Lifecycle of a Business – 10 tips when joint ventures go wrong
Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…
10 tips when joint ventures go wrong
Parties often enter into joint venture (JV) arrangements with a sense of excitement and enthusiasm; the parties seem a perfect match, the individuals involved get on well together and the market looks promising: “Yes, we’ll put in place a basic shareholders’ agreement but there’s really no need; it’ll just be filed somewhere and never looked at again.” As lawyers, we really hope that’s the case too, but situations can and do change.
So, what can you do if the relationship breaks down or your JV partner is in breach?
(This article assumes that the JV entity is an English company and as such, refers to shares, shareholders’ agreements and so on, but the points are applicable to other JV arrangements too.)
1. What’s the problem?
Decide what the actual issue is (of course, there could be more than one). This may be straightforward (for example, your JV partner had a contractual obligation to acquire a licence and hasn’t done so) or it could be more complex, but, once you’re clear as to the main problem(s), you can then focus on how to deal with them.
2. Call on your legal advisors
Calling your legal advisors may be seen as a last resort, particularly in a dispute situation, but getting them involved early on can save time and money in the long-run. Not only will they be able to review the documents and let you know your options, but they may have other suggestions as to how to resolve, or deal with, the issue. Involving lawyers can defuse the emotion from the situation and focus everyone’s minds.
3. Does the shareholders’ agreement cover the problem?
Once you’ve decided what the actual issue is (see point 1), you should look at the shareholders’ agreement and see if it covers the problem. If your JV partner has failed to fulfil one of its material obligations, it will be in breach of contract and the shareholders’ agreement should provide for what happens in this situation.
While parties are often eager to get started with their new venture, it’s vital to put in place a comprehensive shareholders’ agreement as early in the arrangement as possible, precisely for this type of situation.
The agreement should set out the contractual relationship between the parties, including specifying each party’s obligations towards the JV and each other, how decisions will be made and the steps to take if a party wants to walk away, the parties are in dispute or the JV is to be terminated. Don’t be tempted to skip over these provisions when the shareholders’ agreement is being negotiated; it’s much easier to agree the process when the parties are amicable than when the relationship is breaking down.
4. Do you have any other remedies?
In addition to the terms of the shareholders’ agreement, you may have other legal remedies. If your JV partner is in breach of the shareholders’ agreement, you may have a breach of contract claim against them. If successful, this will usually result in the defaulting party having to pay damages to the non-defaulting party, but other remedies can include an injunction (which prohibits the defaulting party from continuing in its default; useful for example, if the party has broken its confidentiality obligations) or specific performance (which forces the other party to meet its contractual obligations; for example, where a party is obliged to obtain a third party consent and hasn’t done so).
There may be other claims available to you as well, including misrepresentation (where one party makes a false representation to you which induces you to act in a certain way) or claims for breaches of intellectual property.
Your legal advisors will be able to help here (see point 2).
5. Funding arrangements
Bear in mind the funding arrangements. If your JV partner provides some or all of the finance for the JV, what will happen to this if they dispose of their shareholding?
You also need to consider the terms of any third party funding in place. Having one JV partner leave the arrangement may, for example, be an event of default, although depending on the circumstances, you may be able to come to some arrangement with the funder.
6. Do you want to continue with the JV arrangement?
The answer to this is likely to depend on the situation. If, for example, one of the parties is in financial difficulties and is unable to contribute its share of the funding, but it also contributes know how and the relationship between you is still good, you may want to continue with the current JV arrangement and come to some agreement as to how to cover the other party’s funding obligations. However, if, say, the parties fundamentally disagree as to the future direction the JV business should take, it may be time to call it a day.
7. Selling your interest
Typically, the shareholders’ agreement (or the JV company’s articles of association) will set out the process if one party wants to sell their interest.
At the very least, parties are likely to want a pre-emption right (a right of first refusal) to purchase the other party’s shares before they’re sold to a third party, but options are likely to depend on the parties’ relationship and their role within the JV. For example, a minority shareholder might not want to be forced into accepting a new majority shareholder so may insist on being able to sell their shareholding to any third party purchaser that the majority shareholder wants to sell to (a tag along right). Conversely, third party purchasers are unlikely to want to have to deal with a minority shareholder and so a majority shareholder might insist on having a drag along right, where they can force the minority shareholder to sell to any third party purchaser. Other sale mechanisms are likely to be included where the JV parties have an equal interest in the JV.
8. Forcing your JV partner to sell its interest
The shareholders’ agreement may include situations in which one party is forced to dispose of their interest, often when that party is in material breach of the shareholders’ agreement. A process will usually be set out, including how the shares will be valued. Bear in mind however, that the provisions may provide that you have to acquire the shares of a defaulting party, failing which the JV company has to be wound up.
9. Keep open the dialogue
Ideally, continue talking with the other JV partner. Maintaining the relationship and talking about the dispute or issue causing the problem may lead to a resolution. If the problem boils down to a clash of personalities, the JV parties may be able to bring in new personnel to temper the situation. If the issue relates to a breach by one party, there may be a reasonable explanation behind the party’s actions.
Keeping the dialogue open, even when the JV arrangement is at an end, can ultimately reduce the amount of stress, number of man-hours and the amount of legal fees incurred in resolving the situation.
10. Maintain records
Keep a record of discussions held and emails sent between the JV parties. Not only can these be referred to at a later date to jog peoples’ memories or be used as evidence, they can also help your legal advisors to understand the situation and history.
The main takeaway from the above is to ensure that you have a detailed shareholders’ agreement in place from the outset of the JV arrangement. (If the JV entity is a limited liability partnership, an LLP agreement will be used instead. Where there is no corporate entity, the parties should still enter into a collaboration agreement or similar.)
Don’t shy away from discussing what will happen if the JV doesn’t work out; although contracts can’t cater for every eventuality, having a written process in place in case the relationship sours will make resolving the issue much more straightforward.
If you wish to discuss any of the above in more detail or think we may be able to help, please contact any member of our friendly Corporate team.
Disclaimer
This note reflects the law as at 14 May 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
