The TNK-BP joint venture between BP and Alfa Access Renova (“AAR”) set up in 2003 to explore, extract, refine and sell Siberian oil and gas has been a frequent subject of headlines in the decade since. Notwithstanding a number of high profile shareholder disputes, the joint venture has generated upwards of £19 billion in dividends for BP and reportedly accounts for around a quarter of its total oil production. Nevertheless, the joint venture is coming to an end.
In 2011, BP sought to enter into a strategic alliance with Russia’s largest state owned oil company, Rosneft, which would have seen the two companies drill for oil together in the Arctic Ocean. BP and Rosneft were however forced to put their plans on hold after AAR obtained a High Court injunction against BP. AAR claimed BP was contractually obliged to ensure TNK-BP was its primary vehicle for investments in Russia due to an exclusivity provision contained within the joint venture agreement for TNK-BP. Rosneft eventually partnered with Exxon-Mobil and BP lost out on the opportunity.
One of the minority shareholders in TNK-BP’s listed subsidiary, TNK-BP Holding, also claimed that BP had damaged TNK-BP’s interests by blocking the joint venture’s opportunity to participate in the Arctic deal with Rosneft. The Russian courts agreed and awarded 100.4 billion roubles (about £2 billion) in July of this year. BP is however expected to appeal on the basis that TNK-BP could never have participated in the Artic venture because it lacked the necessary technical expertise.
As a result of the growing tensions, both BP and AAR explored various exit routes from the TNK-BP joint venture and on 18 October 2012, Rosneft agreed to buy out both BP and AAR in a reported £56 billion deal. The deal appears to be positive for both AAR and BP, with AAR set to receive a substantial windfall and BP acquiring a significant shareholding in Rosneft. BP will also benefit from access to Rosneft’s Arctic reserves and gain future cooperation opportunities.
A clear statement of intent from the outset
This example brings into sharp focus the importance of joint venture parties giving proper consideration at the very outset of their relationship to fundamental issues such as: (i) the purpose of the joint venture; (ii) the degree of separation between the business/operations of the joint venture and the joint venture parties’ core businesses; (iii) their respective roles, responsibilities and contributions; and importantly (iv) the mechanisms for dealing with deadlock situations.
Dealing with deadlocks
Mechanisms for addressing deadlock situations invariably focus on either finding a solution to the impasse such that the joint venture is able to continue or, alternatively, triggering a process which results in the termination of the joint venture. There is no "right" mechanism and, indeed, the respective bargaining powers of the parties may make certain options more attractive. The main options which joint ventures parties can include within joint venture agreements are as follows:
- Casting vote
In a deadlock situation, one of the joint venture participants can be given a casting vote. This is essentially an avoidance measure and gives one party effective majority control. The negative impact of this route can however be mitigated by (i) giving the casting vote to a chairman (nominated in alternate years by each party) or (ii) by including an independent non-executive director with a tie-breaking vote in deadlock situations.
This option involves passing deadlock issues to representatives of both parties, who are often senior figures within each joint venture party. Senior decision makers who have not become bogged down in the politics of the dispute are often better placed to take a pragmatic decision in the best commercial interests of the joint venture.
- Dispute Resolution
It is also open to the joint venture parties to opt for a dispute resolution procedure to solve deadlocks. This can take the form of expert determination, mediation or arbitration. All of the dispute resolution options involve third party involvement to some degree and parties in a joint venture may be reluctant to open up commercial disputes to third party influence. However, the binding decision of an impartial third party may be the only way to resolve a deadlock situation.
- Termination There are also a number of options which can be included within joint venture agreements which provide that in a deadlock situation, parties can opt to terminate the joint venture altogether. These mechanisms tend to involve one party serving a notice on the other specifying a price at which that party is willing to purchase the other party’s share in the joint venture. What happens following the serving of the notice differs widely from joint venture to joint venture and options range from Russian roulette to a Dutch auction and even to a Texas shootout. All of the variants will be explained in detail in the next article in our series on joint ventures in the Energy & Natural Resources sector which covers termination provisions in joint venture agreements.