MA 4: Joint Ventures

• The most common rationale for parties to enter into joint ventures is the objective of saving costs through sharing employment or other fixed costs, or the cost of research and development or capital-intensive programs.
  • A healthcare startup focused on AI-driven diagnostics partners with a major hospital network to share the costs of developing an advanced imaging system.
• A similar rationale behind many joint ventures is the wish to share significant financial risk, which may be involved in undertaking a speculative or capital-intensive project. Projects of considerable size, such as natural resource or infrastructure projects, are frequently undertaken as joint venture projects.
  • Two energy companies form a joint venture to explore a new deep-sea oil field, where the high initial investment costs and potential for low returns pose a substantial financial risk.
• Joint ventures may also provide a route for a party to gain access to, and to learn from, a co-venturer's technology and skills, accelerating its entry into a particular technology or market.
  • An established automotive manufacturer partners with a cutting-edge electric vehicle startup to gain access to the latest battery technology and expedite its entry into the EV market.
• The merger of similar businesses between two or more participants may be desirable in order to establish economies of scale, global customer reach, purchasing power, or capital investment resources necessary to meet the strength of international competition.
  • Two large agricultural cooperatives merge to increase their purchasing power and establish a global customer reach for their commodities.
• Joining forces with a financial partner can also be a method of financing an acquisition or venture which would not otherwise be affordable.
  • A small software company joins forces with a venture capital firm to finance the acquisition of a larger competitor, a merger that would be unaffordable individually.
• A joint venture may also be a first step in an eventual full disposal or acquisition of a business or a future exit such as an IPO or trade sale.
  • Two companies form a joint venture with the intention of eventually merging their operations after a period of initial collaboration and market testing.
• Lawyers play a very important part at the planning stage of many joint ventures.
  • Senior partners at a law firm provide strategic guidance to a tech company.
• As a lawyer, you'll be expected to alert the business negotiators to important legal or business issues to be addressed in establishing the venture and the options available to deal with these issues.
  • Senior partners at a law firm advise two companies merging and alert their leadership team.
• Lawyers also help to identify and obtain clearances and consent from third parties or ensure that the joint venture arrangements are properly and clearly documented and the interests and the intentions of the clients are properly safeguarded.
  • Lawyers will help to identify and obtain clearances and consents, such as licensing.
• It is important to manage the legal and other formal steps necessary to establish the joint venture and generally advise constructively in helping to establish a joint venture according to the client's wishes and interests.
  • Lawyers set out all procedures in a business venture for an effective deal.
• The two most common forms of joint ventures in Singapore are corporate joint ventures and contractual alliances.
• Under a corporate joint venture, two or more parties jointly own a corporate vehicle which will hold its own assets and undertakings as a separate legal personality. This is the most common form of joint ventures in Singapore.
  • AlphaTech and SecureSolutions both have their own shares in Cynergy Solutions as the separate legal personality for its own assets.
• The second is a contractual alliance, basically an unincorporated joint venture where no separate vehicle or entity is established.
  • Green Solutions partners with Blue Energy to work to promote both their environmental goals.
• The arrangement is just based on a simple contract and does not involve the creation of a separate legal entity. For the purposes of this lecture, I will just be focusing on corporate or equity joint ventures.
  • The two companies agreed to a straightforward contractual agreement which does limit or involve a new company.

Legal Documentation for Joint Venture Companies

• The key legal documentation for joint venture companies in Singapore comprises the constitution of the company as well as the joint venture agreement or shareholders agreement. These two terms are used interchangeably.
  • Eco-Life and Pure Energy combine and make an agreement on forming documentation needed for an effective corporate company. Eco-Life creates shareholders while determining business structure.

Shareholders’ Agreements vs. Constitution

• The Constitution is regulated by the Companies Act and comprises the regulations of the company. The constitution binds all shareholders, including future shareholders, and can be amended by shareholders with at least 75 % of the voting rights, i .e. by way of passing a special resolution.
  • All shareholders are bound by the constitution under voting rights with 75 percent of the voting rights.
• Shareholder agreements are governed solely by contract law and only bind the parties to the agreement. Typically, we would draft the two hand -in -hand where the Constitution replicates certain regulatory or governance provisions that are contained in the Shareholders Agreement to ensure that the documentation binding shareholders are fully aligned.

Key Issues in Shareholders’ Agreements

• Shareholding proportions : This is the amount of equity involved
  • Alpha provides 60 and Beta provides 40 shareholding

Joint Venture Company as Party to Shareholders’ Agreement

• This is beneficial because it can directly undertake obligations to observe certain restrictions or procedures
  • A Non-compete or confidentiality must be kept with both sides for an effective deal.
• If the JV company is a party, it can directly undertake obligations to observe certain restrictions or procedures, such as non -compete or confidentiality undertakings, which could make enforcement easier.
  • Tech-Frontiers signs legal agreements to only be used at their new merger.
• A direct contractual right of enforcement against the joint venture company will also help if there is a risk that the directors of the joint venture company may not observe constraints or undertakings contractually agreed between the shareholders.
  • There has to be a contractual right of enforcement against illegal and harmful actions of directors.
• Even if the directors are likely to have regard to the wishes of the shareholders in fulfilling their duties as directors, they will not be contractually limited or bound by commitments in the shareholders agreement unless the company is a party.
  • If the directors don't follow shareholders duties, the company is limited or bound
• Another situation in which it is advantageous to have the joint venture company as a party to the agreement is where there are multiple parties to the joint venture, where the cooperation of several shareholders is likely to be required in order to give effect to an undertaking relating to the conduct of the joint venture company.
  • A team must undergo many requirements especially if there are several shareholders for an effective company.
• In such a case, having the company as a party to the agreement will ensure compliance and assist with an enforcement of the agreed term.
  • If everyone is aligned, then everyone will fulfill their roles and compliance rules effectively.
• On the disadvantages of having the joint venture company as a party, one disadvantage is where the joint venture parties prefer that the terms of their contract should not involve the company so that in the event of disputes or variations, they can take any wider relationship issues into account without the consent or knowledge of the joint venture company and its management.
  • There is a potential risk of negative company relationship if there is knowledge of disputes.
• Another potential disadvantage is that if the shareholders agreement contains terms which fetter the joint ventures company's exercise of its statutory powers, for example, a term which restricts the joint venture company from passing a resolution pursuant to a specific right given to the shareholders by statute, those terms may be unenforceable.
  • If there is a restricted term or condition that involves the shareholders, there may be legal or statutory problems.
• However, it is possible to contract around this by phrasing this as a restriction on the shareholders where they will exercise their voting rights to ensure that certain resolutions are not passed unless certain contractual approvals have been obtained.
  • There has to a limit on the shareholder and the proper contract and restrictions to move forward.

Minority Protection

• Another key issue is the rights and protections that should be considered or negotiated for when acting for minority shareholders in a joint venture company.
  • Proper negotiation for voting is important for proper procedures of a joint venture.
• The underlying statutory and corporate rights for minority shareholders are generally quite limited and provide no realistic safeguards or influence in relation to joint venture companies.
  • An efficient legal agreement between shareholders is key for the statutory and corporate benefits.
• When acting for a minority shareholder, your client will usually expect stronger rights and you should do your best to negotiate such rights for them.
  • Minority shareholders need to advocate for their vote in joint ventures for legal security.

Negotiating Minority Rights

• The minority protection rights to be negotiated will vary from case to case. For example, there should be differences between the rights to be negotiated by a minority party in a 60 -40 joint venture, where the minority party is providing substantial management and technical expertise, and in an 80 -20 joint venture in which the minority is a strategic partner, but the majority shareholder has day -to-day operational control and management rights.
  • When dealing with a minority protection, the proper team should split duties of high management and shareholder tasks.
• Similarly, should expect differences between a joint venture in which a venture capital institution has a majority minority stake, but may be the principal provider of finance, and a multi -party joint venture in which a number of parties have comparatively small and passive shareholding interests, which you'll see in a lot of startup joint venture or shareholder agreements. A range of protective measures should be considered and the appropriate protection should be selected to prevent undue preference or misuse of control by a majority party or parties.
  • An efficient way to protect the shareholding from others is to seek good third party partnerships that will reduce or prevent misuse of a shareholding.
• Before we consider the typical minority protections in a shareholder's agreement, let's have a recap of what the statutory remedies for minority shareholders are. By and large, these tend to apply only in limited and relatively extreme circumstances. The principal rights are essentially confined to the following:
  • All minority shareholdings need to be covered which will improve statutory remedies from the other shareholders.
• If the minority holds more than 25 % of the voting rights, it would have the ability to block certain decisions which require special resolution or 75 % shareholders approval.
  • Alpha 15 percentage can not be used for the 75 percentage approvals as a minority shareholder.
• Statutory rights to call for meetings, information, or formal regulatory investigations in certain limited circumstances.
  • There has to have information given with a detailed list in a contract that covers all needs.
• A right to initiate an action on behalf of the company, commonly known as statutory derivative actions, against directors for breach of duties under the Companies Act.
  • With all the documentation set in Companies Act, there are legal measures used in this act to hold directors accountable.
• A right to seek a remedy under the Companies Act in the event of unfairly prejudicial conduct by the majority party, and
  • Act under the protection of the company's act will give the minority a potential remedy if prejudiced occurs with the majority party involved.
• A right in certain circumstances to seek a winding up of the joint venture company on the grounds that it is just and equitable to do so.

What Do Negotiate for as a Minority Shareholder

• A minority shareholder will therefore look for express contractual rights and protections beyond those afforded by statute and corporate law. Minority participant will generally aim to protect its interests in the following principal areas:
  • A minority shareholder would want effective rights for security.
• Typically, minority shareholders will want to ensure its participation in management through representation on the board of directors, on the joint venture company.
  • A minority shareholding is not a reason for their rights to be limited for their management purposes of the company.
• They would typically negotiate for specific information rights, for example, for budgets or periodic financial statements to be provided to them on a regular basis.
  • The minority board will look toward budgeting, accounting or statements involving the company or team they have invested and represent.
• Minority shareholders would also want that it would be involved in major business decisions, including that its consent would be required on key matters. Typically, we call these reserve matters in a shareholders agreement.
  • With the minority shareholder, they would have consent for key decision making of the group.
• Minority shareholders would also want to protect against its equity stake in the joint venture being improperly diluted by subsequent share issues. It would want to ensure that it receives a proper distribution of profits from the joint venture company and also establish safeguards to enable the joint venture company to assert claims when necessary against the majority shareholder if the majority shareholder is in breach of its obligations to the joint venture.
  • Profit and share holding for each board in the company has to be protected and agreed so one doesn't impose on the other.
• Lastly, it would want to ensure that it has an ability to exit the joint venture in worst case scenario without it remaining trapped in a situation where the relationship between the shareholders have broken down.
  • If there is a horrible situation or a broken shareholder deal has occurred, the process needs to have an exit for all parties involved.

Governance / Management

• Moving on to another key issue in drafting shareholders agreements would be governance and management rights, which we briefly touched upon when discussing minority protection measures. These arrangements cover things like board composition, key management appointments, as well as the proceedings for board and shareholder meetings or resolutions.
  • A new agreement for the parties due to shareholder and governance matters is recommended.
• On board composition, mean, this typically refers to the number of directors that each party can appoint, as well as the manner in which the parties can appoint and remove their board nominees.
  • Board composition will determine who has what amount of power for the new company.
• Usually we also include provisions to adjust for the number of directors that can be appointed by the parties if there is a change in shareholding proportions.
  • In times the company needs to be upgraded and if new members are brought it and they need their numbers to be raised as well or other member numbers falling.
• So for example, if you start the joint venture on a 60 -40 basis, maybe you'll provide that party A, who holds 60%, can appoint three directors and party B, who holds 40%, can appoint two directors. Then you would include provisions to say that if there is a change in the shareholding proportion, then the number of directors that each party can appoint would be adjusted. Maybe, for example, every 10 % shareholding you hold would be equivalent to one board seat. The next one is on key management positions. For example, CEO, CFO. In some cases, the parties would like to prescribe upfront which party gets to appoint or nominate the persons to these positions.
  • As we go and implement the group, each member can split votes and power of CEO and CFO.
• The last one on board and shareholder proceedings would cover things like quorum and Notice Requirements, especially if you're acting for a minority shareholder or an investor which is taking a more passive role, typically they would want one of their directors to be present at a board meeting or their shareholder representative to be present at a shareholders meeting in order for the Quorum requirements to be met. Notice Requirements will follow the prescribed notice arrangements under the Companies Act for shareholders' meetings, unless contractually agreed otherwise. We would also typically provide for certain different approval thresholds depending on the matters that are being decided by the board or the shareholders. Typically, day -to -day matters would just be based on simple majority vote. And then certain prescribed matters, reserved matters as I referred to in my earlier slide, are matters which would require the prior written consent of either the minority shareholder or both shareholders depending on the balance between the two.

Financing

• There needs to be new funding coming for the organization so they don't lose revenue.
• Financing: Another key issue would be the financing arrangements for the joint venture company. So for example, are there any specific funding obligations on the part of the shareholders? Typically, if the joint venture is being established for a specific project, for example, like a property tender or infrastructure project, there may be specific funding obligations or a funding schedule that would be attached to the shareholders agreement where shareholders are committed to fund specific or minimum amounts upon the achievement of certain milestones. - A property and lending company should set up the arrangement of their payments in a new structure that benefits them.
• The other thing would be how funding should be obtained for the joint venture company. Sometimes there is a priority of methods of funding. For example, first you have to go to banks to seek external funding. Secondly, shareholders loans. Third, through pumping in of shareholders equity where shareholders subscribe for additional shares to fund the companies. - There are three different methods, starting with loans, bonds and shares being provided that need to be discussed and set up.
• Also important would be when the company can trigger these funding arrangements if the shareholders are meant to be contractually obligated to fund the company in these scenarios. If external financing is obtained, sometimes the banks might require provision of security by the shareholders of the joint venture company. And so the shareholders agreement would also contain provisions to discuss how the liability under any security granted by the shareholders should be apportioned. - In times of bank and legal deals, if the terms can't be met then they trigger new solutions to solve the companies troubles.
• Lastly, what happens if there are specific funding obligations imposed on the shareholders and one of the shareholders fails to fund? Can the other shareholder fund on behalf of the non -funding shareholder? And if so, in some cases there are penalties imposed such as default interest or the funding will take place by issuance of shares at a dilutive issue price. - If there is troubles, then legal consequences and penalties are set out in a contract that would take place in the funding process of the shareholder.

Transfers of Shares

• The inability to transfer shares to any third party without constraint is contrary to the basic personal nature of a joint venture. - If a venture prohibits the right of transfer it may be rendered impossible.
• Transfers of Shares: Next, I'll discuss when and how a share in a joint venture can usually be transferred and the circumstances under which joint venture parties may exit a joint venture. Almost all joint ventures contain restrictions on transfer. This is because the ability to freely transfer shares to any third party without constraint is contrary to the basic personal nature of a joint venture. - A partner transfer of shares can be beneficial to all, and each transfer is covered to the needs of protection
• The range of potential restrictions on transfer include completely free transferability at one end of the spectrum, to an absolute prohibition on transfer at the other end. A crucial question is therefore, where within this range should transfer restrictions in the particular joint venture be pitched? In certain joint ventures, particularly multi - party ventures, where a number of parties may have a largely passive investment, for example, with like startups, a regime of relative freedom of transfer may be appropriate in order to enable a party to transfer its interest to a third party. In contrast, in many core corporate joint ventures, particularly cooperative ventures, where the personal relationship between the parties is crucial to the continuance of the venture, the simplest route may be to prohibit any transfers without the consent of the other parties or parties, certainly at least for an initial lock -up period. So for example, if it's a very operational joint venture where parties are leveraging on specific assets or specific know -how of the other parties, its very personal to the identity of the relevant parties involved, then there would be additional transfer restrictions imposed. - Transfer is not good for many companies, with the relationship of each stakeholder, but it can happen for passive investments that need to be transferred quickly. In most joint ventures, parties will choose to adopt a solution where transfers are permitted but subject to a pre-emption procedure. This will usually entail a procedure along the following lines.

Pre-emption Procedure

• A transfer price is given to the other party, setting out the selling party's wish to transfer shares in the joint venture company and the proposed price. The other joint venture party is given a period in which to decide whether to exercise a pre-emption right on the terms stated in the transfer notice. In the case of a multi -party venture, where there more than two shareholders. Each party is offered the selling party shares pro rata based on their existing shareholding percentage in the joint venture company, together with an opportunity to take up any excess shares not acquired by the other non -selling shareholders. If and to the extent that the pre-emption rights are not exercised, the selling party is free to sell its shares to a third party within a defined period and at a price that is not less than the price offered to the existing joint venture parties under the pre-emption procedure.

Rights of First Offer vs. Right of First Refusal

• Andrew Yip (19:23.896) There are different types of pre-emption rights on a transfer of shares, but most usually fall within one of the following two descriptions, either a right of first offer or a right of first refusal. These pre-emption rights are also known as soft and hard pre-emption rights respectively. - The agreements need to either include "right of first offer or right of first refusal.

Shareholding Example

• Shareholding offer to all parties is an efficient route for an investment, to give shareholders a proportional slice of assets.
• A right of first offer occurs where the selling party wishes to sell its shares, but is not obliged to first identify a third-party purchaser. The non -selling shareholder has the first opportunity to take up that offer or to negotiate. The right arises at the front end of the sale process. If the offer is not accepted, then the selling party is free to sell its shares to a third -party purchaser at a price not less than the previously offered price. An advantage for the selling party under the right of first offer is that it avoids the initial cost and effort of marketing or negotiating with third parties. A disadvantage for the non-selling party is that it may be forced to participate or make a decision on whether to buy out the selling party in circumstances where the sale to a third party may not be a real possibility. So
• A right of first refusal, on the other hand, occurs where the selling party is required to identify a bona fide third-party purchaser before the pre-emption right is exercisable by the non -selling party. So this right arises at the back end of the sale process, instead of the front end, like you have under the right of first offer. In this situation, if the pre-emption right is not exercised, the only permitted sale will be to the specific third-party purchaser and at the price specified in the transfer notice. A hard right of this kind can make it very difficult in practice for a selling party in a joint venture company to find a purchaser. It will not often be feasible for a seller to obtain a firm offer from a third party in advance of the pre-emption process taking place, since a third party would usually prefer to wait and not waste time on potentially abortive negotiations until it has clarified whether any pre-emption rights will be taken up or exercised. - Many investors don't want to spend time and waste resources, so they wait til a sale occurs to engage properly with investments.

Transfer Price

• Price is invariably a key issue when negotiating pre-emption rights. The price at which the non -selling party can buy the selling party's shares under pre-emption provisions could be based on the price set by the selling party, the price offered by a third party purchaser, or a price determined by an independent valuation.
  • A value is the set standard and a key term for new deals and investments.
• The last option gives rise to some interesting issues. Setting the valuation formula and procedures will be a matter that requires the assistance of the parties, accountants or other financial advisors. These are usually very technical financial determinations and will require detailed mechanics and timelines to be set out for parties to determine how the valuation will be determined, the assumptions that should be used by the valuer, timelines for preparation of the valuation report and what are the procedures that should be in place if the parties disagree with the valuer or with each other's valuation. - The timeline, mechanical processes, and third party legal terms are all crucial for transparency when making an agreement.
• Different basis for valuation of a party's shareholding in a joint venture company include market valuation on fair value and more formulaic basis for valuation such as net asset value, earnings basis, discounted cash flows, startup costs and dividend yield.
  • There is always high risk, but there are some simple agreements made which will protect each party.
• The most appropriate basis or manner in which the valuation should be done will depend on the transaction at hand as well as the party's commercial preference.

Tag-Along Right (Piggy-Back)

• Two additional issues that are relevant to a party's right to transfer its shares in the joint venture are whether a tag -along right and or a drag -along right are appropriate. If a party wishes to sell its shares in a joint venture company to a third party, the other joint venture parties may also want to have the opportunity to exit. This exit right can be preserved by giving the other parties a tag -along or piggyback right where the selling party is obliged to ensure that any third-party purchaser of its shares must extend its offer to include, on the same terms, each other party's shares in the joint venture company. This is usually a sensible precaution for a minority shareholder in order to ensure that upon a sale by a majority party, the minority is not deprived of the opportunity to obtain equivalent sale proceeds and that it doesn't get locked in as a minority in a joint venture with a new, unknown majority partner.
  • A legal right can improve business for both parties when setting out a sales agreement in a corporate venture.

Drag-Along Right

• A drag -along right, on the other hand, may be particularly appropriate for a majority party. In this case, the selling party is given a right, if it is selling to a third -party purchaser, to oblige each other shareholder to also sell its shares in the joint venture company to the third party, at the same price per share as negotiated by the selling party. This enables the majority party to avoid any blocking of the sale by the minority and enables it to deliver the entire interest in the joint venture company to the third-party purchaser. Typically drag -along rights are structured so that they can only be exercised if the sale involves either all of the shares in the company or a majority of the shares in the company. - It is an efficient move from the majority share that will provide and give way for future partners, so the company doesn't get locked down under previous owners.
• Usually, if the drag -along provisions will also provide that the dragged shareholders, i .e. the other shareholders who are compelled to sell their shares, will only be required to give limited reps and warranties, for example, in relation to title to shares, authority and capacity to enter into the sale agreement and will not be giving detailed business or operational reps and warranties in relation to the joint venture company. This is especially where the minority shareholders are silent investors that do not have control or involvement in the management or day -to-day operations of the joint venture.

Exit Provisions in Joint Venture Agreements

-I turn now to exit provisions, where I'll discuss the typical considerations when negotiating when and how a party should be able to exit from a joint venture. In designing appropriate exit provisions for a particular venture, a number of basic questions should be addressed. I will touch on these questions briefly. Is a joint venture to be established for a fixed term with automatic termination unless each of the parties agree to renew? This approach is more common for non equity joint ventures and is often the simplest approach but rarely seen in the context of equity joint ventures. - The end date of a fixed agreement from parties need to be documented properly for future deals.

• Should a party have the right simply by notice to terminate its interest in the venture, irrespective of any cause attributable to the other party? If so, what should be the exit mechanism following any such notice, for example, winding up or buyout mechanism? - A third has the legal action to remove them self from the legal joint venture due to certain instances, documented for the long run.
• Should a party have the right to terminate the venture in the event of specified circumstances or for cause, i .e. in a default scenario? If so, what should be the trigger events which entitle a party to exercise these rights? Will the party have a direct right or option to put -There are trigger events for each group to be accountable for their performance.
• Its shares in the joint venture company to the other party, i .e. to require the other party to buy its shares, or to call for the other party's shares, i .e. to require the other party to sell its shares at specified times as part of a pre -agreed commercial deal? Should a party have the right to initiate a sale of the joint venture company as a whole, either through an initial public offering or through a trade or other secondary sale? Such a route may be specifically contemplated as an objective or possibility when the joint venture company is established. Should there be a right to trigger a specific deadlock resolution mechanism which will terminate the joint venture if there is a deadlock or breakdown in the joint venture relationship? - Legal right also needs to be taken upon the sell, trade or offer is made available for all parties. Any contractual provisions for exit or termination will be centred on these core issues. Within each of these scenarios, there are detailed questions and many different approaches. I will explore two of the more common exit scenarios or provisions,

Deadlock

• Default measures are used based on strategy and problems. For the purposes of this lecture, deadlock means the inability of the parties to agree on strategy or other important decisions affecting the venture. This ability may be due to genuine disagreement between the parties on a business dispute or a fundamental breakdown in their relationship. In particular, the existence of strong minority rights can lead to a greater risk of potential deadlock.
  • The party, or relationship with one another might create a deadlock and a break in the company due to issues and strategy.
• Deadlock in the joint venture company can present itself in different situations. A management deadlock can arise at board level, where the directors appointed by two or more shareholders take opposing views and the votes cast are equal. Or if there is a minority shareholder where their board appointee exercises a veto right. A similar deadlock can arise at shareholder level.
  • Directors are appointed, there might be a breakdown if board members split votes or if minority over powers one.
• Sometimes a deadlock arises because one of the parties refuses to attend meetings and it becomes impossible to pass decisions or to conduct the affairs of the joint venture company. For example, as we touched on in the in the governance provisions if the quorum requirements require at least one representative or appointee of a specific shareholder to be present at board of shareholders' and that shareholder just simply fails to turn up at those meetings. - If someone misses, they won't be able to pass or process new company events.
• In these scenarios, the question comes up as to whether parties should include provisions in the joint venture company's governance structure to deal with deadlocks at all. Do they really help? There are two primary and opposing schools of thought on the value of making special provision for deadlock resolution in joint venture agreements. - How the teams will react against each other in times of emergency?

Dealing with Deadlocks

There are those who actively try to establish governance rules which avoid a potential deadlock or which establish a clear resolution procedure if a deadlock or breakdown arises.

• Then there are those who would prefer to try and negotiate an appropriate resolution at the time of any deadlock, rather than anticipate in advance what this might be and do not therefore provide for deadlock resolution procedures in the agreement.
  • A contract on emergencies or an agreement is important for times of trouble.
• The truth is that detailed deadlock breaker provisions are rarely used in practice. Commercial pressures and negotiations will usually lead to agreement on the way forward without going through a formal preset deadlock procedure. - There might be trouble between each side, and not an equal agreement for each shareholder or partnership.
• Many practitioners have considerable doubts as to their usefulness, unless the parties have a strong commercial desire to ensure at the outset a definite exit route exists in the event of breakdown.
  • There should be a door for many scenarios but not something so small that can impact decisions being made.
• If deadlock breaker provisions are included but not operated in full, they can nevertheless establish an important background against which each party will then develop its tactical strategy in any dispute or deadlock situation and provides a fallback scenario in case parties are unable to reach an agreement at that point in time. - If an agreement can't be met or there is a dispute, the parties can have a fallback agreement to provide them something in equal turn.

Designs to Avoid Deadlocks

The first is to design management structures to avoid deadlocks arising in the first place.

• The second is to provide for mechanisms enabling the venture to continue.
• The third is what is commonly referred to as divorce measures. One way of dealing with deadlock is to design the management structure in a way which endeavors to avoid deadlock in the first place.
• Structural measures, in addition to the typical issue resolution procedures, can include agreeing at the outset that one party is to have clear voting and management control.
  • All new ventures need a management structure to organize everything and move as a functioning unit.
• Alternatively, it may be agreed at the outset that a particular party will have control or leadership over a particular area of management responsibility or decision making.
• All groups need to have leadership who is responsible to conduct and implement plans for success. This can work well in practice in situations where each party is contributing a different and distinct skill or resource to the venture. A different approach is to establish a management structure whereby as many decisions as possible are taken at individual executive level without the matter requiring referral to the full board of directors.
  • There will always be people of higher management to oversee a corporation for effective management.
• Similarly, the parties can choose to restrict the list of matters which must be referred or reserved to the decision of the shareholders themselves. - This structure helps them manage themselves in the team without having problems reach shareholders easily. These measures will all go to the management structure within the particular venture. Much will therefore depend on the wishes of the parties when establishing that structure. In many cases though, each party will be reluctant to give up its right to agree to major decisions, which then leads back to the potential for inter - party deadlocks which will have to be broken by one means or another.

Mechanisms Enabling Continuity

• Possible mechanisms for resolving deadlock within the context of a joint venture, which the parties wish to continue, include giving a party a second or additional vote in the event of a tie. An alternative is to give an independent director appointed from outside, without prior allegiance to any joint venture party, an additional vote, which will decide what would otherwise be a deadlock between the parties. Other possible mechanisms of this kind are essentially features of a general dispute resolution procedure for the joint venture. The deadlock may be referred, perhaps in stages of escalation, up to the chairman or chief executives of the joint venture parties themselves for resolution at the highest level within each party's organisation. In a potentially long -running or complex venture, a standing dispute review panel may be established which will be available throughout the venture to assist with the resolution of disputes. Lastly, a dispute may also be referred to an independent expert or to mediation or other alternative dispute resolution. In this scenario, arbitration or court proceedings would not be appropriate because a deadlock relates to a business disagreement rather than any breach or contractual interpretation. - A third party vote, will ensure fairness to all without harming integrity.

“Divorce” Mechanisms

• The last way to deal with deadlocks, divorce measures, are useful when dealing with major breakdown in relations between the parties. In such circumstances, the first question is to assess whether the express exit or termination provisions in the joint venture agreement are sufficient to deal with the situation. In many ventures, there may be express rights which provide an effective route to divorce. For example, an express right for a party to terminate by notice, by calling for a winding up of the joint venture company, exercise a put option, or otherwise exit from the joint venture. It is only if the termination provisions do not provide an adequate solution that the parties need to consider whether special divorce measures should be introduced to provide for a situation of management didlock or breakdown. Here I should mention that divorce measures are often considered but may or may not be included in equity joint venture agreements. - During bad times and high stress, a right will allow for someone to be given a severance to move on.
• The strongest reason for their inclusion is that they will generally act as a nuclear deterrent. The threat of their implementation puts pressure on the parties to agree on a commercial solution. If such a measure is adopted, it is highly desirable to allow sufficient timing breaks within the formal deadlock procedure before the strict provisions of the Joint Venture Agreement are finally implemented. This allows parties the opportunity to agree on a commercial solution, even if they do so reluctantly. - A hard time can push parties to see the best in each other and work together to come to a solution for themselves.
• In addition, we sometimes limit these divorce mechanisms to a key deadlock, where the deadlock must relate to something that is inherently critical to the continued operation of the joint venture. For example, if no resolution is reached, either the company might have to cease operations or it would be found to be in - When a critical failure is occurring, something critical action needs to be done to make sure the corporation to continue operating.

Default: Events and Mechanisms

• i will share with you now some examples of measures which are sometimes used or considered. They recognize that an insoluble deadlock will inevitably lead to the breakup of the joint venture and that this cannot realistically be solved by the sale of one party's interest to a third party. The measures therefore result in a buyout of one party's interest or in certain cases winding up of the joint venture company. In this scenario, upon the defined deadlock trigger event, A party has a contractual right to initiate the relevant divorce measure