In a joint venture, the fastest way to renegotiate the deal may be to stop paying for it. There is no breach notice and no dispute to begin with, just a capital call that goes unmet when the project needs money the most. Does your funding clause still do its job once your partner decides that not paying is the better strategy?
When Funding Becomes Leverage
Funding a joint venture is not a one-off commitment made at signing. It is an ongoing obligation that has to be honoured each time the project needs capital. The initial funding plan is however often built on the assumption that all shareholders are aligned and will keep contributing when required. This assumption does not always hold, and many agreements are not built for the moment it fails.
1. Funding obligations without real consequences
Most JV agreements set out the funding obligations with care: how a capital call is made, how much notice is required and how each shareholder’s share is calculated. Few spell out what happens if a shareholder refuses to pay. Even where they do, default interest and exposure to damages alone may carry insufficient weight to deter a deliberate default, effectively turning the funding obligation into an option.
Weak remedies also affect shareholders unevenly. A well-capitalised majority investor can usually cover a smaller partner’s shortfall, but the smaller partner can rarely do the same. The risk is greatest for the investor who holds a minority stake but funds most of the project, because protections tied to shareholding may bear little relation to its actual exposure.
This mismatch between stake and exposure is familiar in South-East Asia, where foreign ownership limits and licensing requirements often leave an investor with a minority stake despite funding most of the project, while the local partner contributes the concession, the land or the permit rather than cash. The arrangement holds until the first serious capital call, typically on a mine development or processing plant where the funding requirement has moved well beyond the original budget. The foreign investor is then left choosing between funding the shortfall alone or watching an asset it has largely paid for stall. Dilution offers little comfort if the local partner has limited equity left to give up, and the foreign investor may be barred from taking it in any event.
2. The stronger hand may not hold the larger stake
The shareholder with the larger stake is not always the shareholder with the stronger hand. A majority investor carrying most of the capital burden may withhold funding to force a renegotiation with a partner that cannot complete the project alone. Equally, a minority investor may refuse to fund, betting that its partner has too much invested to let the project fail. The leverage depends less on percentage ownership than on who can absorb delay, who can fund the shortfall and who suffers most if the project stalls.
Designing for Misalignment
Funding provisions should be designed for misalignment from the outset. They should not depend on cooperation continuing after a default, but should remove discretion and operate regardless of which shareholder is exposed.
1. Objective triggers, short cure periods, automatic consequences
A funding default should be capable of being established without argument, cured quickly if it can be cured at all and followed by consequences that take effect automatically. These mechanics must continue operating once cooperation has broken down, which is precisely when they will be tested.
2. Remove the minority investor’s incentive to free-ride
A defaulting shareholder should face automatic dilution on terms that carry a real economic cost. It should also lose the right to block alternative funding simply because it objects to the terms. Without the second, a minority investor may be able to withhold funding and veto around it, leaving the majority with no real choice but to give in.
Where dilution is unavailable, the remedy has to work on the economics instead of the share register. Advances by other shareholders to cover the shortfall can bear commercial interest payable by the joint venture on the defaulting partner’s behalf and rank ahead of distributions, leaving the defaulting partner with nothing until the shortfall is repaid. Profit entitlements can also be adjusted to track contributions actually made rather than shareholdings. Further, a sustained default can trigger a call option over the defaulting partner’s stake, exercisable by the funding shareholder or, where regulatory limits apply, by a third party. None of these mechanisms is novel, but each must be built in from the outset.
3. Make non-payment costly for the majority investor
The problem is reversed when the majority investor defaults. A right to cover the majority’s shortfall is worth little to a shareholder that cannot afford to exercise it. Non-payment by the majority therefore needs to carry a cost that does not depend on the minority contributing more cash. This may involve loss of voting rights or rights to appoint directors, reducing the majority’s economic entitlement or giving priority to distributions on the minority’s actual contributions.
Conclusion
Funding provisions should not be treated as an administrative schedule to the real bargain. They dictate who carries the project when alignment breaks down and who can keep it alive when capital is needed. Parties should identify where the funding pressure will fall before the first serious capital call, and provide for swift, automatic consequences that do not depend on further cooperation.
Next in the Series: “The Deadlock Trap”
Funding disputes rarely stay funding disputes for long. Once capital stops flowing, decision-making often stops with it.
The next article in the series, “The Deadlock Trap”, examines why so many JV exit and deadlock mechanisms fail precisely when they are needed most, and how to avoid being trapped in a relationship that no longer works.
