On January 13, 2009, in Fisk Ventures, LLC v. Segal, the Court of Chancery of Delaware considered the petition by an investor to have Genetrix, LLC dissolved because it was no longer “reasonably practicable” to continue to operate the company when the company had no operating revenue, no prospects of equity or debt infusion, a deadlocked board of directors and an operating agreement that gave no means of navigating around the deadlock. The court found in favor of the investor and concluded that judicial dissolution was the best and only option for the members in the company. When all other options have failed, the last resort for such joint ventures is judicial dissolution or litigation, and in either case the outcome is unpredictable and may be downright unpleasant.
Many joint ventures, especially those in the real estate arena, that were formed two or three years ago in very different economic times now find themselves having to adjust to a new reality. In many cases, those joint ventures were established with assumptions that land values would continue to rise and that a simple business plan with a quick sale would result in positive returns for the developer and the money partners alike. With land values declining and development opportunities disappearing, such joint ventures now find themselves having to hold onto their land for longer than initially intended. In many cases the original investors are being asked to fund additional capital to cover the carrying costs associated with the land or to provide additional equity in order to refinance or to obtain an extension to existing debt.
Unless the joint venture agreement was drafted with governance provisions that enable the joint venture to navigate its way through such changing times, there is a strong possibility that the joint venture parties will be unable or unwilling to agree on a new direction, resulting either in a deadlock or possibly litigation. With a well-drafted buysell provision, it is likely that a deadlock can be broken and the company can continue to operate with one partner purchasing the interests of the blocking partner and taking over unilateral control of the company. However, if the company’s operating agreement does not contain such a mechanism to break a deadlock, the parties will have to decide whether to renegotiate the deal and amend the operating agreement or to seek judicial dissolution, as in the Fisk Ventures, LLC v. Segal case.