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Executing Successful Joint Ventures (Part 4): Frequently Asked Questions

on Thursday, 31 March 2016 in The Closer - M&A, Securities & Corporate Counsel: Kevin P. Tracy, Editor

How long will the joint venture last?

Some joint ventures are intended to have unlimited terms. Others may be limited to the duration of a specific project. Still others may expire or change by operation of law, as when a concession right requiring local ownership expires. When a joint venture is of limited duration, the parties should discuss whether, after the initial term of the venture, either partner can go it alone and compete independently. In some countries and in some industries, local ownership is required.

Because a cross-border joint venture frequently involves a growing dependence upon the local partner as local management is trained by the expatriate partner, it is important to address termination of the joint venture at the outset of the venture. The termination also may be complicated by the existence of other agreements, such as licensing or supply agreements. If the expatriate partner wants to sell, it may be difficult to find a willing buyer. If the host country partner wants to sell, it may be impossible for the expatriate partner to buy.

The joint venture agreement must identify the legal and operational barriers to meaningful liquidity rights and address them in the documentation. The joint venture documentation should specify how a buyout will occur.

What are some common methods of structuring termination strategies?

Frequently, the parties will provide that neither party will be able to sell its interest for a certain period of time to allow the venture to achieve sustained value. Thereafter, each party has a right of first refusal if the other party wants to sell. Within the right of first refusal process, it often is preferred to give the parties a period of time to negotiate before introducing an appraised price.

Another option is a “put-call” structure, wherein one party sets the price and the other has the option to buy or sell at that price.

But, it should be understood that other issues may make it impossible or impractical to buy out a partner. For example, one party may simply not have the financial means to buy out the other. Moreover, it may be legally impossible for the expatriate to buy out the local partner, and non-competition agreements may be unenforceable in the host country.

Another alternative to a buyout provision is to grant a dominant partner the right to sell the entire company, i.e. to “drag along” the joint venture partner in connection with a sale. Similarly, the agreements frequently give the non-dominant partner a right to “tag along” with the dominant partner in the sale of its interest in the venture, i.e., to share on a pro rata basis in the sale on the same terms.

What other considerations are there when terminating the joint venture?

Because you may have transferred technology, trademarks, goodwill, key employees and other assets to the venture, it is important to properly address, at the beginning of the joint venture, the rights of each party to those assets upon termination. A key goal of the termination is restoring to each of the partners to the joint venture the assets that are properly theirs. If the joint venture terminates without a sale of the going concern to a third party, the partners should agree upon a plan to value and dispose of the assets. Also, the parties should contemplate how they will pay indemnities to terminated employees required by local law.

Sylvestor J. Orsi

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