In our last article in this series, we considered the various options available for resolving a deadlock situation which arises during the life of a joint venture. This article focuses on the legal mechanisms available to parties when they are simply unable or unwilling to continue a joint venture.
Consider your fall-back position
Naturally, when parties enter into a joint venture, they are primarily focused on the benefits that they anticipate the joint venture will deliver. Unfortunately, history shows that, for a host of reasons, one or more of the parties will at some stage consider whether or not to bring the joint venture relationship to an end.
Unless the joint venture agreement (the “JVA”) or the joint venture companyʼs articles of association provide otherwise, each party is free to sell its interest in the joint venture to a third party. This was evident in the TNK-BP joint venture (discussed in our previous article) where both BP and Alfa Access Renova explored the option of separately offloading their interests prior to Rosneftʼs involvement. However, given that the parties to a joint venture will have specifically selected each other for the qualities that they bring to the joint venture, more often than not, the JVA will contain provisions to ensure that any change in the make-up of the joint venture cannot be achieved unilaterally. In any event, even if no such restrictions exist, securing a buyer for a shareholding which does not confer outright control is likely to be challenging.
Be clear from the outset
To ensure that a thawing of relations does not impact on the value (or even continuation) of the joint venture, it is important to agree at the outset (i) the methods of terminating the joint venture and (ii) the parameters within which those termination mechanisms can be used.
Ultimately, the mechanisms which are included within a JVA will be determined by the relative negotiating strengths of the parties. It is important, however, for each party to be clear as to the consequences of including a particular mechanism within the JVA.
Achieving a clean break
This section sets out the most commonly used methods of bringing a joint venture to an end in the context of a deadlock scenario.
- Russian Roulette
A Russian Roulette mechanism permits one party (“Party A”) to serve notice on the other party (“Party B”), detailing the price at which it wishes to acquire Party Bʼs interest in the joint venture. Party B then has the option of either: (i) accepting the bid and selling its interest in the joint venture to Party A; or (ii) purchasing Party Aʼs interest at the price specified in the notice. Either way, the joint venture comes to an end with one party gaining complete control. Importantly, this device ensures that the price at which Party A is willing to acquire Party Bʼs interest is a true reflection of Party Aʼs valuation of that interest. That said, if Party B has limited resources, Party A could submit a low offer in the knowledge that Party B is unlikely to be in a position to acquire Party Aʼs interest at that lower price. This illustrates the importance of properly assessing the respective bargaining positions and resources of the parties before adopting a particular deadlock regime.
Click here to see diagram.
- Texas or Mexican Shootout
A Texas or Mexican Shootout is similar to a Russian Roulette provision in that it commences by Party A serving notice on Party B stating a price at which it wishes to buy Party Bʼs interest in the joint venture. Following service of the notice, Party B has a period of time within which to either accept the offer or to serve a counter offer to acquire Party Aʼs interest in the joint venture for a higher price.
If Party B opts for the latter, Party A must then indicate whether it accepts Party Bʼs counter offer or, alternatively, issue a further counter offer to acquire Party Bʼs interest at the higher price. If Party A still wishes to acquire Party Bʼs interest, then a bidding process commences and both parties will submit sealed bids detailing the price at which they are willing to acquire the other partyʼs interest in the joint venture. The party who submits the highest offer acquires the other partyʼs interest in the joint venture. It is also possible to vary this method such that the bidding process, rather than being sealed, simply passes back and forth with each party countering the otherʼs offer with a higher offer until one party finally accepts and sells their interest.
A Texas or Mexican Shootout is open to misuse, particularly where parties have unequal resources. The opening offer from Party A will inevitably be low as Party A will know that it has further opportunities to acquire Party Bʼs interest in the joint venture should Party B reject its opening offer and make a counter offer. If Party B has insufficient resources available to acquire Party Aʼs interests, it will either have to accept the low opening offer from Party A or show real nerve by continuing on with the process and making a higher counter offer in the hope that Party A remains determined to acquire its interest.
Click here to see diagram.
- Dutch Auction
A Dutch Auction mechanism is triggered by notice from either party and requires both parties to submit sealed bids confirming the lowest price at which they will sell their interest in the joint venture. The party who states the lowest price must sell their interest in the joint venture to the other party at that price. A Dutch Auction creates a real incentive to bid fairly: bid too low and your joint venture partner might get a bargain; bid too high and you will be forced to acquire your joint venture partnerʼs share above your true valuation of that interest.
Click here to see diagram.
- Expert determination
An expert determination provision is again triggered by Party A serving notice on Party B indicating it wishes to acquire Party Bʼs interest in the joint venture at a price to be determined independently. A third party valuation expert is then appointed to determine a fair price at which an interest in the joint venture should be sold. Party B can then choose to either purchase Party Aʼs interest or sell its own interest to Party B at the fair price.
The expert determination method described above can be varied in a number of ways. For example, the price at which Party B can sell its interest in the joint venture could be set at 110% of the fair price determined by the expert and the price at which Party B could acquire Party Aʼs interest in the joint venture at 90% of the fair price. A weighted expert determination provision such as this discourages parties from taking the termination process too lightly. A similar weighting can be used in a Russian Roulette provision to discourage abuse.
Click here to see diagram.
- Independent agent instructed
It is also open to parties to include within the JVA a provision which provides that on notice from either party, a third party agent or broker will be instructed to market both partiesʼ interests in the joint venture to third parties and to secure a purchaser. The JVA will be clear on the deal parameters for a sale arising out of the exercise and should set out a clear price range within which both parties must accept an offer.
- Voluntary winding up of the joint venture
Some joint ventures will have a natural end or fixed duration such as where the joint venture is created simply for one distinct project or collaboration. The JVA governing such ventures will often include a provision whereby the business of the joint venture can be brought to an end, the assets of the joint venture sold and the proceeds split when that natural end is reached.
This article has considered the key mechanisms for dealing with termination scenarios arising as a result of a deadlock, whilst highlighting the importance of considering the respective bargaining position of the parties before adopting a particular mechanism. To ensure that a partyʼs contribution during the lifetime of a joint venture is not undervalued, it is important to ensure at the outset that there is absolute clarity as to the implications of adopting a particular termination mechanism.