No business enters into a joint venture expecting it to fail, but it is essential that adequate thought be given to what will happen in the event of a breakdown in the relationship, breach, or poor performance of the new entity. It may also be that eventual termination or dissolution of the joint venture is envisaged from the start depending on the nature of the relationship between the parties. For example, it might be the agreed plan that at a certain point, one party will buy out the other, bringing an end to the joint venture in the process.
What are the main ways to dissolve or terminate a joint venture?
For the sake of completeness, in this section, we will cover both dissolutions of a joint venture and termination of a joint venture corporate entity. The primary methods of bringing a joint venture to an end are as follows:
Consensual termination
As the name implies, the joint venture is terminated following an agreement by all parties. As there is a common agreement, this is the most straightforward method of termination. In general, the main termination provisions in the joint venture agreement will be followed, including in relation to confidentiality and restrictive covenants. Assets can be dealt with by using the same method as when they were transferred or acquired. Any assets (e.g. intellectual property) created by the joint venture entity requires careful consideration in terms of who will continue to retain ownership etc.
Sale of interest
There are several ways of selling interest in a joint venture. Much will depend on the circumstances of the dissolution or termination and the set-up of the joint venture entity. A sale of interest can be carried out in one of several ways, including:
- Based on pre-emption rights - if the intention is to sell to a third-party, the documents drawn up in the initiation of the JV should specify the rights of the shareholders who are being advised by another shareholder of the desire to dispose of their holding (e.g. the right to purchase a pro-rata proportion of the shares which are intended for sale). The third party then has to enter into an agreement with the remaining shareholders.
- Default or deadlock - there are several options where a sale of interest is not consensual, including using put and call options, ‘Russian roullette’, and Texas (or Mexican) shootout. These are different methods for how shares can be offered for sale and be accepted or rejected.
- Winding up - in circumstances whereby the venture and relationship have broken down irretrievably, it may be agreed by both parties that the JV should be wound down and the assets dealt with accordingly. In this situation, no third parties are involved, and assets are typically returned to those who contributed them.
You can get legal assistance from LawBite
Questions about dissolving a joint venture? LawBite is here to help! Joint venture arrangements can easily go wrong if there is a mismatch of expectations as to the allocation of responsibilities, risks and rewards.
Our expert lawyers and solicitors can help your business to craft an agreement document that meets your needs. You can download our legal document templates as part of your free trial or book a no-commitment call with our lawyers today to get started.
