADER ACCESS AS COMMONLY SEEN IN JV AGREEMENTS
Specific types of data JV could be required to make available to Company:
Financial information
Operational information
Technical information
Events requiring notice
• Profit and loss statement
• Balance sheet
• Cash flow report
• Operational expenses
• Periodic sales
• Capital budget
• Operating budget
• Finance budget
• Variance from budgets
• Capital account balances
• Third-party audit findings
• Annual tax reporting
• Status of FCPA / SarbOx
compliance
•…
• Annual strategic plan
• Proposed business plans
• Approved business plans
• Health, safety,
environmental performance
• Manufacturing and
production reports
• Sales reports
• JV third-party contracts
• Identities / due diligence
information for all vendors,
consultants, etc.
• Details on JV property
• Details on JV assets
• Hydrocarbon reserves
• Reports submitted to
government agencies
• Names / addresses of all
Directors and JV
management employees
• JV personnel files
• JV compensation details
•…
• R&D plans / expenditures
• Feasibility studies
• Product samples
• Project / construction status
• Trademark / patent
applications by JV
• Details on IP created by JV
•…
• Actions impairing assets
• Decisions to close business
or terminate employees
resulting in charge of X
amount
• Entry into any off-balance
sheet arrangement
• Entry into contracts related
to patents or technology
licenses over X value
• Entry into sole-source
contracts in “high-risk”
geographies
• Entry into any debt in
excess of X amount
• Notice of lawsuit against JV
• Notice of loan default by JV
• Any recall or alleged JV
product defect
• Removal or resignation of
JV accountants
• Changes in JV accounting
and tax policy
•…
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SELECTING THE “RIGHT” TYPES OF DATA FROM COMPANY PERSPECTIVE
Screening tool to determine what data to include in the JV Agreement
TEMPLATE / TOOL
Criteria
Value of information:
Legal rights:
• Is it a critical need for the • Do the laws covering the
Company to have the info
(i.e., required to enable
skills transfer)?
JV’s jurisdiction entitle the
Company to receive this
(or similar) information?
Ease of providing:
Limited antitrust risk:
• Would requiring JV
• Are there any competitive
management to provide
this information be overly
burdensome, expensive,
etc.?
sensitivities in having the
JV share the information
with the Company or other
partners?
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ASSESSING ANTI-TRUST RISK
What information is sensitive vs. appropriate to share in a
JV between competitors?
Challenge
When parents and JV have
overlapping customers and
suppliers, how should
information sharing be designed
to avoid even appearances of
competitive impropriety?
Recommended
approach
DISGUISED METALS AND
MINING EXAMPLE
Identify competitively sensitive
information and develop policies that
govern its exchange between the JV
and the Company, including JV Board
Members and other Company
employees
Example: Mining JV information sharing policies
Not likely to be
competitively sensitive
Confidential but not too
sensitive to share
Confidential and
inappropriate to share
Details:
• Information completely unrelated
to price or commercial terms
• Historical information, especially
if in public domain
• Certain statistics or details
related to ongoing operations
(i.e., safety and health
performance, labor market
demand)
• Production and cost
performance at the aggregate
level, including output volumes
margins, sales data, etc.
• Identities of customers and
suppliers
• Market forecasts at the
aggregate level
• JV business plans and future
strategies for marketing, R&D,
expansion, etc.
• Detailed pricing and terms inside
JV contracts to buy services or
sell goods
• JV negotiation strategies and
pricing models with customers
• Proposed terms and timing of
any tenders or bids
• Inputs into market forecasting
• Company inputs into own
market forecasts
Sharing:
• Appropriate for any JV
employee and any Company
employee to discuss
• Appropriate for JV Board
Members to receive and
discuss as part of fulfilling
fiduciary duties
• Not appropriate to share or
discuss with JV Board, or
between JV and Company
employees
Source: Water Street Partners case library and analysis
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1B. TIMING OF REQUIRED REPORTING
Input into deal term
Term
Options
What to consider
How often will
Company receive
a particular report
or piece of
information from
the JV?
A. Real time access
• Dealmakers should chart their corporate planning
timelines and needs, and ensure supply of
information from JV matches up against it
B. Periodically (i.e., weekly, monthly,
annual)
C. Upon request
D. Event-driven (i.e., within specific
timeframe after defined event occurs)
• Choosing specific details over broad terms on
reporting helps prevent future partner
disagreements over what and when JV should be
reporting (see page 20 for example)
• Need to balance reporting requirements against JV
management resources – management should
avoid spending too much time on reporting (and not
enough on operating / growing the JV)
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DEFINING THE TIMING OF REPORTING AND INFORMATION ACCESS
TEMPLATE / TOOL
Types of information
JV will provide
• _____________
• _____________
• _____________
• _____________
Real-time access
Defined period
Upon request
Event-driven
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• _____________
Issues / considerations:
• Provision of
Company services
to JV (i.e.,
accounting, IT
systems) is
opportunity to
automatically secure
real-time access
• Best for financial
reporting that
correlates with
periodic reporting
requirements at
Company level
• Make sure periodic
data provided long
enough in advance
to be rolled into
Company reports
• Use for information • Use for activities
Company has only
occasional need for
– especially if
expensive / time
consuming to
prepare for
Company
that are
unpredictable in
occurrence, but
critical for Company
to learn about as
soon as possible
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19
CASE EXAMPLE: ALIGNING ON SPECIFICS OF REPORTING FORMATS AND CONTENT
Useful approach for lowering costs and tax on JV
management caused by lack of coordinated
approach to information sharing
DISGUISED OIL AND GAS
INDUSTRY EXAMPLE
Oil and gas JV challenge:
• JV agreement grants broad access
to financial and operational data –
but does not clearly define nature
and timing of required reporting
• Partners requesting overlapping
information at different times and in
different formats
• JV management spending
significant time and money to meet
partner requests
Aligning partners on a new approach:
Partner A
requirements
Monthly Operations
Report
January 2012
Partner B
requirements
• Partners jointly developed a single document with mutuallyagreed format and content that would meet their needs if
produced by JV management on monthly basis
• Standard format and removal of wasteful overlapping requests
enabled management to reduce information reporting effort
and expenses by [$xx]
Source: Water Street Partners case library and analysis
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DEVELOPING AN INFORMATION REGISTER
Potential schedule to include in JV Agreement
DISGUISED METALS AND
MINING EXAMPLE
Useful approach to prevent disagreements down
the road on what / how / when partners are entitled
to receive information
Information Register for Mining JV
Data provided JV to the Board (and others in the shareholders) on a recurring basis
Description
(content and key
analyses)
Recipients
Frequency
(e.g., Board, OpCom, (weekly, monthly,
other committees)
quarterly, annually)
• Operator joint monthly report
• Performance against scorecard targets
• Production volumes – actual with variances
• Consolidated balance sheet
• Cashflow statement for month and year to date
• Financial and operational performance forecasts
• Approved budget and program for each project
• Variance between project budgets and expenditures
• Updated risk profile and risk register
• HSE events
Source: Water Street Partners case library and analysis
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21
1C. ACCESS TO JV FACILITIES AND STAFF
Input into deal terms
Term
Options
When to consider
What access will
Company have to
JV facilities, staff,
etc.
A.
Generally defined broad access: blanket
statement providing reasonable access to
JV facilities, staff, etc. as needed by the
Company (typically with provision that
access is constrained by safety concerns)
• Broadly defined access will suffice in most
situations
B.
Access to specific facilities and/or JV
staff: in addition to general access, can
also ask for specific facilities / staff be
made available for defined purposes
• Consider asking for specific types of access in
addition to broadly-defined rights in ventures that
are high-risk, have complicated financial structures,
or represent material levels of investment or income
for a parent
Example:
• JV CFO required to meet with Company
executives / attend Company financial
reviews to answer questions related to
JV financial performance
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22
1D. GOVERNING REGULATIONS FOR BOOKS AND RECORDS
Input into deal terms
Term
Options
When to consider
Which regulations
will govern how
the JV’s financial
books and records
are maintained?
A.
Standard accounting principles:
adoption of IFRS, GAAP, and / or other
financial accounting methods consistent
with the laws applicable to the JV
• Most JVs – but may also need to prepare multiple
sets of “standard” books if governing law for JV is
different from governing law for parents
B.
Modified accounting principles: usage
of a modified version of IFRS, GAAP, etc.
to reflect unique elements of the JV’s
construct (also known as “pro forma”
accounting, and often used to offer a
clearer picture of operational performance
with special items and charges stripped
out)
• JVs that have unique financial constructions not
covered by standard language – or JVs that are
going to be consolidated with parents who use
some form of modified GAAP
• Note that usage of modified accounting principles
often requires a “standard” set of books also be
prepared for regulatory and tax purposes
In addition to Option A or B – compliance
with Sarbanes-Oxley: Regardless of
accounting principles chosen, compliance with
Sarbanes-Oxley requires adopting a set of
additional internal controls and certifying the
validity of the company’s financial statements,
with criminal and civil penalties for
management in the event of inaccurate
financial reporting
• JVs operating under US financial regulations or
being consolidated into parents operating under
such regulations
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23
DEFINING INFORMATION RIGHTS IN THE DEAL DOCUMENTS
Appropriate level of detail for the Term Sheet / MOU and the JV Agreement
Example: information rights in a Term Sheet / MOU
DISGUISED ALTERNATIVE
ENERGY EXAMPLE
• Both parents will have joint access to the physical
facilities and data (other than data/information that
is proprietary to the other party) of the JV, including
(but not limited to) [various production facilities].
• No access will be provided to other [Parent A]
facilities without the consent of [Parent A], which
will not be unreasonably withheld.
– Alternative energy JV Term Sheet
Example: information rights in a JV Agreement
“The Parties shall cause EverQ to furnish the
following reports to each of [the Parties]:
• As soon as practicable after the end of each fiscal
year of EverQ, and in any event within forty (40)
days after the end of each fiscal year of EverQ, an
audited consolidated balance sheet of EverQ as at
the end of such fiscal year, and consolidated
statements of income and cash flows of EverQ
• As soon as practicable after the end of the first,
second and third quarterly accounting
periods…and in any event within twenty-five (25)
days after the end of the first, second, and third
quarterly accounting periods…an unaudited
consolidated balance sheet of EverQ as of the end
of each such quarterly period, and unaudited
consolidated statements of income and cash flows
of EverQ for such period
• Monthly P&L statements as soon as practicable
• Such other information relating to the financial
condition, business, prospects or corporate affairs
of EverQ as [the Parties] may from time to time
reasonably request.
– EverQ Master JV Agreement
Source: Water Street Partners case library; SEC Filings; Water
Street Partners analysis
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24
2. AUDIT RIGHTS AND PROCESSES – KEY TERMS TO NEGOTIATE
Key terms
2A. Nature of required audits
Audit rights and
processes
2B. Choosing auditors and accounting
policies
2C. Executing required JV audits
2D. Scope of additional audits
Company can request
2E. Executing additional audits
requested by Company
Key questions for dealmakers:
• What audits do we need the venture to perform on a regular
basis to be comfortable with its performance and financial
controls?
• What parts of the JV’s business and operations do we need to
monitor and audit, as needed, given the risks faced by the JV?
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25
2A. NATURE OF REQUIRED JV AUDITS
Input into deal terms
Term
Options
When to consider
What audits will
JV be required to
perform (or have
performed for it by
the partners or a
third-party)?
A. Audit of financial records and internal
controls: to verify compliance with
securities laws and applicable financial
controls
• Every JV
• Note that traditional audits of financial controls and
results appropriate for most ventures to organize
via use of “Big 5” external auditor
A. Audit of financial records plus other
defined topics (operational performance,
HSE activities, etc.): to verify compliance
with securities laws and applicable financial
controls, plus validate performance on key
topics selected by Company
• Larger JVs with significant risks due to amount of
capital at stake, nature of business, geographic
location, etc.
• Note that most additional audits of JV business,
risks, operations, etc. more logically performed by
Company and/or partners, which are often
calibrating JV against own internal standards and
practices
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26
2B. CHOICE OF AUDITORS AND ACCOUNTING POLICIES
Input into deal term
Term
Options
When to consider
How will the JV’s
auditor for
required audits
and associated
accounting
policies be
chosen?
A. Define specific auditor and key
accounting policies in the JV agreement,
and allow Board to change in future
• Most JVs – particularly for JVs that will be closely
connected with Company via use of services,
consolidation, etc. where ensuring policies align at
outset reduces overlap
B. Require Board to select an auditor and
key financial policies once JV is
established
• Highly-independent JVs that will operate similar to
an independent business
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2C. EXECUTING REQUIRED JV AUDITS
How will JV (and potentially Company) work together to execute required audits?
Key questions in designing process for required audits
1. How often will JV be required to execute required audits?
2. If auditor is not defined in the JV agreement, who decides on the Lead
Auditor for required audits?
3. Will the Company have any rights / ability to influence the audit’s scope
(e.g., request the Lead Auditor include specific items in the audit
program)?
4. Will Company be entitled to participate in required audits?
5. How will costs of required audits be allocated?
6. What audit-related information will the Company be entitled to receive
(e.g., final report, copies of all correspondence, etc.)?
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DEFINING PROCESS AND TIMING FOR REQUIRED AUDITS
Potential schedule to include in the JV Agreement
TEMPLATE / TOOL
Sample audit process
1. JV management and
partners meet to review
audit topics and select audit
lead (either JV-led, partnerled, or third-party)
2. Audit notifications
distributed to appropriate
elements in JV to begin
preparation work
3. Audit conducted on-site,
including document review,
interviews as needed, etc.
Sample audit timeline
Time period for JV audit
2008
Q1
Q2
Q3
Audit Execution
2009
Q4
Q1
Q2
Q3
Q4
Audit
preparation
Audit of
2008
Reporting
of results
Board
review
Audit
preparation
4. Audit report distributed to JV
partners
5. JV Board meeting with JV
management to review audit
report, adopt changes as
required to resolve issues
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2D. SCOPE OF ADDITIONAL AUDITS COMPANY CAN REQUEST*
Input into deal terms
Term
Options
When to consider
Which audits can
Company perform
on the JV (or have
performed by a
third-party)
beyond the
required audits?
A. Solely financial information and related
controls
• Consider narrow audit rights only when Company
will have significant visibility into JV operations (via
secondees, provision of services to JV, etc.) and is
comfortable using that regular visibility in place of
targeted audits
B. Financial information and specific
additional elements of the JV: defines
right of Company to audit one or more
specifically-defined categories (implies no
other topics allowed)
C. Any element of JV business, operations,
etc.: grants Company ability to audit any
topic of interest, without restriction
• Consider broad audit rights when Company will
have narrow access to daily operations of JV and
feels need to (i) validate information being provided
in reporting and (ii) ensure awareness of all risks
posed by JV
* Note: The JV Board collectively, and subject to specific owner voting rights, will typically
have wide-ranging rights to sponsor audits of the joint venture business and
operations. This deal term does not pertain to the Board, but rather to what audits the
individual Company can conduct or cause to be conducted.
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BENCHMARKING OF ALLOWABLE SCOPE FOR ADDITIONAL AUDITS IN THE JVA
Scope of audit partners can request in the JV agreement
(N=18)
Financial information and
specific additional areas
Solely financial
information and
related controls
11%
39%
50%
Audit topics listed in JV agreements
• JV financial controls and performance
• Handling of service agreements with
JV partners
• Capital account management
• Capital project management
• Health / safety/ environmental
policies and practices
• Manufacturing processes
• Sales practices and performance
• Due diligence on vendors,
consultants, etc.
• Contracts with third-parties
• JV facility / plant management
• JV governance review
• …
Broad – any topic related
to JV financials, business,
operations, etc.
Source: Water Street Partners case library and analysis
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CASE EXAMPLE: AUDIT RIGHTS RELATED TO JV SERVICES
Illustration of contractual rights found in JV Administrative Service Agreements
Overview of the JV and
shared service set-up
• 80-20 JV between P&G
and Clorox in food and
trash bags, containers and
wraps
• Valued at >$1BN
• Services provided by
Clorox include: payroll,
product supply, project
management, human
resource, information
systems, facilities
management, treasury, tax,
financial system and
accounting, legal
Illustration of contractual audit rights on Clorox provided
services as contained in the JV agreement
• The Board will review on an annual basis the costs and quality
of the Clorox Services and determine whether it continues to be
in the best interest of the JV for Clorox to continue to provide all
such services
• The JV Leadership Team will monitor the Clorox Services on
an ongoing basis and will report to the Board on an annual basis
as to the results of its review of the Clorox Services and will
provide the Board with any recommendations for changes in the
Clorox Services. The Board will promptly act on any such
recommendation by the JV Leadership Team
• All allocations in all geographies for all allocated costs (i.e. those
costs that cannot be solely attributed to the JV) will be reviewed
and documented annually to facilitate consistency and disclosure
• Clorox’s internal audit function will review the JV financials and
processes in a manner and frequency consistent with Clorox
internal audit procedures. These audits will be performed at least
once every 24 months, and these reports will be shared with the
Board
Source: SEC filings; analyst reports; Water Street Partners analysis
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32
2E. EXECUTING ADDITIONAL AUDITS REQUESTED BY COMPANY
How will JV (and potentially Company) work together to execute requested audits?
Key questions in designing process for requested audits
1. How often will Company be allowed to request additional audits?
2. Will Company be required to coordinate requests for additional audits with
other partners?
3. Who decides on the Lead Auditor for requested audits?
4. Will the Company have any rights / ability to influence the scope of audits
requested by other partners (e.g., request the Lead Auditor include
specific items in the audit program)?
5. Will Company be entitled to participate in requested audits (whether audit
is requested by Company or other partners)?
6. How will costs of requested audits be allocated?
7. What audit-related information will the Company be entitled to receive
(e.g., final report, copies of all correspondence, etc.)?
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CASE EXAMPLE: OVERALL APPROACH TO AUDIT IN THE JVA
How Dow approaches negotiating audit rights into the JV agreement to ensure its
interests are protected
JV Audit Principles (cont’d)
• The partners, generally, should
JV Audit Principles
• All JV Agreements being drafted for
new joint ventures should include a
“right to audit” clause. Exceptions to
this expectation should be confirmed
with the Corporate Auditor.
• If the joint venture has its own
internal auditing department, Dow’s
Corporate Auditor needs to
periodically evaluate its competency
to ensure Dow’s interest is properly
safeguarded.
• Where a joint venture has no
internal auditing department and the
partners provide internal audit
services, the partners should
coordinate the audits they perform
so that adequate audit coverage is
provided and duplicate audits are
avoided where possible.
exchange audit results and
cooperate with the JV management
and the JV Board to determine what
audits should be performed.
• There are at least three internal
audit constituencies for a joint
venture: two joint venture partners
and the joint venture management.
All three constituencies need to
have input to this process, but the
process must be controlled by the
joint venture partners.
• Either Dow should perform the
audits of the joint venture (e.g., if the
partner has no internal audit
function) or the partners should work
together in a collaborative audit
process.
•…
•…
Source: Are Your JVs a Ticking Time Bomb? (JVX)
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3. ORGANIZATIONAL STRUCTURES – KEY TERMS TO NEGOTIATE
Key terms
Organizational
structures
3A. Audit committee on JV Board
3B. Internal audit function in JV
Key questions for dealmakers:
• What are the critical structures and related practices the JV
needs to adopt to support information sharing and auditing?
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SET OF KEY ACTORS TO POTENTIALLY INVOLVE IN JV AUDIT PROCESS
Key actors and their roles in JV audit process
JV Board
Audit Committee
Other
shareholder
committees
• Responsible for JV internal controls
and compliance with regulatory
requirements
• Establishes guidelines for executing
internal reviews
• Coordinates external audits
• Approves changes based on audit
results
CEO
Important for dealmakers
to consider whether to
use – and if so, how to
structure in the JVA
Internal audit function / unit
JV
• Reports to Audit Committee and JV
CEO
• Develops annual internal audit and
control framework for monitoring JV
• Executes audits against key areas
of risk
• Builds audit reports, recommends
changes, and monitors progress
against recommendations
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3A. AUDIT COMMITTEE ON JV BOARD
Input into deal term
Secondary questions
• Will it be responsible for reviewing only financial
performance and controls – with other
shareholder committees providing review of
technical, operational, strategic issues , etc.?
Primary question
• Should the JV be required to establish
an Audit Committee?
If yes
• What role will it have in setting accounting
policies and practices for the JV (e.g.,
promotion of standardized reporting,
optimization of tax, dividend and other financial
policies)?
• Will it control the overall audit program
(including financial performance and controls
plus all broad-based annual shareholder audits,
specific functional audits, etc.)?
• What other responsibilities will it have (e.g.,
establishment of guidelines for non-financial
reviews, recommendations on key plans,
assisting with project financing, self-regulation)?
• How will it be staffed (e.g., # of members, how
many from each parent, whether solely
composed of Board members, expertise and
skill sets)?
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PREVALENCE OF AUDIT COMMITTEES IN JVs
Overall usage rates of audit
committees in JVs
(N=59)
Usage rates of audit committees in JVs by industry
(N=38)
Chemicals
Metals and Mining
36%
No audit
committee
64%
Use an audit
committee
Oil and Gas
Financial Services
Travel and Logistics
High Tech
Alternative Energy
0%
Source: Water Street Partners JV database and analysis
20%
40%
60%
80%
100%
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3A. AUDIT COMMITTEE ON JV BOARD
Input into deal term
Secondary questions
• What types of audits will the internal audit
function be involved in performing / supporting?
• How large should it be, and how will it be staffed
– by JV employees, Company secondees, etc.?
Primary question
• Should the JV have its own internal
audit function?
If yes
• How will it be funded?
• What kind of reporting relationships will it have
inside the JV – to the CEO, to the audit
committee, etc.?
• How will it interface with Company staff?
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ADDITIONAL STRUCTURES USED TO SUPPORT JV AUDIT PROCESS
Power generation JV
Industrial manufacturing JV
Board
Board
Parent A
Parent A
Audit
Committee
Audit
Committee
Corporate
audit group
Audit
Department
(Shareholder
Staffed)
Audit
Commission
CEO
Corporate
audit group
CEO
Internal
Audit
JV
JV
Parent B
Parent B
Context:
Context:
• JV between European and emerging market company
to operate power assets in emerging market
• JV between US and European company to operate
industrial manufacturing assets
• Audit department of 3-4 FTEs created by parents to
monitor JV’s risk management and controls; reports to
JV’s audit committee
• Parents created audit commission to perform annual
shareholder review focused on financial controls (e.g.,
related party transactions, FCPA compliance)
• Audit department located in emerging market, but not
a direct part of JV; department’s GM is from
European parent, supported with 3 local FTEs
• Commission is chaired by the Audit Committee Chair,
and staffed annually by 3 person team drawing on
parent corporate audit groups and the Head of the
Internal Audit function in the JV
• Explores issues like “quality of JV’s third-party
contracts” (and not operational or project topics)
Source: Water Street Partners case library and analysis
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40
CONTENTS
A. Introduction
B. Guidance on key information and audit decisions
1.
Information rights and processes
2.
Audit rights and processes
3.
Related policies for execution
C. Related resources
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41
ADDITIONAL RESOURCES
Core documents
• Managing Shareholder Information Demands (JVX)
• Role of Internal Audit in JVs (Practitioner Guide)
• Best Practices in JV Audits (External Document)
• JV Finance and Audit Committee – Charter
• Designing a Corporate-Level JV Review
• JV Peer Reviews – Overview and Sample Tools
• Managing Anti-Bribery and Corruption in Emerging
Market JVs (JVX)
• Guide to Setting Metrics and Targets for a Joint
Venture
Related materials
• ‘Are your JVs a Ticking Time Bomb’ (JVX)
• Guidelines for Joint Venture Audit Standards Australian Petroleum Production & Exploration
Association Limited (External Document)
“Structuring the JV Agreement” Series
Additional guides on other facets of JV Structuring:
• Structuring the JV Agreement Overview (Executive
Summary)
• Structuring a JV – Corporate Form in JVs and other
Partnerships (Guide)
• Structuring a JV – Contributions, Valuation and
Ownership (Guide)
• Structuring a JV – Governance (Guide)
• Structuring a JV – Level of Control (Guide)
• Structuring a JV – Audit, Information and Reporting
Rights (Guide)
• Structuring a JV – Intellectual Property in JVs –
Contributions, Rights, and Protections (Guide)
• Structuring a JV – Dispute Resolution and Termination
Provisions (Guide)
• Structuring a JV – Service Agreements (Guide)
• Structuring a JV – Taxation and Accounting
Considerations (Guide)
• Norwegian Oil Industry Association JV Audit
Guidelines (External Document)
• CALPERS JV Governance Guidelines
• Anti-Corruption Issues for Minority and 50-50 JVs in
Emerging Markets
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42
ABOUT US
About us
Water Street Partners
The Joint Venture Advisory Group
Water Street Partners is an advisory firm that supports
clients on joint ventures, alliances and partnerships. Our
work focuses on negotiating and structuring
transactions, managing the integration process, and
supporting JV Boards and CEOs restructure and evolve
these businesses.
The Joint Venture Advisory Group (JVAG) is an
annual subscription service for JV CEOs,
JV Board Directors, and other executives with an active
role in structuring, governing, or managing joint
ventures.
Water Street Partners has a team with direct personal
experience working on more than 400 joint venture and
other alliance transactions and restructurings over the
past 20 years.
Subscribers benefit from a variety of resources including
best practices, benchmarking data, a peer network and
events, tools and templates, and on-call
support from our team.
Contact information
For questions about this document, please contact
the document’s authors:
Josh Kwicinski, Consultant
Michal Kisilevitz, Executive Director
Jim Bamford, Managing Director
David Ernst, Managing Director
Joint Venture Advisory Group
Water Street Partners
3050 K Street, NW
Washington, DC 20007 USA
+1.202.742.7311
www.waterstreetpartners.net
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