Joint Venture Exit Clauses: From Gamble To Control

• Published date: 28 February 2023
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Schoenherr Attorneys at Law
• Author: Mr Bojan Bre'an and 'ana 'abnikar

At the outset, a joint venture (JV) is accompanied by handshakes, a meeting of minds and a great business strategy. But in addition to the idea of pursuing a new business goal together and pooling resources to share the profits, it is of salient importance to think one step ahead and include an exit strategy in the JV agreement.

When doing business together many unexpected changes can occur and the parties may find that their strategic interests have diverged. When the parties cannot reach a consensus on important issues, they may find themselves in a deadlock. This can disrupt the operations of a JV and hurt the value of the business. Finding an ex-post solution can be a nightmare resulting in a delayed exit and high costs.

Breaking up is hard to do: achieving the best exit strategy for JV parties

There may be other reasons for a party to seek an exit from a JV, too. An orderly exit may be planned from the outset or simply a desired option, when a good opportunity to sell the share presents itself. Typically, breaches of the JV documentation by a party may also be sanctioned with exit or exclusion rights. To avoid inefficiencies, careful attention should be paid to the drafting of exit clauses in the JV agreement.

Exit clauses are mechanisms that allow the parties to protect their interests when one of the reasons to exit a JV arises. If drafted correctly, they can provide a party with an elegant and equitable solution to exit a JV by disposing its shares or to take full control of it by acquiring the shares of the other party. Many different exit clauses exist and can be combined to achieve an exit strategy best tailored to the party's interests.

"To avoid inefficiencies, careful attention should be paid to the drafting of exit clauses in the JV agreement."

Typical exit clauses

The most frequently used exit clauses are call and put options. They give the beneficiary a right to either sell its shares (put option) or buy the shares of the other party (call option). These clauses may be tailored in a number of ways, especially regarding the calculation of the option price and the time period when the exit may be triggered. They can be used to resolve deadlocks, breaches or planned exits.

Another type of exit clause addresses a potential sale of the JV. In JVs with a majority/minority shareholder structure, the parties typically agree on a...