JV agreements usually contain a 'deadlock' resolution mechanism for where the partners are unable to come to an agreement. This is usually mediation, but can be arbitration. In normal circumstances, a fall-back provision of 'status quo' will usually operate during a deadlock. However, this provision may be counterproductive given the harsh economic realties of the pandemic.
In response to the crisis, we have seen some JVs creating revised operational structures using working groups and committees to streamline the decision process rather than following existing deadlock resolution mechanisms.
JV partners must also be alert to the possibility of a partner triggering a forced buy-out option during an ongoing stalemate. Instances have occurred where deadlocks have been engineered, enabling one of the partners to potentially acquire an additional stake in the JV at a time when the value of shares and assets has plummeted. Where buy-out becomes a genuine option, the partners will have to agree on the valuation of the JV or engage a third party appraiser to do so.
The exiting partner must establish its obligations in relation to guarantees, security, funding commitments, loan arrangements, licences and other intellectual property issues which continue to exist after the exit.
Dealing with default
Partners should also be aware of the risk of inadvertently triggering a default under the JV agreement on insolvency grounds, especially when partners are part of larger corporate groups. More often than not, the definition of insolvency of a JV partner includes where a group company is unable to service its debt or has entered into negotiations with its creditors.
JV partners should make a point of reviewing the definition of insolvency in their agreement, in order to give a currently solvent partner the time and option of pulling out from the JV in advance of any actual insolvency, or to establish control of the JV's interests and assets through by initiating a transfer. This may also help in reducing the risk of the JV's assets becoming part of any insolvency proceedings. Some governments have suspended the initiation of fresh insolvency proceedings for a certain period of time, in order to shield otherwise viable companies impacted by the pandemic.
Defaults can be triggered by all sorts of breaches of JV agreements including failure to make a capital contribution or any advance, assignment or sale for the benefit of creditors or otherwise, and any legal action undertaken by creditors. The JV partner is usually entitled to a 'cure' period in which to remedy the default, although this period is likely to be inadequate during the current pandemic.
Consequences of default vary from triggering cross-default, winding up the JV and industry-specific consequences. It may also lead to the trigger of a call-in option, allowing the non-defaulting JV partner to purchase the shares of the defaulting partner at a discount; or a put-option requiring the defaulting JV partner to buy the non-defaulting partner's share at fair market value or higher.