Whether you are a company looking to have greater access to a foreign market or an entity that would like to collaborate with another company on a product or service, a joint venture agreement is a great tool to utilize. A joint venture agreement may be beneficial to both parties involved in the agreement. However, the initial excitement or financial benefits of the partnership may quickly dissipate. Below are some of the most common reasons why a joint venture agreement may fall apart and key issues to consider before finalizing this termination.
Why May a Joint Venture Agreement Fall Apart
In many cases, a joint venture agreement will break apart because one or both companies break the agreement. Furthermore, because this is such a common occurrence among joint venture agreement, most contracts for this type of partnership will have a list of scenarios that defines what actions break the contract. Common things that lead to a contract breakup include: insolvency of a party, material breaches, change in company control, or one party tries to transfer or act in the interest of the other that is outside of the scope of the joint venture agreement.
Additionally, most joint venture agreements have a set timeframe that once passed, will automatically end the partnership. Thus, once the timeframe of the agreement passes, the partnership will immediately break apart. In many cases, if both parties want to continue on with the partnership, they can easily extend the length of the agreement.
Finally, the parties engaged in a joint venture agreement may disagree on certain aspects of the agreement and thus experience a deadlock in daily operations. If deadlock occurs that does not seem like it will end, it may make more sense for the parties to terminate the agreement. By terminating the agreement, both parties can seek out new partners and focus on a different business venture.
Key Considerations when Terminating a Joint Venture
There is a myriad of issues that both parties must consider before terminating a joint venture agreement. Whether both parties are leaving the business venture or if only one party wants to leave the agreement, below is a list of some of the most important things to consider before terminating a joint venture agreement.
Change of Control
In most cases, the joint venture will have additional outside contracts with suppliers and other commercial entities. Furthermore, the contracts between the joint venture and outside entity will commonly state that if one of the members of the joint venture leaves or is bought by another party, the supplier or commercial entity can terminate the contract. When looking to terminate a joint venture, both companies must identify contracts of this nature and mitigate these issues. Additionally, when creating these additional contracts the joint venture should look to state that if one party assumes full control of a business venture, the other commercial partners cannot terminate the contract.
Risk Profile
When one party leaves a joint venture agreement, the other party may desire to continue working on the project. However, if this occurs, the party that assumes full control must understand that they are taking on double the risk. Thus, if possible, the companies should de-risk the venture or seek a new partner to keep the risk profile manageable.
Experience
Another issue to consider is that the reason entities create a joint venture is that both parties have a specialty. Furthermore, when these specialties are combined, they can be financially beneficial for both parties. Thus, when one party wants to leave a partnership, yet the other party wants to continue with the venture, it is imperative that the staying party ensures that the venture can successfully continue even when losing one party’s experience. Certain joint venture agreements such as clothing brands may not be able to continue if one party leaves. However, if a business created a joint venture to gain access to a market, they can get another local partner.
Financial Considerations
When one party leaves a joint venture, they must ensure that the other party secures funding to buy them out. If the leaving party does not do this, they could stop receiving income from the joint venture. Additionally, they would also likely never receive their buy out payment.
On-Going Funding
Additionally, the party that leaves the joint venture agreement may have been the entity that secured the initial funding. Thus, the party continuing to operate needs to ensure that they fill the funding gap left by their partner.
Assets
Whether the joint venture purchased assets or uses intellectual property together, the party that continues to operate must figure out if they can operate without these assets or if they can buy out the leaving company. Another option is that the party continuing to operate may create a lease agreement with the existing company. Furthermore, if both companies terminate the venture, they must decide how to split the assets that the joint venture acquired.
Staff
When parties enter a joint venture agreement, they will likely involve their staff in the partnership. Thus, when an entity wants to leave, the roles that its staff had must be filled or risk being under-resourced.
Tax Implications
Understanding the tax implications of terminating a joint venture is one of the most important things businesses must consider. Aside from changing the corporate structure of the joint venture if only one party wants to leave the agreement, if both parties want to leave, they will have to pay the costs associated with winding up the company. Additionally, if one party plans on selling their shares to an outside business, taxes apply to this transaction. Finally, other taxes may apply depending on the equipment and circumstances involved in the sale or closure of the venture.
Contact Our DC Law Office for More Information
Finally, for more on what to do when a joint venture falls apart, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding business law, check out our blog.