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.[1] In July, Stellantis announced it was pulling out of its loss-making Jeep production joint venture in China.[2] 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.[3]
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.[4] 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,[5] 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.
2. Plan for Partner Buyouts.
Two-thirds of terminations of joint ventures between strategic partners (as opposed to ventures with a financial investor) result in one partner buying out the others, while one-third of these JVs end in other ways, such as dissolution, sale to a third party, or public offering.[6] The implication: the hotly negotiated provisions about transfers to third parties may be less important than your client thinks, while provisions about transfers among shareholders—like those related to puts, calls, or buy/sell provisions—may become critically important. Thus, anticipating partner-to-partner sales in JV Agreements can be useful.
3. Include a Lockup Period.
Less than 25% of JV agreements contain a lockup period—that is, a period where no partner is allowed to transfer its shares to a third party. Where lockups exist, the median period is five years.[7] Many JVs would benefit from a lockup period during which partners commit to provide early stability to the venture. Thus, dealmakers should consider—and push to include—a lockup in their clients’ JV agreements, particularly where the partners are starting a new business that requires people, know-how, and other contributions from multiple partners.
4. Use Performance-Based Triggers and Other Creative Terms to Bridge Gaps.
Interestingly, some 12% of agreements include performance-based exit triggers—both negative and positive.[8] For instance, in a JV between Goodyear and Sumitomo, the original agreement governing the JV established that if the venture did not achieve a 6% share of the tire market in Japan, such underperformance would provide either partner with the right to initiate exit.[9] Performance-based exit triggers can help partners with different views on exit—say because one wants the right to exit anytime, and the other wants the partner locked in for life—to find a middle ground. Performance-based triggers can be particularly helpful when a JV is a client’s exclusive vehicle in a given market, as such triggers can allow the client to exit and pursue other opportunities in the market if the venture flounders.
Drafting and negotiating JV exit terms is no easy feat, especially when exit terms are often some of the last terms negotiated when clients (and their attorneys) have deal fatigue and want to sign a deal. But addressing JV exit prior to the deal is critical to ensuring the partnership will work for your clients in the long term. After all, all joint ventures end—so plan for it.
The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
Press Release, BP, “BP to exit Rosneft shareholding” (Feb. 27, 2022) (available at https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bp-to-exit-rosneft-shareholding.html); Press Release, Ford, “Ford Issues Statement on Suspension of Russian Joint Venture and Assistance for Ukrainian Refugees,” (Mar. 1, 2022) (available at https://media.ford.com/content/fordmedia/fna/us/en/news/2022/03/01/ford-russia-ukraine-statement.html);
Press Release, WWE, “WWE Terminates Broadcast Partnership and Shuts Down WWE Network in Russia,” (Mar. 3, 2022) (available at https://corporate.wwe.com/news/company-news/2022/03-03-2022). ↑
“Stellantis, China’s GAC to terminate loss-making joint venture,” Reuters (July 18, 2022). ↑
Press Release, Pfizer, “Pfizer Provides Update on Ownership Interest in Haleon,” (June 1, 2022) (available at https://www.pfizer.com/news/press-release/press-release-detail/pfizer-provides-update-ownership-interest-haleon). ↑
James Bamford, Tracy Branding Pyle, and Edgar Elliot, “At-Will Exit in JV Agreements: Eject Buttons Often Come with Strings Attached,” The Joint Venture Alchemist, March 2022. ↑
Tracy Branding Pyle and Kira Medish, “How Long do Joint Ventures Last,” The Joint Venture Alchemist, March 2022. ↑
James Bamford, Tracy Branding Pyle, and Edgar Elliott, “JV Exits: Five Steps to Structuring Robust JV Exit Terms,” The Joint Venture Alchemist, February 2022. ↑
Ibid. ↑
Gerard Baynham, Ben Bollero, David Ernst, and Jason Reid, “Running for the Exits: Getting Joint Venture Exit Right,” The Joint Venture Exchange, August 2020. ↑
The Goodyear Tire & Rubber Company, Umbrella Agreement by and between The Goodyear Tire & Rubber Company and Sumitomo Rubber Industries, Ltd. (Exhibit 10.1 to Form 10-Q) (Aug. 10, 1999). ↑
