When you enter into a joint venture with your business partner, it is reasonable to consider that, for an array of reasons, the partners may not agree on important aspects of the business and eventually you will hit a deadlock. It is important, therefore, that the procedures to resolve the deadlock are clearly agreed upon in the joint venture agreement. This is necessary due to the fact that the financial differences between varying options and their existence or nonexistence may be significant.
This article will point out only some of the options to be considered for deadlock regulation. Naturally, the choice depends on the actual business as well as negotiation power of the parties.
1. Keeping the joint venture intact
The following are the alternatives aimed at preserving the joint venture intact:
- casting vote of the chairman - the chairman of the managing body has a casting vote in any tied issue that caused the deadlock.
- escalation clauses - the lower level management body will refer the deadlocked issue to the higher level body (e.g. management to supervisory board).
- third-party reference - a qualified expert is appointed and asked to resolve the specific issue that has lead to the deadlock on the basis of information provided to the expert.
- ad-hoc arbitration - an independent arbitrator or arbitrators are appointed to reach a settlement among members of the decision-making board.
2. Exit of one party of the joint venture
Sometimes you may find yourself in a position where the best route to take is to get yourself out of "bed with a stranger." As one can never be sure about who should leave and how much leaving would cost in case of a breakdown of a personal relationship, the same goes for a business partnership. The urge to terminate a joint venture, therefore, gives rise to two questions: 1) who should leave the joint venture and 2) how much will the exit (or staying) cost?
- Pre-determined price - for example, a financial investor is usually allowed to exit at a predetermined price (initial investment plus return).
- Pricing formula - a way to agree on the price is to determine the financial indicators and a formula to calculate the price. However, this may be difficult and unfair if the potential of the venture is a controversial topic and the deadlock appears shortly after establishment.
Your option is also to throw in the glove and organize a duel, such as:
- Russian roulette - a party serves a notice to the other requesting the other to either sell its or buy the other's entire shareholding indicating the price. The other has a time period in which to accept or reject the offer. The right of rejection, however, is subject to the requirement to reverse their roles - e.g. the party who offered to buy must now sell and vice versa.
- Texas or Mexican shoot-out - this is a variation of Russian roulette, where the notice does not trigger a "buy or be bought out" ultimatum but a round of sealed competitive bids.
- Auction shoot-out - a compulsory auction of the joint venture's shares is held with open bids and a third party acting as an auctioneer. This may include interested joint venture parties as well as third parties.
3. Liquidation of the joint venture
Where the parties are of comparable strength and where they do not wish to use any of the options discussed above, they can rely on a conventional regime of pre-emptive offerings of shares coupled with the right to sell to a third party if existing shareholders do not take up the pre-emptive offering.
The best scenario for any agreement is that it remains in your drawer, and the partners will successfully carry out their joint venture. However, by abiding by the rule "better safe than sorry," we urge you to call your lawyer before you join hands to venture.
Anne Adamson is an associate
at Sorainen Law Offices in Tallinn.
Please enter your username and password.
2024 © The Baltic Times /Cookies Policy
