Ending the affair
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Joint ventures have become increasingly popular in the haulage industry but what happens if the partners fall out? We examine how to end a beautiful relationship.
The costs of getting a joint venture wrong in haulage can be expensive and the relationship can be fraught. One reason for this is that often the term "joint venture" is used to cover a wide range of commercial relationships. These can include an oral agreement between hauliers, a partnership being formed, to the creation of a new jointly owned transport company.
Equally, there are many uses for a joint venture. Agreements to co-operate in bidding for a contract are joint ventures. The establishment of a joint venture with a local firm could be a way into a particular market. It can also mean the establishment of the deadlocked joint venture company—a company that needs consent of all concerned to do anything significant—to allow both parties to maximise their return on investment, perhaps when faced with a more competitive market.
But as is so often the case, size is unimportant when considering a joint venture. What is vital is that there is a shared understanding of commercial objectives, the resources to be invested in the joint venture, and commitment over the short, medium and long terms. The intention should be that the coming together of the whole results in more than the aggregate of the parts.
There should also be an agreed understanding of what are termed "exit routes". A joint venture is most unlikely to last for ever; things can go wrong and, even if they go right, needs can change. By determining on what basis it can be ended when the agreement is made, how difficult it may be to do so and what the consequences of termination should be, can avoid problems later on. The saving is not only of legal fees but also, and importantly, management time and effort.
Deadlocked
In the case of a deadlocked joint venture there are invariably two critical issues. First, that only the joint venturers, and not others, can be involved. Second, that the jointventure company can only move outside the expected business of the joint venture with the agreement of both sides.
It is usual for these issues to be dealt with in a shareholders agreement and articles of association by wide-ranging provision. As a result the parties will often hold separate classes of shares with identical rights. One of the rights can be expected to be the power to appoint a number of directors to the board. As the joint venture company is deadlocked, an equal number are to be appointed by both parties. In turn this power of appointment will be matched with one of removal. Both should be capable of being exercised easily and rapidly. Often this will be through the use of a "killer" clause or article—a director is removed when a memorandum from the joint venturer is received at the deadlock company's registered office. Instantaneous blocking power can be achieved.
Quorums will be established for meetings of directors and shareholders. Usually each party will be required to have its representative throughout the meeting. In the case of a director, one director can exercise the votes of all the directors of his appointing shareholder.
Again, there will usually be a minimum period of notice for board meetings. This has merit when it is considered that where necessary all the directors can agree to waive it. What is to be discussed at the board meeting should have been previously notified.
But if the board is concerned with tactical issues, the joint venturers should reserve to themselves the making of strategic decisions. These can include matters outside the ordinary course of business of the joint venture company. For example, a substantial change in the company's activities or the taking of loans.
Another significant issue is likely to be the entry of new partners. This could be either through the issue of new shares or the transfer of existing shares. But no joint venturer is likely to want to be involved in an arrangement with a third party not of its choice. As a result it can be expected that the joint venture documentation will restrict both the allotment and transfer of shares—usually between the partners themselves.
When things go wrong in the relationship between the joint venturers, a provision dealing with the transfer of shares is often found in order to bring a deadlocked joint venture to an end. One way in which termination may be achieved is the grant by one party to the other party, or on a reciprocal basis, of a 'put option'. This enables the option holder to put (sell) shares in the joint venture company to the other party at a particular price. Conversely, one party may grant to the other an option allowing the holder to call for (require) the sale of the other party's shares to him at a particular price.
Russian roulette
A variation on this theme is the use of a device known as "Russian roulette". This might be described as an offer by one party to purchase the other party's shareholding at a stated price. This offer can be accepted or declined. However, if declined the party which made the offer can insist on buying the other party's shares at the same price!
It is also common to include provisions requiring a joint venture company to be put into liquidation in the event of disagreement. However, when such a provision is used it is often appropriate to consider the need for a cooling-off period as well.
There is every incentive to get it right at the outset. Otherwise you may find that breaking up is hard to do.
LI by Stephen Sidkin
Stephen &Ain is a commercial law partner in City law firm Fox Williams and specialises in advising companies on business km and commercial agreements.