Joint Ventures – What Should You Be Thinking About in the New Normal?
Joint ventures are common and can take a variety of forms ranging from collaboration agreements right through to stand alone joint venture companies. In the current crisis, the day to day operational issues in relation to any JV will have taken centre stage but as we progress towards a new normal, it’s important for parties in a JV to think about how to manage the ongoing risks in working with their JV partners.
If there is existing legal documentation in place, now is the time to look at this and give some thought to the following questions:
1. Procedures and processes.
In reacting to this crisis, have the decision making processes set out in these documents been followed? If not, then get all parties to confirm they are happy with decisions taken to date to avoid any risk of later challenge. Going forwards are the decision making processes set out in the documents fit for purpose? Where decisions need to be made and implemented quickly, is there a need to agree a temporary change to these requirements – delegated authorities, a removal of requirement for prior written consent and changes to quorum provisions should all be considered.
2. Business Plan.
Does this need to be reviewed and a new version approved by the parties to the JV? What happens if they cannot reach agreement on a new plan?
3. Funding.
If the venture needs cash, is there any obligation on JV parties to provide that? If a party does not meet its obligations to pay, what happens next? If external funding is needed, who needs to consent to that and what happens if agreement cannot be reached on the levels of funding needed or the terms of any such funding?
4. Deadlock.
Do the documents contain deadlock provisions? If so, what is the definition of a deadlock? If that’s met, do you want to trigger a deadlock and follow that process at this point? If the deadlock process allows one party to buy out another at market value, how would the current crisis impact on that value and would there be funds available to allow a purchase to proceed?
5. Events of default.
Is insolvency specified as an event of default in any of the documentation and if so, what process is followed if one of the JV parties becomes insolvent? Are there any other events of default that might be relevant and what are the consequences if these are triggered – removal from management decision making; an obligation to transfer shares or assets?
6. Disputes.
Are there any specified dispute resolution procedures in the documentation? Do these prevent any other actions by JV parties until they have been complied with?
7. Exit.
Can JV parties transfer their share or interest to any other parties without consent? Are there compulsory transfer provisions triggered on insolvency or other events of default? What valuation will apply to any transfer? Will there be any restrictions on an exiting JV partner once they are no longer involved in the venture?
8. JV Directors.
In a corporate joint venture where a director has been appointed by a shareholder, do they need to be reminded that their duty is to act in the best interests of all shareholders, not just the one who appointed them? Failure to do so is a breach of their fiduciary duties and they may incur personal liability.
Being proactive and thinking about these issues will help to provide a sound commercial footing for ongoing JV activities, prevent damage to good working relationships between the parties and reduce the risks of disputes further down the line. In addition, being aware of your options should a deadlock or default scenario arise means you are best placed to find a way through what is already going to be a difficult situation.
