Summary and implications
Joint venture parties will devote a considerable amount of time agreeing how their joint venture will operate on a day to day basis. However, it is important not to overlook when and how the joint venture will come to an end.
Joint ventures are often established for a particular project and as a consequence have a finite life. Joint venture parties should therefore consider at the outset the circumstances in which the joint venture will terminate.
It is preferable for a joint venture to terminate by the mutual agreement of its partners. What happens though if one party wishes to exit unilaterally? What happens if during the life of the joint venture a party fails to deliver on or breaches its obligations or if the parties fail to agree on a matter requiring their mutual consent?
This briefing note sets out some of the ways by which joint ventures may be terminated.
MUTUAL CONSENT/ACHIEVEMENT OF OBJECTIVES
Although a joint venture can be brought to an end by the parties' mutual agreement at any time and in any manner on which they agree, the parties are likely to seek a guaranteed exit within the joint venture agreement which is not dependant on the other party's consent.
A joint venture agreement will usually provide for the termination on a specified date or on the occurrence of a particular event e.g. such as the completion of a particular project or achievement of a performance target. Possible methods of termination/exit routes include:
Winding Up/Sale of Assets
- whether the assets will be divided between the joint venture parties, and if so on what basis; and
- will assets be sold to a third party, and if so how will they be valued and marketed?
Where the joint venture vehicle is a company, a listing on a public exchange.
Transfer of Interests
Typical provisions would include:
- one of the joint venture parties buying the interest of the other – either one of the joint venture parties (A) may require the other (B) to either buy A's interest (a "put option") or sell B's interest to A (a "call option") at a specified price during a specified period; or
- one of the joint venture parties (A) selling its joint venture interest to a third party – given the nature of a joint venture this would usually be subject to either B having the prior option to acquire A's interest at the same price and on similar terms as A would otherwise have transferred its interest to the third party, the right of A to require B to also sell its interests to the third party ("drag-along") and/or the right of B to require that the third party acquires its interest as well as A's interest ("tag along").
During the life of the joint venture, a joint venture party may breach the terms of the joint venture agreement which it fails to remedy. Click here for our briefing note on the key issues arising from a partner's default.
It is possible that in the course of the joint venture the parties will fail to agree on a matter or a course of action. It is common for the joint venture agreement to provide for disputes to be referred to a nominated senior officer of each partner for resolution and if they are unable to resolve the matter, or as an alternative, and if the matter is of a technical nature (e.g. legal or accounting issue), to an independent expert. Sometimes JVs will not have deadlock provisions. The incentive is then on parties to sort out the problem to avoid the venture stagnating.
If the deadlock cannot be resolved the only option may be for one of the parties to exit the joint venture. This could happen in a number of ways:
- Put/Call Option One or both joint venture parties have the right to require the other to buy or sell their respective interests in the joint venture at a specified price for a specified period
- Russian roulette Either one of the joint venture parties (A) may serve a notice on the other (B) offering to transfer A’s interest to B at a price specified by A. B must either accept A’s offer and buy A’s interest at the stated price or sell its own interest to A at that price
- Shootout Either one of the joint venture parties (A) may serve a notice on the other (B) offering to buy B’s interest at a price specified by A. B can either sell its interest to A at the stated price or, if B does not wish to sell its interest, initiate a sealed bid auction in which A and B specify the amount at which they are prepared to buy the other out. The party with the highest bid buys the other’s interest at that price.