This year (2022) has seen the end of many high-profile joint ventures. Early in the year a flurry of global companies, including BP, Ford, and Worldwide Wrestling Entertainment (WWE), announced they were shutting down Russian joint ventures or partnerships. In July, Stellantis announced it was pulling out of its loss-making Jeep production joint venture in China. And Pfizer announced its intent to exit its 32% stake in Haleon, its consumer health venture with GSK that IPO’d in July in London’s biggest listing in more than a decade.
Such terminations should not be surprising. The median duration of a joint venture is ten years—a figure that has remained largely unchanged for decades. While JVs in relationship-driven geographies such as Asia and the Middle East—as well as asset-style JVs in slow-twitch industries such as oil and gas, mining, and chemicals—often last twice as long, the fact remains that all joint ventures come to an end, often earlier than partners anticipate.
Despite knowing this, drafting exit terms in joint venture agreements can be challenging for counsel, given that clients and their partners often do not know who will exit and when, or how successful the venture will be. Divergent views among partners commonly lead to clashes, as one partner may wish to be able to leave the venture while others desire that partner to be locked in for life, particularly when the partner is critical to the JV’s success.
Below are four tips that can help legal practitioners navigate these and other challenges of drafting and negotiating JV exit terms:
1. Negotiate Exit Terms Outside the JV Agreement.
In a JV Agreement, Shareholders Agreement, or other similar agreement, exit-related terms are scattered throughout various sections of the agreement, including sections about share transfers, termination, events of default, covenants, and/or definitions. This makes it challenging for clients to see a coherent picture of if or when they or their partners can leave the venture. It’s best to negotiate exit terms in a chart outside the JV Agreement, at least preliminarily. A simple and handy format for this chart includes four columns:
- Exit Trigger – Exit triggers are circumstances that enable one or more partners to exit the venture. Exit triggers include, among other things: partner default, partner bankruptcy, partner change of control, Board or shareholder deadlock on material matters, force majeure, partners owning less than a certain percent of the venture, expiration of the JV term, and no trigger at all (i.e., the right to exit at will).
- Exit Mechanism – Exit mechanisms are the means through which a partner exits once it has the right to do so. Exit mechanisms can include the right to put (i.e., sell) a partner’s shares to remaining partners, to call (i.e., buy) its partners’ shares, to trigger a buy/sell provision, to terminate the venture, or to sell to a third party at a negotiated price. Beyond these exit mechanisms, the non-triggering party may have rights, such as a right of first refusal, right of first offer, or tag-along right.
- Valuation Approach – If the exit mechanism requires shares to be valued (e.g., if the exiting partner has a right to put its shares to the remaining partners), then the partners should agree in advance on an approach to establish the value of the shares to be transferred. Options include having a formula that determines the price of shares or having the shares appraised by one or more external appraisers.
- Post-Exit Considerations – Many joint ventures will depend on the exiting partner for items like intellectual property or services. In such cases, partners should decide up front, at least at some level of detail, how these interdependencies between the JV and the exiting partner will be handled post-exit. For example, will there be a transition services agreement for a period of time? Will the JV retain a license to use IP from the exiting partner? The details of these arrangements (e.g., the price of an ongoing license between the exiting parent and the JV) are often best left to be negotiated in the future, but having the overall construct in place can eliminate uncertainty and streamline exit when it happens.
Addressing these points outside the JV Agreement can help counsel identify and close gaps in JV exit terms and help clients digest and develop a preferred approach to JV exit.