By Matt Clark, Chief Executive Officer, Cardium Law
Joint venture partnerships face unique challenges in tough economic times, particularly concerning liquidity and project timelines.
If one party in the JV is potentially facing financial distress, there’s a mismatch between his or her desire for an early exit and the opposite number’s commitment to maximising returns.
It’s a similar story when unexpected circumstances arise for one or more JV partners.
Adjudication proceedings become more common as joint venture partners grapple with diverging objectives and financial pressures.
Good legal advice is essential if disputes can’t be resolved internally but it’s better to have consulted a business lawyer at the outset of the partnership so that the agreement is fully fit for purpose. That can help to avoid the worst case scenario if something happens to upset the partnership
Let’s break down this situation and explore some potential strategies to address the mismatch between stakeholders who want to exit the JV early and those who wish to remain invested for the full return.
1. Communication and Transparency
Open communication among JV partners is crucial. Encourage regular discussions to assess the financial health of the venture and address any concerns or challenges proactively. Transparency about the JV’s performance, cash flow projections, and potential risks can help align expectations and mitigate surprises.
2. Flexible Exit Options
Consider implementing flexible exit options within the JV agreement to accommodate stakeholders facing financial distress or urgent liquidity needs. This could include provisions for early buyouts, partial exits, or structured repayment schedules for distressed partners. By providing multiple exit pathways, you empower stakeholders to make decisions based on their individual circumstances without disrupting the overall JV operation.
3. Capital Recycling
Explore opportunities for capital recycling within the JV to facilitate early exits for distressed partners. This could involve selling off non-core assets or refinancing existing investments to generate liquidity for stakeholders looking to exit. By strategically reallocating capital, you can optimize the JV’s portfolio and address the liquidity needs of individual partners.
4. Secondary Market Transactions
Evaluate the feasibility of secondary market transactions to facilitate early exits for stakeholders. This involves selling ownership stakes in the JV to third-party investors or specialized secondary market platforms. While secondary market transactions may incur transaction costs and require regulatory considerations, they offer an alternative liquidity option for partners seeking to exit the JV prematurely.
5. Alignment Incentives
Align incentives to encourage long-term commitment and discourage premature exits. This could involve structuring performance-based incentives tied to the achievement of strategic milestones or financial targets. By rewarding stakeholders for staying invested and contributing to the JV’s success over the long term, you foster a culture of alignment and collaboration among partners.
6. Dispute Resolution Mechanisms
Establish clear dispute resolution mechanisms within the JV agreement to address conflicts arising from diverging exit preferences. This could include arbitration clauses, mediation procedures, or designated governance bodies tasked with resolving disputes impartially and efficiently. By providing a structured framework for conflict resolution, you minimize the risk of prolonged disputes derailing the JV’s operations.
Summing Up
To sum up, addressing the mismatch between stakeholders’ exit preferences in a joint venture requires a combination of proactive communication, flexible exit options and alignment incentives.
Good legal advice is essential in setting up flexible JV agreements, and if disputes can’t be resolved between the partners themselves.
The best way to avoid such disputes is by fostering transparency, flexibility and collaboration. That way, you have the best chance of navigating challenging situations effectively and preserving the long-term value of the JV for all parties involved.
About the Author
Matt Clark is CEO of London-based international business and property litigation specialist Cardium Law.