(iii) Termination of the JVC

Overview. Most joint ventures will cease to exist within the first year of their existence. The main reasons for this include the incompatibility of the parties’ organisations or operational functioning, differences in internal (decision-making) culture, a change of strategy by one of the parties, a material breach of contract or even a dispute regarding interpretation of contractual obligations. A sale by a party of its shares in the JVC can, under the ITC Model Contract, only be made with mutual consent.

Termination grounds affecting mutual trust will typically lead to a deadlock in decision making. Therefore, it is appropriate not to include an exhaustive list of possible termination situations but simply to provide for ‘deadlock’ as a ground for termination. If a party wishes to bring the joint venture to an end, this usually requires mutual agreement. In the ITC Model, Article 14.3 contemplates that (after a reasonably lengthy procedure) a party can nevertheless call for a winding up of the JVC in certain circumstances of breakdown or deadlock.

Russian roulette, Texas shoot-out etc. It is not uncommon to provide for an alternative termination mechanism. In many joint venture configurations, the sale of JVC shares to a third party or to only one of the parties is not acceptable. Sometimes, the parties may foresee which of the two would be the most appropriate acquirer of the JVC shares. The key issue in such cases is the valuation of the shares at a reasonable price. The contract clauses providing for a valuation or acquirer-appointing mechanism have been given exotic names such as ‘Russian roulette’ or ‘Texas shoot-out’. It is beyond the scope of this book to elaborate on all the ins and outs of such clauses, but a brief description of three common mechanisms is given below.

  1. Russian roulette (two-party JVC’s). When it is uncertain who will buy out the other party, a common mechanism provides for an internal auction (also called Russian roulette).[1] Both parties should indicate whether they want to buy or sell, and at what price. If one party wants to sell and the other wants to buy, then the latter must buy at the price proposed by the former party. If both parties want to sell, then the highest bidding party must buy at the lowest offered price (and vice versa in case of two willing buyers). The combination of these two outcomes embodies an implicit incentive for the willing seller to offer at an appropriate price (i.e. if it offered at a too high price, it would become the buyer; and there is no reason to anticipate an offer at a below-value price).
  2. Texas shootout (multiparty JVC’s). When it is uncertain who will buy out the other party, another common mechanism can be applied in a multi-party JVC (it is known as a Texas shootout). An independent person who will facilitate the process must propose a share price for the JVC. All parties will indicate whether they are willing to buy or sell at that price. The indicated sellers will sell at that price; if more than one party wants to buy, the process is repeated among the willing buyers at a bid price increased by five or ten percent, until there is one buyer left. If at some point all the remaining willing buyers turn into willing sellers, the price is decreased by 1 percent (and goes down until there is one buyer). The prices to be paid by the buyer will be the prices at which the relevant seller was still willing to buy. If the first round provides only sellers, instead of increasing, the price will decrease by 5 or 10 percent (and while the reference price goes down each time, the mechanism works mutatis mutandis the same).
  3. One pre-appointed acquirer. If one particular party must eventually acquire all the shares, the bidding mechanisms described above do not work. Instead, the valuation must be more adequate. A termination mechanism would require each of the parties to propose a valuation of the JVC shares (including a breakdown and explanation as to how the valuation has been calculated. If there is a difference between them, the parties will discuss both valuations and deviations. If after a period of (for example) 60 days no consensus is reached on the price, each party may require the appointment of an independent accountant, and it is therefore important that the joint venture agreement provides for an appointing authority in case the parties fail to agree on one person or firm. The appointed independent accountant will establish the price at which the prospected seller must sell and the anticipated buyer must acquire. The mechanism might contain instructions as regards the valuation method (but in many cases, it is best not to include such instructions).

[1]           This mechanism matches the auction principle developed by Nobel Prize winner William Vickrey.