Nearly every attorney has, at some point, been faced with an implausible exam question and thought to oneself: That would never happen. However, in practice, situations that are seemingly more convoluted than any exam question do occur. Consider the following:

Two American citizens with a personal and professional relationship decide to buy a vineyard in Europe, each purchasing their interest through a separate legal entity. Several years later, the two individuals get married and remain married for five years followed by an acrimonious divorce.

The ownership of the vineyard is not altered by the divorce. Following the divorce, one spouse sells their interest in the vineyard to a third party without notice to and over the other’s objection. Finally, the new owner is reported to be a Russian oligarch who is or may become subject to sanctions due to a global conflict.

Sounds outlandish, right? In broad strokes, however, that is the nature of the February Pitt v. Jolie complaint in the Superior Court of the State of California, Los Angeles County, a current litigation between Angelina Jolie and Brad Pitt over their interests in Château Miraval in France.[1]

As result of an unexpected transfer by Jolie, Pitt finds himself partners with a “Luxembourg-based spirits manufacturer controlled by Russian oligarch Yuri Shefby,” according to the complaint. According to the pleadings filed by Pitt, the new owner is actively trying to take control of Miraval from him.

This not-so-hypothetical situation raises a number of questions as to how a situation like this can be avoided. Since the focus of this article is the contractual relationship of the parties, we will assume that a complete transfer of the business to one spouse as part of the settlement was not possible or desired at the time.

As with all business partnerships, the first thing to consider are the underlying agreements governing the venture. According to the complaint in the Miraval dispute, the parties each owned shares in a foreign entity through separate California limited liability companies.

As a result, governing agreements between the parties are the organizational documents of the European entity. Consider that even a contractual arrangement in the U.S. might not be controlling in the administration of a foreign entity. In this case, the governing documents and local law placed restrictions on transfers by the stakeholders. However, it seems they do not directly address transfers of the stakeholders.

However, it seems they do not directly address transfers of the stakeholders. That distinction may make all the difference in this scenario. If Pitt and Jolie had acquired their interest in Miraval as a whole through another domestic entity owned by their respective entities, they could have directly addressed most of the change of control provisions through an operating agreement governed by well-settled state law.

In most jurisdictions, state law will defer heavily to the operating agreement of a limited liability company, as the agreement reflects the negotiated agreement of sophisticated parties. Further, the law will generally respect the parties’ rights not to have a partner forced upon them to the extent an agreement prohibits transfers. In this case, this concept has become crucial, as not only is the new partner an industry insider, it is controlled by a Russian oligarch who could face sanctions that may cripple Miraval.

In order to avoid a situation like this, the parties entering a joint venture can and should carefully consider several key points.

In the present case, the initial owners were individuals in a close personal relationship. They are two of the most famous people in the world. In the case of celebrity couples, professional advisers must consider that such relationships can be volatile and guide their clients as best as possible so that any potential business separation is manageable.

This is always a sensitive topic to raise at the beginning of a venture, particularly when the parties are friendly and not looking to get into protracted negotiations.

While difficult in such situations to discuss the end of the relationship, it is critical. This means focusing on both the potential inevitability of an impasse at a later date or a possible future desire of one party to sell its interest and leave the venture.

The analysis should begin with determining the specific organizational structure, including the legal domicile, of the entity controlling the venture. Frequently, this can get entangled in tax or other considerations; but where you have a potentially volatile situation, such as a celebrity couple investing together — albeit separately — it is important not to lose sight of the potential endgame should the underlying partnership fail.

When structuring a venture such as the subject vineyard, the parties must also carefully consider the mechanics of any potential business separation. The definitions and prohibitions related to transfers must also be clearly and broadly designed to cover indirect transfers and transfers of control of a stakeholder.

The agreement can provide for an outright prohibition on transfers without consent. This can be a recipe for an impasse. In such a situation, the agreement can and should provide for an exit strategy, such as a buy-sell arrangement or a forced sale of the enterprise following an impasse.

If the parties are unable to agree on such a structure, there can also be limits on parties to whom interests can be transferred. For example, in any venture, it is not unreasonable to prohibit transfers to strategic competitors, foreign nationals subject to restrictions on sanctions or transfers that could result in a change in tax status of the venture.

The agreement can make clear that any transfer in violation is void ab initio. In the Miraval scenario, the transfer was made to a strategic competitor in the alcoholic beverage industry that is reported to be attempting to impose its will on Pitt. A prohibition on transfers to strategic parties might well have been appropriate in such a case and, according to Pitt’s pleadings, essential.

In this case, there are numerous obstacles to resolution. If indeed there was no direct prohibition on Jolie’s transfer of her limited liability company to a third party, there may be no litigation path for Pitt to wrest control of the other half of Miraval from its new owner and will have to find a way to make peace or buy them out.

This resolution is complicated by the ultimate ownership by a Russian oligarch. If the subject oligarch is targeted with sanctions, it may be nearly impossible to unwind the venture without extensive government involvement in several countries. Likely, this is why Pitt brought suit in California against Jolie, seeking damages rather than voiding the transfer in Europe — assuming, of course, that any claims to void the transfer are not already underway in Europe.

Further complicating the situation is that, since this is not a marital matter and no real privacy interest is involved, this dispute will be fought in the public arena.

In the case of a celebrity joint venture, the parties may well desire to keep disputes out of the spotlight with strict confidentiality and opt for arbitration in order to remain out of the public eye. Here, Pitt has demanded a jury trial, perhaps with the hope that all of the glitz and glamour of celebrity will entertain and sway a jury pool as opposed to a panel of arbitrators who might not be as impressed.

The critical takeaway here is that when advising on any joint venture, celebrity or not, decisions regarding structure and transfer conditions made at the beginning are among the most crucial. These decisions will also be the driving force in most disputes if and when the parties go separate ways.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Footnotes:

[1] The facts in the Miraval case are actively in dispute and the description in this article relies on the facts as set forth in the filed complaint for illustrative purposes.