Although most joint ventures have long (if not indefinite) terms, in turbulent economic times, corporate joint venture partners are more likely to reconsider their commercial arrangements. And in some cases, parties may decide to terminate cooperation and sell their shares, buy out the other shareholder, or simply wind up the joint venture company and distribute the assets. These business decisions may be driven by poor economic performance of the venture, or merely a need to rationalize and liquidate investments to repatriate funds back up the corporate chain. In most cases, the end of these arrangements will be consensual, but in others it may become contentious. Here are five things to think about when exiting a European corporate joint venture.
1. Check the contracts
The first step should always be to check the contractual position. The core documents to consider are the joint venture or shareholders' agreement and the articles of association or other relevant constitutional documents. Most shareholders' agreements will contain exit and termination provisions, whether the exit is a forced sale under a drag-along right (a contractual obligation that forces a reluctant shareholder to sell), a right to join a sale under a tag-along right (a contractual right that allows a shareholder to participate in a sale), a call or put right to buy each other out, or just some non-binding statements of intent related to working together to achieve an exit.
Other key legal agreements may also come into play. For example, there may be financing arrangements where bank consent is required, shareholder loans that need to be settled, cooperation or commercial agreements with the joint venture that need to be revised or terminated, employment agreements with key executives containing golden parachute provisions, or change-of-control clauses in key customer or supplier contracts.
2. Look beyond core legal documents
After checking the contracts, there are other key legal issues to consider. First, both parties will probably face tax consequences, which will need to be analyzed and structured around. Also, when one party increases its shareholding, there could be an impact on merger and antitrust controls, and other regulatory issues under licenses and permits (such as those related to the offering of financial products in the case of a financial services business). In addition, one or more parties may provide shared services to the venture (such as group accounting, cash pooling, HR, IT, data privacy, general compliance or legal functions), which may need to be unwound or re-costed. A transitional agreement may be needed to address these issues.
3. Consider the contractual timeframes
Shareholders' agreements can vary significantly and most exit clauses will contain bespoke and negotiated arrangements around things like the sequencing and timeframes for a drag-along or bidding process (like lock-up periods). This is further complicated where one party has a right of first refusal on a drag-along, or where there are multiple shareholders with competing bids in an auction.
Deadlock clauses can further complicate matters where one party may argue that in fact commercial relations have broken down giving rise to a deadlock, and not just an exit situation, and therefore the provisions of the agreement dealing with deadlock should first be applied. This will really depend on the actual wording of the agreement and could have an impact on the process and timing.
4. Consider external factors
In addition to the contractual time limits set out in the shareholders' agreement, the process may ultimately be driven by external factors, such as any mandatory merger control process or statutory time limits. On a practical level, if one shareholder is seeking to buy out the other, then it may need time to raise external financing and to deal with any of its lenders' due diligence and security requirements. Any existing third-party debt in the joint venture vehicle may also need to be refinanced or repaid and security released, together with any shareholder loans or guarantees provided by the shareholders themselves to third parties.
Many continental European jurisdictions will require documents evidencing transfer of ownership to be formally signed by the transferor or their attorney-in-fact in the presence of a notary. Depending on the size of the transaction, some shareholders may also need to obtain consents from their own shareholders or investors. When terminating employment or labor contracts, most European jurisdictions have complicated laws and regulations in place that need to be carefully considered, and the time periods involved can be lengthy.
5. Anticipate closing issues
Practical issues may also arise on closing. These include any tax filings and payment of tax charges, plus practical issues like changes of websites, emails, brands and logos. Employees may need to be transferred and secondment arrangements unwound while complying with all related employment rights under laws and regulations. Parties must also plan for issues related to the use of IP rights, data sharing and storage, use of shared premises, ongoing access to historic tax and accounting records, and any ongoing transitional arrangements. Finally, be sure to review and follow any ongoing obligations regarding restrictive covenants and non-compete clauses.
