How to escape from a joint venture (Part 1)
In business, a joint-venture is the experience most similar to a marriage. The last of your thoughts is to prepare for the time the love is gone.
Indeed, when structuring a joint venture, the parties tend to focus more on the “true love” side of the papers and a bit less on the “divorce” scenarios. Indeed, as far as exit is concerned you can find a vast array of M&A tools available, with exotic appellations: deadlock resolution mechanisms, put & call options, Russian roulettes, Texas shoot-out clauses, buy-you buy-me clauses and other niceties.
But when things go South and your joint venture is located in the other side of the world, you know that going legal is a rough road. And it is not just a matter of money: because of the “true love” phase, you have contributed in the joint venture valuable assets (trademarks, patents, know-how, goodwill, license agreements, supply agreements, distribution agreements, etc.) that you would like to have back in a moment, but this is not going to happen.
The point is that, although you have a set of exit clauses, you do not have a real exit strategy.
“An exit strategy and an exit clause are not the same thing.”
An exit strategy should include the following instruments:
1. A leverage to deter the partner from taking hostile initiatives that would force you to trigger an exit clause. This includes retaining control on strategic assets and strategic contracts.
2. A mechanism to enforce the execution of purchase options.
3. A mechanism to pre-determine the value of your shareholding in case of exit.
4. A mechanism to control the liquidation process, in case liquidation is the last resort.
5. A plan to quickly redeploy strategic assets and contracts and preserve the joint-venture goodwill.
In part 2 we will analyze these 5 tools.
Copyright Giorgio Mariani 2016. All rights are reserved.
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Barrister-at-Law (of Lincoln's Inn) | Associate, Syed Ishtiaq Ahmed & Associates | M&A - Project Finance Practice Group
7yI appreciate the way you put emphasis on the exist strategy. very informative article for professionals. thanks for sharing. waiting for the part 2.
Legal Affairs & Risk Compliance Director
7yThanks for the intro. Can't wait to see part 2. (and 3?)
Legal Advisor
7yI always enjoy reading your articles.
Senior Accountant at CMG
7ya lovely article, very interesting! Like the style to demonstrate authentic theory in a "flying heart" way but precisely hit the point!