In our previous article, we outlined the options available for resolving deadlocks that result in the continuation of the joint venture. In this article, we focus on the legal mechanisms available when parties are simply unable, to resolve the impasse and continue 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. We have set out the most common methods below:
Russian roulette
- A Russian roulette clause involves one party (Party A) offering to either buy the shares of the other party (Party B) or to sell its own shares to Party B at a specified price. Party B then chooses to either purchase Party A's shares or sell its own shares at the specified price. Either way, the joint venture comes to an end with one party gaining complete control.
- 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 A's interest even at that lower price. This illustrates the importance of properly assessing the respective bargaining positions and resources of the parties before agreeing to accept a particular deadlock regime.
Texas shootout
- In this situation, both parties submit sealed bids detailing the price at which they are willing to acquire the other party's share in the joint venture, with the party that submits the highest offer acquiring the other party's share.
- It is also possible to vary this method so that the bidding process, rather than being sealed, simply passes back and forth with each party countering the other's offer with a higher offer until one party finally accepts and sells its interest. This would also be open to misuse, particularly where parties have unequal resources.
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 that states the lowest price must then sell its 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 partner's share.
Expert determination
- Expert determination is triggered by Party A serving notice on Party B that it wishes to acquire Party B's share in the joint venture, but this time at a price to be determined independently.
- A third-party valuation expert is 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 A's interest, or sell its own interest to Party B at the fair price.
Independent agent
Parties also have the option to include a provision within the shareholders' agreement (the SHA) providing that, on notice from either party, a third-party agent or broker will be instructed to market both parties' interests in the joint venture to third parties and to look for a purchaser. The SHA should be clear on the deal parameters for a sale arising out of the exercise.
Voluntary winding up of the joint venture
Lastly, some joint ventures will have a natural end or fixed duration, for example where the joint venture is created simply for one distinct project or collaboration. The SHA governing such ventures will often include a provision where the business of the joint venture can be halted, wound up, and the remaining proceeds split when that natural end is reached.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
