A JV needs bank borrowing to expand production — but the partner vetoes, ‘afraid of debt’. The company has great opportunities but no capital to seize them; expansion-wanting partners are ‘helpless’ as charters require consensus. Capital deadlock is among the most common causes of JV stagnation and breakup. This article analyzes handling partners who block expansion borrowing.
Why partners reject borrowing: real reasons
Don’t rush to call borrowing vetoes ‘obstruction’ — many legitimate reasons exist. One, genuine financial-risk worries: large high-interest loans amid unstable markets may endanger companies — cautious partners aren’t necessarily wrong. Two, disagreeing with expansion plans: partners viewing expansion as unfeasible (insufficient markets, unready technology) don’t want company debt for disbelieved plans. Three, control-dilution fears: loans may carry conditions (bank guarantee demands, asset mortgages, or conversion terms) shifting power balances.
Four, ‘hidden’ reasons: partners facing parent-company financial distress fearing loan guarantees; partners wanting capital increases (instead of borrowing) to raise their ownership ratios; or simply using borrowing vetoes as leverage in other disputes (as analyzed in article EXP-6277 on veto abuse). Correctly identifying reasons determines handling: for reasons one and two — persuading with figures; for three — negotiating loan structures; for four — resolving root conflicts. Never confront over loans without understanding partners’ real worries.
A borrowing-deadlock mistake is taking the refusal at face value: partners block JV borrowing for real reasons — genuine risk aversion, competing capital allocation, or regulatory constraints on the partner — but also for tactical ones: starving the JV of growth capital to force a buyout, or preserving leverage in an unrelated dispute. Diagnose the real reason before responding; the remedy for genuine caution differs entirely from the remedy for tactical starvation. A second error is no financing plan B in the JV agreement; without one, every loan needs unanimous consent and every refusal is a crisis.
Teams ask whether the refusing partner must give reasons (check the agreement — good drafting requires reasoned refusal; without it, the refusal’s motive must be inferred from circumstances) and whether the JV can borrow without the partner’s consent (only with a legal basis — unauthorized borrowing creates director liability).
Checklist: diagnose the real reason first, check what the agreement requires for refusal, assess unauthorized-borrowing risk honestly, and prepare plan B before the crisis — financing deadlock is foreseeable, so foresee it.
Red flags of tactical refusal: the partner refuses without reasons, the refusal coincides with an unrelated dispute, the partner’s own affiliates borrow freely, and the partner proposes a buyout just as the JV needs capital. Each suggests the refusal is leverage, not prudence — diagnose before treating.
Teams ask whether to demand reasons in writing (yes — every time; the refusal without reasons is the evidence) and whether the partner’s borrowing elsewhere matters (yes — it undermines the prudence narrative).
Template: the refusal file — date, reasons given or not, context, concurrent disputes, the partner’s own financing. The file diagnoses the motive.
Alternative funding when borrowing is blocked
Where partners block bank borrowing, many funding alternatives remain. One, charter-capital increases: pro-rata additional contributions — creating no debt, but requiring partners to also pay (borrowing opponents often won’t contribute either — but at least this is fair, nobody ‘carries’ risks for others). Two, shareholder loans: expansion-wanting sides lending to companies at agreed rates — funding without needing other-side bank-borrowing consent (charter-dependent), with lenders earning interest on success.
Three, third-party fundraising: bond issuance, new-investor calls (without excessive dilution) — though these usually also need partner consent per charters. Four, ‘slow but sure’ expansion: reinvesting retained profits gradually — needing no borrowing or anyone’s consent (within executive authority), though slow speeds may miss opportunities. Five, financial leasing over asset purchases: expanding capacity without large one-time loans — leasing often doesn’t count as ‘borrowing’ needing special approval. Each option has trade-offs — presenting multiple options shows flexibility, not ‘forcing’ single choices, often breaking deadlocks.
The alternative funding menu runs: shareholder loans from the willing partner (with proper terms — interest, maturity, priority — not informal advances); third-party debt secured on JV assets (lenders care about cash flow, not partner harmony); asset-light restructuring reducing capital needs; staged capital calls with dilution consequences for non-participation; and strategic investor entry. Each has a cost and a governance implication — price both.
Teams ask whether the willing partner’s loan creates leverage (yes — creditor status plus shareholder status is powerful, which is why the terms must be arm’s length and documented) and whether dilution for non-participation is enforceable (if the agreement provides it — check the mechanism; implied dilution rights are litigated, express ones are enforced).
Checklist: price each alternative fully, document shareholder-loan terms arm’s length, check dilution mechanics in the agreement, and choose the alternative that solves the funding without creating the next dispute — funding fixes shouldn’t breed governance fights.
On shareholder loans: the willing partner’s loan must be arm’s length — market interest, defined maturity, proper priority, board approval with the lending partner abstaining. Informal advances become disputed capital; documented loans are enforceable debt. The formalities are the protection.
Teams ask whether the loan gives the lender control (it gives creditor rights — which in distress are powerful; that’s why the terms must be fair) and whether the other partner can block the loan (check the agreement — some require unanimous consent for any borrowing, which recreates the deadlock).
Template: the shareholder loan pack — term sheet, board resolution, abstention recorded, security if any. Packed properly, the loan is clean.
Breaking deadlocks: from persuasion to contractual mechanisms
Step one, persuading with detailed business plans: presenting expansion plans with figures (revenue forecasts, payback periods, risk analyses), comparing borrowing vs non-borrowing scenarios — many partners change minds seeing clear numbers over just hearing ‘need loans to expand’. Inviting banks or independent financial experts adds objectivity. Step two, negotiating loan structures to ease worries: scaling down loans (phased borrowing over lump sums), increasing collateral (reassuring partners against personal guarantees), or target commitments (halting expansion on missed revenue targets).
Step three, triggering contractual deadlock mechanisms where available (as analyzed in article EXP-6277) — deadlocks over key financial decisions may constitute contractual ‘deadlocks’. Step four, long-term: amending charters or contracts for more reasonable borrowing-approval thresholds (e.g. special majorities instead of 100% consensus for within-limit loans) — though such amendments themselves need partner consent, so they must ride ‘package’ negotiations. The lesson: capital deadlocks are usually symptoms — the root disease is partners no longer trusting shared growth strategies. Curing the ‘disease’ resolves ‘symptoms’; treating symptoms alone brings recurring deadlocks on next decisions.
Breaking the deadlock runs from persuasion to contract mechanics: first, address the genuine concern — better information, risk-sharing structures, covenants that protect the cautious partner. Second, invoke the agreement’s financing provisions — many JV agreements have them, unused. Third, the escalation ladder — mediation on the financing plan, expert determination on terms. Fourth, the nuclear options the agreement provides — buy-sell triggered by financing deadlock, or dissolution proceedings where the deadlock is fundamental.
Teams ask how long persuasion deserves (a defined period — open-ended persuasion is just delay; set the deadline and communicate it) and whether to threaten the nuclear options (prepare them visibly — the credible alternative to agreement is what makes agreement possible).
Checklist: try genuine persuasion with a deadline, invoke unused financing provisions, escalate per the agreement, and prepare the endgame options visibly — deadlock breaks when the alternative to agreement is clear.
The dilution mechanism: staged capital calls where non-participation dilutes — the classic deadlock-breaker. But it must be in the agreement; implied dilution is litigated, express dilution is enforced. And the valuation for dilution must be fair — a punitive dilution is itself challengeable. Design it in calm times; invoke it in crisis.
Teams ask whether to propose dilution now (only if the agreement provides it — proposing it without a basis is a threat, not a mechanism) and what valuation applies (the agreement’s formula — or independent valuation; agree it before the call).
Template: the capital call notice — amount, purpose, deadline, dilution consequence, valuation basis. The notice is the mechanism in motion.
Legal bases to keep on file
The situation in this article is governed by the Enterprise Law 59/2020/QH14 on borrowing decision authority, charter-capital increases and shareholder/member rights, plus the 2015 Civil Code on loan contracts. Verified at time of writing (16/10/2026).
- Identify real rejection reasons: risk worries, plan disbelief, or leverage
- Persuade with detailed business plans and specific figures
- Propose alternative funding: capital increases, shareholder loans, leasing
- Negotiate loan structures: smaller scale, more collateral, target commitments
- Trigger contractual deadlock mechanisms when qualified
- Long-term: adjust borrowing-approval thresholds more reasonably
Contact FLAT Law Firm
Deadlocked over capital decisions in your JV? The FLAT Law Firm team, with 30+ years of experience, supports option analysis, negotiation and decision-mechanism design. Contact us for detailed advice.
This article has been quality-reviewed by the FLAW AI Legal Council
