A bilateral G2G joint venture creates a corporate entity jointly owned by two government shareholders. Unlike a supply contract, which can be terminated on notice or expire at its term, a JV embeds its shareholders inside a shared legal structure with joint assets, liabilities, board representation and—critically—no automatic exit door. The International Centre for Settlement of Investment Disputes has recorded sovereign JV disputes where the absence of pre-agreed exit rights turned a commercial disagreement into a diplomatic standoff. The governance architecture must be negotiated before the entity exists, because after incorporation, one shareholder cannot redesign it alone.
What you will learn
- Why a G2G JV is structurally harder to exit than any contractual arrangement.
- How sovereign immunity, board deadlock and shared liabilities interact inside one entity.
- Which exit and governance provisions must be agreed before the first board meeting.
Written by the G2G Deal Design practicepowerabode DMCC's neutral buy-side practice for government-to-government procurement. We hold no position in the transactions we advise on—no cargo, no supplier, no equity. People, standards and certifications.
What makes a bilateral G2G joint venture harder to unwind than a supply contract?
A supply contract binds two parties to an exchange. A JV binds two shareholders to an entity. The difference is not one of degree—it is one of form. A supply contract has a defined term, a termination clause and a payment-in-exchange-for-goods logic. A JV creates a corporation with its own assets, its own liabilities, its own governance structure and no built-in expiry. Exiting requires either selling shares—which the other shareholder must usually consent to—or dissolving the entity, which requires agreement or a court order. Neither path is available unilaterally unless the founding agreement expressly provides for it.
- Supply contracts: terminate on notice, expire at term, or end through breach and remedy
- Joint ventures: require mutual consent to transfer shares, dissolution negotiation or a contested exit
- The entity continues even when the shareholder relationship deteriorates
This structural asymmetry exists for a reason. Governments form JVs because they want the durability of a shared entity. The same feature that makes JVs durable also makes them sticky.
Why do governments form JVs instead of signing a supply deal?
Governments choose the JV form when they need shared control, long-term asset co-ownership or risk-sharing that a contractual arrangement cannot deliver. The motive is often strategic rather than transactional. A JV may be the right form when:
- The project requires a dedicated operating company with its own balance sheet
- Both governments want board-level influence over operational decisions, not just contractual remedies
- The asset—a refinery, a pipeline, a processing facility—is jointly owned and neither government wants the other to control it unilaterally
- The venture is intended to operate for decades, outlasting any single procurement cycle
The OECD's guidance on state-owned enterprise governance notes that when governments co-invest through corporate vehicles, the governance challenge shifts from procurement compliance to boardroom accountability—a shift that many government shareholders underestimate until a dispute arises.
What are the specific structural risks of a G2G joint venture?
Five structural risks differentiate a G2G JV from a standard commercial entity. Understanding them before incorporation is the difference between a governed partnership and an ungoverned collision:
- Board deadlock: two 50:50 shareholders means every major decision requires agreement. Without a deadlock mechanism, a single unresolved item can paralyse the entity.
- Funding asymmetry: one shareholder may have deeper reserves than the other. If the JV needs additional capital, the government with fewer resources may face dilution or default.
- Policy divergence: the two governments may change administrations, revise their energy or industrial policy, or reassess the strategic value of the venture.
- Asset entanglement: the JV may own assets—land, licences, infrastructure—that neither government can easily separate from the entity.
- Diplomatic visibility: a supply-contract dispute is a commercial matter. A JV that fails is a visible fracture in a bilateral relationship, reported in both capitals.
Each of these risks can be anticipated and governed. What makes them dangerous is not that they exist, but that they are often addressed only after the dispute has begun.
How does sovereign immunity complicate the entity?
When a government becomes a shareholder, the question of whether it can be sued as a commercial counterparty must be answered in the founding documents. Sovereign immunity protects states from litigation in foreign courts, but it is not absolute. Most JV agreements between governments include a partial waiver—the shareholder consents to being sued for specified commercial disputes in an agreed forum. The key drafting choices are:
- Scope of the waiver: all JV-related disputes or only specified categories
- Forum: international arbitration under ICSID, UNCITRAL or another ruleset
- Governing law: a neutral legal system, typically English or New York law
- Enforcement: whether an arbitral award can be enforced against sovereign assets, and which assets are protected
A JV without a clearly drafted immunity waiver creates the worst of both worlds: a commercial entity with a sovereign shareholder who cannot be held to account in the forum that would normally resolve the dispute.
What exit rights should the agreement include before incorporation?
Exit is the hardest governance question in a JV, and it must be answered before the entity exists. Once the JV is incorporated, neither shareholder can unilaterally impose exit terms. The founding agreement should address at least:
- Transfer restrictions: can either party transfer its shares, and on what conditions? Pre-emption rights, tag-along and drag-along provisions determine who can exit and at what price.
- Buy-sell mechanism: if one party wants to exit, can it trigger a process where either party buys the other out? A Russian roulette or Texas shootout clause creates a path to separation.
- Valuation methodology: what formula or process determines the price of the exiting shareholder's stake? Book value, discounted cash flow, independent expert or a pre-agreed multiple?
- Dissolution triggers: what events—sustained deadlock, material breach, force majeure of a defined duration—permit either party to seek dissolution?
- Wind-down procedure: if the JV is dissolved, who gets which assets, who bears which liabilities, and in what order?
- A shareholders' agreement that is legally binding and takes precedence over the articles of association
- A clear division between reserved matters (requiring unanimous shareholder approval) and delegated matters (within the board's authority)
- Board composition, quorum requirements and chairmanship—and whether the chair has a casting vote
- A deadlock resolution ladder: negotiation between CEOs, escalation to ministers, mediation, expert determination, buy-sell trigger
- Information rights: what operational and financial data each shareholder receives, at what frequency
- Funding obligations: initial contributions, future capital calls, consequences of default
- A JV is equity, not procurement: two governments become co-owners of a single entity with shared assets, liabilities and no automatic exit—unlike a supply contract that ends at its term.
- Sovereign immunity must be addressed in the founding documents: without a clear waiver, the entity may have no effective forum to resolve commercial disputes.
- Exit rights define the options available later: transfer restrictions, buy-sell mechanisms, valuation methodology and dissolution triggers must be agreed before incorporation, not after a disagreement.
- Deadlock kills JVs that lack a resolution mechanism: define the escalation ladder from board to ministers, and agree on what happens when escalation fails.
- Governance first, operations second: the shareholders' agreement, reserved matters, board composition and information rights determine whether the JV runs as a business or as a diplomatic channel.
These provisions are rarely exercised early, but they determine the shape of every negotiation that follows. A JV with no exit clause is not a partnership—it is an arranged marriage without a divorce law.
What governance must be in place before the first board meeting?
The governance architecture of the JV should be complete before the directors take their seats. Waiting until the first operational disagreement to decide who decides what is a reliable path to deadlock. The pre-incorporation governance checklist includes:
Each of these choices has a material effect on the balance of control inside the entity. For the wider commercial architecture that frames these choices—price, risk, governance and delivery in any G2G transaction—the deal architecture section of the homepage sets out the structure before the entity is formed.