Structuring joint ventures and minority investments to improve their performance

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One of the issues that has always provided complexity and challenge is in the structuring of partial deals, whether they be joint ventures, minority investments.
It's very easy when you have full control and you can cram down the brand or the culture or whatever the area is.
But what if there is a partial position?
Much more complex, and we're certainly grateful to have this esteemed panel help us think through some of the really current issues and best practice in structuring joint ventures and minority investments, and pleased to have George Casey leading this discussion.
So take it away, George.
Thank you.
Good afternoon.
We are very happy to be here.
Maybe a quick introduction.
So we have a panel that actually represents a number of different industries, right?
So hopefully we'll draw on experiences in different industries on joint ventures and minority investments.
Andrew Gratz is from Lyondell Bissell, based in Houston, with a lot of experience in industrials, chemicals specifically, M&A and joint ventures in particular.
Darren Besson is based here in San Francisco, the general counsel of CBS Interactive.
So coming from the media, but as he would say, there is no true media without technology company.
So he will draw on his experience in that industry.
And Jako Sulander is head of legal M&A at Nokia, currently based in New York until two years ago was based in Espoo, Finland.
So bringing his experience on the technology side and also internationally.
So with that, maybe we'll quickly go into, in 50 minutes, talk about joint ventures.
We can spend an entire day or a week talking about joint ventures.
Maybe first, the four big themes that we were thinking we will cover, but we are happy to answer questions outside of those themes as well.
We'll start with the big picture, right?
There is a lot of discussion as to what joint venture is.
And a lot of people put a lot of different things into what actually joint venture or minority investment is.
Because at the end of the day, it's actually one of the most, one of the broadest terms in M&A that probably exists.
Then we'll talk about some of the specifics, like governance, right?
How do you structure governance?
We'll talk about relationship between shareholders and the joint venture.
And then we'll talk about exits, termination.
We'll try to pack it all within the 50 minutes that we have.
So maybe starting with the first kind of big theme and the big picture, what are joint ventures and why do people do them?
And Andy, if I can ask you, sort of what's the strategic imperative?
That question, I think, is key for each company.
What is the strategic imperative?
Why do it in the first place?
There are a few standard reasons why you do a joint venture.
Maybe there are, you want access to sort of resources or sort of markets you otherwise wouldn't have access to.
You limited up front investment, risk mitigation, to sort of dip your toes in the waters for whatever reason.
And you're not fully ready financially, operationally, whatever, to go full throttle into a greenfield investment.
But the key for the first starting point is to figure out the why.
Because until you know the why, you can't effectively develop the how.
And so throughout this hour, we're gonna talk about the different ways joint ventures can be developed, whether it's simple collaboration, forming a new entity.
There are a variety of reasons, ways to form a joint venture.
But before you get to that point, and before you look at all the levers you can push and pull to get to the joint venture, you gotta figure out why.
And so those are a few of the reasons to proceed with a JV, if it makes sense, to advance your strategy.
And would you consider, for an industrial company like Landell Bissell Chemicals Company, would you pursue, would the company pursue joint venture more as a way to get into new market, get into new technologies?
Develop your business in some parts of the world that you're less familiar with?
What is the question to the why answer for Landell Bissell?
Yes.
All of the above.
We, as a company, want to look at different markets.
And for regulatory reasons, or maybe we just have never really operated in those countries in the past.
We want to partner familiar with those markets.
Maybe a potential joint venture partner can, has a plant, or can provide certain feedstocks that we can use to develop our products.
Maybe we're just looking for certain channels to market that we are, that are not very developed, or we don't have a certain experience with.
And sometimes we're just looking for IP.
In fact, historically, we've been on the other side of that.
Companies will come to us for our intellectual property, and we've formed joint ventures with them.
Here, we'll license you our IP, and then whatever is produced from that intellectual property, we will share together via a joint venture.
So all the reasons you just mentioned, George, we are actively looking at, either in the past or going forward.
Thank you, and in kind of media slash media technology, joint ventures versus minority investments, how would you look?
Why would CBS Interactive look at joint ventures, minority investments?
What are you trying to achieve?
And again, similar to what Andy was saying, I'm now in a business that there's seven companies within half a mile of here who are trying to put me out of business tomorrow.
When you're in media, I think since I've been there for interactive for eight years, TV's been reinvented six times.
Thankfully, none of them have truly reinvented it yet, and I still have a job.
But there's new forms of distribution, there's new forms of content, there's new devices you can view it on.
And we have to try to figure all of that out at the exact same time.
TV went from an industry that didn't change for 70 years.
Effectively, it might have gotten into color and the TV's got bigger, but the form of content and the time slots that was in it didn't change, and the way it was monetized didn't change.
And that's over, and we have to figure that out.
Makes for, again, an exciting gig as a lawyer and a corporate development person, but it also makes it that somebody's trying to put you out of business tomorrow.
So we use it for all of the things, particularly of being a strong minority investor in something, in a brand new technology that we are not an R&D company.
We do a lot of R&D, but there are some things you can't try to figure everything out on your own.
So we will joint venture with people on different ways of distributing content, as in getting it from when it's being made to the device.
We'll partner with people on new forms of content, should there be six minute episodes of things.
And when you have different forms of distribution like we do now, and not just TV, but all access and streaming and OTT and DTC, and I can give you 32 other anagrams, that you have to try these things and try to figure out where your company is going.
And joint ventures or minority investments are a great way to do that without being over committed, and also without necessarily having to put your brand name when they're talking about before on something right away, because most of them are going to fail.
We live in a world where a lot of these new inventions, some will take, most will not, but you've got to try and figure that out and be one step ahead of people.
And as much as JVs, minority investments are extremely difficult and complicated and dangerous, because they do fail, they are a great way to experiment and try new things.
Yeah, thank you, thank you, Dan.
Now, when we talk about joint ventures, right, people often mean a physical transfer of assets, creation of a new legal structure, and that's how people often talk about joint ventures.
Now, looking at kind of broader term, right, joint venture may mean none of the legal structures, not transfer of assets, but partnership, right?
In this part of the world, partnerships is actually one of those forms of developing your business that's quite popular.
Jaco, do you want to talk about virtual joint ventures, so to say, when you actually, you are not co-owning, you don't have an equity interest in a particular legal set of assets in legal entities and legal group, but you are effectively cooperating through contractual arrangements.
Yeah, sure.
I think one of the things that people too easily assume, and when they talk about joint ventures, is exactly that thing.
That you say, well, joint venture means this.
We need to set up a new structure.
We have a standalone entity structure, and we're going to run the business through it.
I think it's super important to stop at that point and actually break it down into pieces and figure out.
Well, a couple of the things that you want to look at is, well, what's the balance sheet going to look like?
Is this actually going to be a standalone entity, or is it going to be contracting things from the parents, if you have a 50-50 joint venture, for example?
What's the ultimate end game for it?
Is it a situation where it is a totally separate business?
What happens if things go wrong?
What ultimately is the goal?
Are you going to plan to IPO it, or are you going to plan to sell it?
Are you going to just plan to kind of run it as it is and figure out through some exit mechanism what happens to it?
Or does it have a more specific purpose for entering into the new markets, maybe it's a collaboration on a new product or something like that, where I've actually found that it is in most cases easier and simpler and far more appropriate to enter into, let's say, reseller agreements, joint development agreements, IP licenses and such, rather than create a particularly complicated structure with its own sort of tax issues and IT systems and what have you.
So, I would just say that you can collaborate in so many different ways that it would always be important not to go too far into thinking when you hear about, okay, we should do a joint venture with this and this company, that this is the form of it, the corporate form is the right form for it, but just try and break it into pieces and see how the business model works and whether a, let's say, you're going into a new market with your customer, you want to customize some products, maybe for that market, but you're probably only going to sell those products.
And maybe you, as the industrial company that is going into that market, is providing most of the technology.
There isn't necessarily any need to do anything other than a joint development R&D agreement, reseller, some licenses going back and forth, and then you don't have to hire any additional headcount or anything like that.
And you get on with life and you don't have a structure that you have to, at some point, wind down.
And that emphasizes the important question that you guys all mentioned, that at the outset, when the business teams start talking about a joint venture, sitting down and saying why we are doing it, and is there an easier, more straightforward way to achieve the business objective as compared to really creating a lot of work and spending a lot of money on executing something that's much more voluminous and much heavier.
Yeah, we've had these multiple times where we've converted structures that we're going into the sort of corporate joint venture routes into contractual, if you want to call them virtual joint ventures, but contractual arrangements.
Usually also easier than to wind down if they don't work out, rather than having some legal entity float around with its own headcount.
Right, right.
Joint venture is kind of an abused term in that people, everybody thinks they know what it is.
And it's really anything you want it to be.
It's truly anything.
And it's kind of when people say, it's in the cloud.
The cloud can mean 700 different things to every different person in this room.
And so could a joint venture.
So it's, as Andy was saying, it's truly understanding what are you really trying to accomplish, and then you get to invent the structure or contracts or whatever it is to fit that.
But it's like everybody thinks, as soon as you say joint venture, everybody thinks they're all talking about the same thing.
And usually everybody's talking about something completely different.
About something completely different.
Yeah, and that one thing that I found helpful is actually to really focus on what are the assets of it going to be.
And if you kind of struggle to figure out if it actually will have any of its own assets, then it probably isn't the right structure.
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So switching to sort of our next topic, right?
One of the biggest differences between joint ventures and other M&A transactions, and William mentioned some of it at the outset, is that in an M&A transaction, typically when you buy or sell something, okay, you're closed and everybody goes home.
Somebody goes with assets, somebody goes with money, and you're done.
Joint venture, in a way, you get to close and you get the deal done, quote unquote, but then you need to live together for the foreseeable future.
Hopefully for the foreseeable future, because then it at least means that the joint venture is successful.
So governance, right?
So one of the key elements of what people negotiate when they set up joint ventures is, okay, how we're going to live together, right?
How we're going to make decisions together, whether it's a 50-50 joint venture or it's a majority-minority joint venture, you need to figure out what the rules of the road, so to say, are going to be.
And can you talk about, people often start with sort of, who should have the main decision power?
In a 50-50 joint venture, you have shareholders, then shareholders nominate directors.
In a way, it shouldn't really matter, right, whether the decision is made by the board or the decision is made by shareholders, or does it?
It does, for a variety of reasons.
If the shareholders appoint a board, whether Delaware law or other jurisdictions law, those directors now are torn.
Are their obligations toward the joint venture, which they now direct as directors or as management, or is their loyalty to the mothership, whichever their employer who assigned them, who seconded them to the company?
And so managing those fiduciary duties and asking your employees to assume those fiduciary duties, and in certain jurisdictions, if the JV gets into trouble, they personally are liable.
And so that is a significant responsibility to ask an employee to assume.
And so there are certain companies that ask their best and brightest to take on that responsibility, because it is so heavy.
And there are some companies that they don't, I'll say, look, they park maybe employees who are not thriving at the JV level.
Well, I would strongly encourage you, your best and brightest should be taking on those responsibilities, because they are significant, especially in jurisdictions where there is personal liability.
The way to sometimes avoid those issues is to have a list of reserve matters or a list of issues that go beyond the board, that go to the actual partners.
Therefore, you're not asking management to have conflicted loyalties.
Now, the problem with that suggestion is, do you want every single decision going up to the shareholder, shareholder's respective board, it'll bring the JV's business to a screeching halt.
So you've got to find what matters belong at the management level, while respecting the fiduciary duty issues, and what matters go to the shareholder level.
I would suggest, though, remember why you did it in the first place.
If one shareholder is bringing operational expertise, and the other shareholder is bringing financial expertise, well, the shareholder bringing financial expertise shouldn't be operating the company, and vice versa.
And so, remember why you did it to JV in the first place, and allocate your human resources accordingly.
And that's a good segue, Andy, into, so in a way, when we look at the governance, the typical corporate governance is you have shareholder level decisions.
You have the board that's elected by the shareholders, and the board that's making decisions, and then day-to-day operations by the management.
Darren, do you want to talk about management?
So what does management mean in the context of a joint venture, whether it's 50-50, or you have a controlling shareholder?
How the two shareholders, the people who are structuring joint venture, should think about management and the day-to-day operations?
And again, the answer is anything you want it to be, because again, we're talking about JVs.
One of the biggest issues about it is that, again, there's no one set of rules.
It's kind of like being, JVs are parenting.
A merger, once you do a merger, one person gets to make the decision in the end.
When you're doing a joint venture, you're parenting together.
And so, just like parenting advice, it's utterly useless until when you're in your individual situation.
You can listen to other people, but you have to figure out what works in that situation.
So take everything we say with a grain of salt, because every JV really is that specific.
But when it comes to managing, you have to let the people who are running it run it.
And if you try to have too much of the parents controlling it, I think you're going to end up, again, in most situations, in trouble.
You can have secondees, but they have to be permanent.
You have to name a management team and let them do their day-to-day job.
You don't have to necessarily let them do everything.
You need a blueprint that sets out what people can do.
But the day-to-day responsibility really has to sit with the JV.
You can't, as Andy was saying, they can't be coming back every ten seconds and saying, can we do this, what about this, can we do this?
It's not going to work.
You've got to find the right kind of people.
And they can't be secondees that are there for three months.
You've got to let people who can learn the business you're trying to develop, whatever the JV is supposed to do in its structure, and who can get that expertise and then run with it for a while.
It might be a year-long or multi-year-long thing and they're going to come back eventually, that's fine.
But people who try to do these quick rotating, my personal run-up for six months, then your personal run-up for six months, then we'll put somebody else in.
You're, in most instances, destining yourself to failure.
Let people, whoever you find them, come in and learn the business and run it and make the day-to-day operating decisions.
And come up with your boundaries for what they need to ask you ahead of time so everybody knows what the rules are.
And this emphasizes actually one of the points that academic research has found why some joint ventures live for a long time and some joint ventures fail.
And one of the things that the academic research has found is that if the joint venture actually develops its own culture, has its own management, has enough independence to run its business, obviously, with full responsibility to the shareholders, typically two shareholders that own it, then that joint venture has a better chance of surviving longer term.
And we were working on one shareholder buying another one of a joint venture that was 70 years old, 7-0, right?
So one of the most successful and long-serving joint ventures out there.
And one of the key reasons why it was so successful and lived for 70 years as a joint venture was because it was standalone.
It has its own culture.
It has its own management, notwithstanding that it was 50-50.
By the way, as a little aside, the interesting thing was when we started working on the actual buyout.
We pulled out in 1947, I believe it was, so it's longer than even what I said, joint venture agreement.
It was about ten pages long, right?
So people were not even trying to prescribe how the joint venture will operate going forward.
Switching from 50-50 to more of majority-minority, because these are even more complex to some extent.
Well, more and less complex, right?
50-50 is complex because nobody at the shareholder level has any real control.
Majority-minority, you actually have a controlling shareholder.
But then, what is a minority investment and what the minority investor should focus on?
Yakov, can you talk about minority investments and your experience there?
Yes, I would go just briefly back to what you were saying also, just revisiting what's the right structure for you.
And if you can't give the JV the independence that it would need as an independent entity, then I think there's another indicator that perhaps you just should set up some kind of a contractual structure instead.
But on minority investments, I guess you're gonna break them into two types of investments, you do strategic or purely financial.
And the protections that you will want will, of course, depend on which one of the buckets you fall in.
I mean, you're gonna be probably served with a fairly standard set of minority shareholder protections that will be all about the protection of your financial investments within certain parameters.
So you can kind of play with them, you can add a couple of them, and you can play with some of the thresholds of how much indebtedness they can incur.
And throw in a couple of amendments to how you define the materiality thresholds and what have you, but that's probably it.
And I think we get to the sort of drags and tags and that kind of stuff a little later on.
But then on, so if you're making a minority investment for strategic purposes, I think they're gonna serve you with the same set of protections, but you shouldn't obviously let that restrict you.
You'll get back your standard comment, well, this is not market practice.
You shouldn't have this and this type of a protection.
But if you're trying to basically get some strategic value out of it, you need to make sure that you at least cover that investment that you've made in a way that saves your face if it all goes wrong, if you haven't had any type of contracts.
Obviously, as a minority investor, you're not gonna be able to participate in the management of the business as such.
You can get a board seat and maybe you get some other rights.
One thing that you might wanna do if you have a particular strategic interest in, let's say, a new technology that the companies that you're investing in is developing is set up some kind of a commercial agreement under which you can perhaps get a little more control over the outcome of what comes out of it.
I'm probably going into the wrong track here, but one of the things that has sometimes worked is sort of a specific circumstance, it's not really a minority investment at all.
But it's sort of a sometimes it may be worth considering if it gets you what you need is if you have a small technology company that's providing you with something.
They have a specific product that you're buying from them and you find it interesting, but maybe they're not doing a financing round.
Maybe you don't wanna invest in them, or maybe they need money.
And you can basically do your supply agreement or whatever it is, and you can kind of try and control the strategic sort of technology element of it through that.
Maybe you prepay them so that they get money, they get funding for what they need.
And then if you can sort of sell to them, because you're now maybe their first big name investor, no, investor customer, what you're doing other than giving them this large contract that comes with a prepayment, you're also giving them some credibility through your name.
They can say, well, we've got this, and this company is a customer.
You can then try and get some warrants.
And through those warrants, you can participate in the upside, and you can figure out what the triggers are for those.
And if you have a cashless exercise and all the rest of it, it might work nicely.
I think AT&T used to do those pretty well at one point in time, and we've done them sometimes, but it's sort of a specific circumstance.
But I think I got derailed a little bit.
No, no, that's important, and it goes back to why, right?
Not only why you're doing 50-50, but why you're doing minority investment.
If it's a strategic investment, and we've seen it, and we've done it, and a number of our clients have done it, where in tech or biotech, there is a new product in development, and you are the first investor.
And if it's strategic, then you do want to have that foot in the door with minority investment, you really want to build some path towards the future potential acquisition of the company as a whole, getting exclusivity on the product that's been developed, and so on and so forth.
So the important piece of it, again, is why you are doing it.
And to add on what he said, if you're a strategic investor, and my apologies to any of my VC and PE friends in the room, but if you're a strategic investor, when you go with your term sheet of the things you need, any financial investor's going to laugh at you.
They will be completely sane to you, but what venture capitalists get as terms in a deal sheet, they are going to think you're nuts.
Don't believe them, you can often get a lot of the protections you need, because your interests are very different from a pure financial investor.
And when it comes to non-strategic investments, if you're a financial investor, be very careful as to why you're doing it.
Because very rarely do companies come to strategic investors just for money, for no reason.
They've usually gone to every VC or private equity firm in the room who has said no.
So this city, again, is littered with companies who thought they were smarter, or got in late to the VC and private equity boom, and started giving money to companies, and they don't often go so well.
So make sure you know exactly why you're giving somebody just money if it's not really strategic to you, because you better really be smarter than everybody else who didn't give them money before you.
Exactly.
And to piggyback on that, if they're coming to a strategic, they probably want some of the intangibles that you can provide.
Your name, your reputation, your stature in the industry, or in a certain community or country.
And so, by doing a joint venture, even if it's a minority investment, for the strategic, that is an inherent risk beyond the financial.
Because if you don't know the partner very well, if you don't know if they operate their assets very well, if you don't know if they're ethical, you are now attaching your name that may have taken you 100 plus years to build up to this entity.
And so you want to appreciate and appraise those risks before you proceed.
And maybe, generally, we're not planning to cover the regulatory issues here, right, but just to mention for those who are considering minority investments.
That antitrust filings may kick in much earlier than people think, in different parts of the world in particular, right?
If you're actually raising funds from non-US investors and the minority investor comes from outside of the US, CFIUS has just changed.
The legislation has been changed, was changed in August of last year, and so you don't have the same level of protection that you had before for particular companies, investors coming from some parts of the world.
So the regulatory piece, and then in some industries, we talked about biotech or some others, you need to be mindful of those regulatory requirements as well.
So switching to our third theme.
So relationship between the joint venture and the shareholders.
So the joint venture is now fully operational.
It's running its business on a day-to-day basis.
So maybe starting with just a basic question on business plan, right?
So the partners got together because they want to run the business together.
So how do people look at the business plan, Andy?
To go to Darren's point, as you're developing the LOI, you need to have the business plan.
And so before any joint venture documents, whether it's forming an entity or different types of agreements, if you're not forming a legal entity, you want to have a business plan in front of you.
And you want to at least have alignment on day one of what the business plan's going to be, because that will evolve over time.
One shareholder may take its company in one direction, and the other may take it in a different direction.
But at least on day one, you want to make sure the business plan is aligned and management is measured by how they, basically how they succeed on the metrics of what the business plan's going to be.
Because if I'm asked to be a manager of a joint venture, I want to know what success looks like.
And the only way I know what success looks like is by seeing the business plan that not only my boss, but my bosses, because they're both partners, have agreed this is what is expected of you.
And so what we do is we have an annual business plan, and we have quarterly reviews, and we always try to have full transparency between the two shareholders to ensure continued alignment.
Because what brings JVs down all the time is divergent interests, lack of communication, lack of transparency.
And then over time, you see the ships go in two different directions.
And so the business plan is the best way to ensure that doesn't happen.
So talking about divergent interests, Darren, can you talk about how shareholders may view their relationship differently going forward?
So now they're in business together, right?
But one shareholder looks at, okay, I put this amount of money or this type of assets into the joint venture, and I am done, let the joint venture run.
The other one actually wants to keep contributing, right, because the joint venture needs to grow.
How would you address those type of issues?
The one guaranteed certainty of joint ventures is that people's interests over time are going to change.
And George's 70-year example of a joint venture that was successful aside, most of the time, the reasons for going into it, one partner's shifting their focus, the main sponsor behind it is no longer there.
Things are definitely going to change.
So you need to have in the business plan the basic outline of the very minimum people are signing up for laid out clearly.
How much money are we putting in the X number of years to get it up and running?
And have it very, very definitive so that people know what they're in for.
Are people going to put in unlimited amounts for five years?
Are they going to put in specific amounts each year?
Is there a cap that you can come at all in one year or over five years, whatever it is?
But if you don't make sure that all of the partners are aligned on that front, right from the outset, if you think two years in, everybody's going to be seeing things the exact same way, you are 90% mistaken.
So have it set up of, hey, look, we are all committed for X million of dollars.
And whether you can pull up to X amount of it in the first couple years, but particularly around the finances side of it.
And the actual strategic commitment if it's not money.
What exactly is going to go in and when?
That has to be laid out very specifically or as specifically as you can in a blueprint.
And it might be more.
And let's, God bless, may it be so successful, everybody wants to put more into it and make even more money.
But if you want to give it the chance to survive, because otherwise, a year or two years, three years, somebody's view of things is going to change and they're going to be less committed.
So if you don't have it down there up front in the shareholder agreement or joint venture agreement or whatever other contracts you're using for a virtual JV, whatever it is.
If you don't have the base level of commitments laid out, you're going to be in trouble.
And that again, emphasizes the point that when you're negotiating joint venture, right?
You need to go into the level of detail like this, right?
Where will the joint venture be self-financed out of its own earnings?
No, is the answer.
No, it won't be.
Would you be required to put new money?
Would you raise it through debt?
Third party equity, how it's going to be actually operating?
And we've seen many times where seem to be two industrial companies entering into joint venture should have aligned interest, but they actually don't.
Because one, culturally and also as a business priority, they view it as something that they want to grow and contribute more funds to enable the joint venture to grow.
The other one says no, right?
And so, how do you, No, please, please.
Maybe we're going in the same place.
I appreciate your comments about the certainty of the business plan.
But what about outlining practices around reconvene to talk about terms?
Or what are the rules of the road for when interest becomes so diversion that they need to be mediated or renegotiated in some way?
What's the best practice on that?
And as George said, we could spend three days just talking about JVs, and you guys would be bored to death.
But it's truly, these things are, it sounds so easy.
Let's just do a joint venture.
And you'll put this in, we'll put this in, and we're done.
It's actually more complicated than a merger agreement.
Because you have to get into detail, or at least you should.
And sometimes you don't, and it works out great.
But these things, well over half of JVs fail.
Of the ones that don't fail, I'd bet 60 to 70% have trouble at some point that you have to try to dig your way out of.
And if you haven't laid out all of those things in a very detailed joint venture agreement or other contracts, as Jaco was talking, whatever it is, you're going to find yourself more likely than not in those troubles.
So yes to all of it.
I think we're going to talk about it, but to put a finer point on it, you should be thinking about the divorce on the way to the wedding chapel.
Because frankly, as we've all shared and many in this room can appreciate, many joint ventures fail.
Because the interests diverge over time.
And so it is one of those hopefully rare circumstances where you've got to think about what if it just doesn't work out in a few years from now.
For a variety of reasons, have we baked in enough flexibility and enough mechanisms in our agreements where one party can say, thanks but no thanks.
We're moving on.
Everybody has the highest hopes in the world.
But the people in this room who do these, it's the old maximum hope for the best, plan for the worst.
And I would say to your question about revisiting the terms and renegotiating the terms, speaking from things I've seen.
When you are negotiating the deal, any deal, right?
Whether it's an acquisition or a divestiture or a joint venture, there is momentum while you are negotiating.
And so people are willing to put the effort and actually are willing to concede things while you are negotiating.
Revisiting later is much, much harder.
Because revisiting later effectively means that something is not working.
Each of the teams need to go to their executives, say what's not working.
Taking the heat probably for explaining that.
Modifying the terms, it's opening the door into more uncertainty down the road.
But you often hear actually from the business team in particular where some of this tedium becomes really difficult, right?
And people say, you know what, why do we need to deal with this now?
Why don't we deal with it after we're done?
After we're done, maybe much harder than actually trying to do it now while you have that momentum going for you.
I'm wondering if there are any specifics though around, this would be a good way after we hit X milestone, we will have a conversation.
Because what you're saying is true about human nature, right?
People don't just openly air this is bothering me until it becomes a big issue.
But I think we can appreciate that having that hygiene around communicating and actually structuring that into how partners work together might be valuable.
So do you have specific examples around that?
I've done it many times, where you've put in that after X number of years or X milestone of revenues or product development or whatever it is.
But you will then, are we going to keep forward?
Does one person have the right to acquire the whole thing?
Do you take it to market and sell it to somebody else?
You would absolutely bake those things.
But again, this could go on for days because those milestones are very specific to the joint venture you're going into.
And if it's a truly new technology being developed, you actually would want to say that, okay, well, why don't we see a year from now where we are on this, right?
How this technology is developing, what's the market like, what competitors are doing, so you may not be able to prescribe.
So as long as people are doing it consciously as opposed to just kicking the can down the road and see kind of, we'll talk about it later because we don't want to talk about it now.
So it's a planned approach as opposed to more chaotic approach.
I think we also have to have discipline in terms of having that informal kind of relationship with maybe the most senior executives or the second most senior executives.
That you can kind of make sure that there is an avenue to discuss these things outside of the parameters of the contract so that you can kind of guide it to the right path and not necessarily go into this.
Are we supposed to meet now?
Okay, what are we supposed to talk about?
So you have a little bit of a discipline to make sure that you have a continuing conversation.
I would also encourage non-financial triggers.
If one of the partners gets into anti-corruption issues, if one of the partners is operating a plant and there's a major environmental issues.
And so beyond financial, think about going back to the, and we're sounding, maybe sounding like a broken record.
Going back to the reason why you're doing it.
If the reason why you did it no longer exists, bake that into the agreement as a trigger to revisit with your partner and determine, should we continue this venture?
And that's actually a good segue into exit and termination given that we will be running out of time.
So to our fourth topic.
So Andy, you said about discussing divorce before marriage, which is actually one of those probably key elements of the joint venture.
And very often when you start talking to people, start talking to the business team that is very focused and very excited about the new venture.
They will tell you, well, why would we be talking about exit?
We will live together for a long, long time.
So what's your view, Andy?
Yeah, I usually have a very candid conversation with my business team.
In ten years from now, how many of us in the room will be here?
I mean, people retire, people win the lottery, people move on.
And so we've got to assume that our successors may not have the same view of this venture as we do.
And so what do we do?
Well, we insert some of the triggers that many of us have worked on.
How do we, is it after ten years, we dissolve?
One party has a call right, one party has a put right.
And if we fall below a certain financial metric for four consecutive quarters, we have those rights.
If there's a liquidation event and one party wants to exit, do we have tag along, where I can tag along with you as you want to sell your interest, or drag along, that if I want to go, I'm taking you with me.
And so you want to have certain triggers and certain mechanisms in your agreements.
Where if the parties decide it no longer makes sense, without any judgment, they can move on and exit and monetize their investment.
Hopefully monetize it, or at least move on and stop the bleeding.
As a lot of joint ventures, typically, you're just stopping the bleeding.
And so it would not be unusual to say that for a set period of time, you will let the joint venture truly live and see what happens.
And the shareholders would be committed, meaning that there is a restricted period during which neither of the two shareholders, or if there are more shareholders, none of the shareholders will actually exit.
Now, all that means is that you cannot do it without somebody's consent that can be withheld, right?
So, but there is a restricted period.
Sometimes it's three years, sometimes it's five years, whatever it may be.
Darren, what happens after that?
So what are the typical mechanisms?
I guess people would want to know, do I exit, do I stay, what should I do?
What are the typical mechanisms?
And there are lots.
And again, the two most standard are right of first offer or right of first refusal.
We could have a massive debate over which of those two is better in which circumstance and why, and you could talk about game theory for two hours.
Right of first offer at least gets it out there.
The right of first refusal often acts as a lag on price.
If other people know that somebody could come in at the last minute and buy it for your dollar value, it slows things down or makes other bidders often quite nervous versus a right of first offer.
If it's good enough, you're done.
If it's not, you can take that offer to other people.
But the flip side of that is no one likes being a stalking horse and putting that number out there that is then the baseline.
So either one of those can work.
I'm a bigger fan if it's between the two shareholders.
I'm a big fan of shotgun provisions.
Name a price and the other person, this is the cut the cake in half.
One person cuts, the other person chooses.
Name your price.
But any of those types of things can work very well to at least get it started.
And then you have to decide as to whether you're also gonna take it to outside people.
Is it just the original people who invested in it for whatever reasons?
Or can it actually go to somebody else?
And so on the right of first refusal versus the right of first offer, very often the business team that's dealing with the joint venture that's actually driving it, they don't want to talk much about it.
And they may not necessarily understand the difference between right of first offer, right of first refusal.
At the end of the day, it's whether you are planning to be exiting or not.
But I think the key advice to the business team, you actually don't know.
You may be thinking that you will be staying, but you may be actually trying to exit two years, three years down the road.
I think my advice whenever people talk about right of first refusal, right of first offer, pick one, right?
Because at the end of the day, you may not know whether you stay or go and which one would benefit you.
Don't have two.
We've dealt with joint ventures where we were brought in to help deal with the exit.
And then you read the agreement and it has actually both of them.
So for the exiting partner, just imagine the nightmare, right?
First you come and you make an offer.
You negotiated with your partner, okay, it didn't happen.
You go to the market, you try to get the best price in the market, then you have to go back to your shareholder.
The nightmare for the exiting partner is enormous.
So my biggest piece of advice, don't have both, right?
Pick one, whichever one you think is better for you at the point in time, but don't have two.
We mentioned, and there are several terms that describe this particular mechanism.
But Jaco, can you talk about the shotgun provision, Texas shootout, Mexican shootout, you pick your term.
Yeah, I mean, I'm with you, and I actually quite like that shot.
So the shotgun or Texas shootout or whatever you want to call it, is basically, it's a situation of if George and I have a JV and after a restricted period, he says, I can't handle that guy anymore.
So I want out, and the provision will say that after a certain period, you can basically make an offer, so you come up with a price.
I can then say, okay, I'll sell my shares to you at that price, or if not, I've deemed to have made him the same offer, and then I have to buy him out at that price.
So I kind of like that as a sort of a fair thing.
You'd never know which side of it you want to be when you draft it.
The other one that I kind of like is where you have a, it's a little more complex because you have to bring in some external people to do valuations.
But you basically have a mechanism that after a certain period of time, somebody can trigger, or a certain event, or whatever it is.
And then you have a fair market valuation calculated, and then one of the parties can offer that or anything above it.
And then the other party can either accept or offer something that is at least x% higher, and then it goes all the way up until one or the other says, okay, I'm out.
So I like those.
We find that actually people quite often want to include them.
Among other things, people like the term, whichever term it is.
But the business teams actually like the Texas shootout or the shotgun provision.
Now, one actual story, how important it is to read the document.
There was a situation a few years ago where in a joint venture, one of the partners realized that the other partner is actually, has financial difficulties, right?
And so the partner decided, okay, you know what, I'm going to go and rely on this provision.
They didn't read the provision actually carefully, so they did not realize that this is this type of a shotgun Texas shootout provision where you put the price and the other party can choose whether to buy or sell.
And so they go with really low ball bid, very, very low ball bid.
Of course, the other one says, okay, well, that's great.
This price, buy you out, and bought out the guy who thought that was much smarter.
So cautionary note, you actually need to read what the agreement says.
I think we are out of time, William, right?
But any questions, please?
Yeah, just on the topic of exit, because obviously, as you've noted, there's a lot of sort of creative ways that you can structure that exit.
In your experience, though, at a practical level, I mean, how sort of easy is it to really disentangle that web when you're exiting a joint venture, and what are some of the challenges in actually getting out, even if you've got the best drafted provision, whether it's IP that's been created during the life of the joint venture, or anything like that?
What are some of the real pitfalls at a practical level beyond just the documentation?
That's, well, yeah.
Everything.
Again, it's the answer, again, you're talking about IP.
If you've contributed a strategic asset, and somebody else has the chance to buy that and take it from you, it can cause problems.
The IP you've created, who has licenses, does one party get it exclusively?
Do licenses go back?
You can't think of everything when you're planning the exit, so all of these issues do come up and get fought over massively.
You can try to prepare as much as you can, but there are always going to be issues that you can't.
But particularly for key things like, if you are the person contributing a strategic asset, what happens to that when this thing falls apart?
Absolutely need to think about ahead of time.
So you have to try to think five, ten years in the future as to what are the things you're going to really care about.
If the JV invents something, whoever buys it, maybe they get to keep it.
But for the things you're putting in especially, those are very, very key, because if you lose that asset, someone's going to remember it was you.
And I would distinguish here between liquidation and a true exit, right?
Liquidating, your point about how you separate those assets is much harder.
And you're effectively destroying value if you're liquidating.
Because at that point in time, it's like marriage after 20 years, people trying to fight and figure out what belongs to whom.
Whereas if you either buy out the other partner or you sell the entire thing, at least you preserve value.
And that value is for the benefit of both shareholders.
But you look at two very successful JVs out there, Hulu and Renault and Nissan, both public right now.
They've both tried to exit, Hulu tried to exit and sell it for the block, what, two or three times, never found a way that they could do it that made the JV partners happy.
And then you look at the Mitsubishi one that's out there right now that's in the press, but they're a virtual JV.
They have all the contracts that Jaco was talking about.
But again, what happens if you have to try to break it apart?
I don't know what happens to any of those car companies if they have to split that up now that they share all the manufacturing stuff, and nobody knows what will happen.
So again, it's- And they have cross-shareholding, which makes it even more complex.
Right.
Because that cross-shareholding, it's actual ownership interest in each of the companies.
So much, much harder to- The smartest lawyers in the world couldn't figure it out ahead of time, is the answer.
And we haven't really touched on dispute resolution.
But in the cases that have just been highlighted, it's mutually assured destruction.
Because you have this asset and this business that both parties have dedicated time, resources, funds, and for years.
Unraveling it is going to destroy value, a significant amount of value.
And so now if the partners are quibbling, they have a very strong incentive to get over it.
And on dispute resolution, maybe, although we are out of time, just very quickly, do you guys prefer arbitration or actually going to court?
What's the typical, how do you usually look at the dispute resolution?
We favor arbitration because we have found that arbitrators, we can get experts in the industry who appreciate all the nuances we've discussed today and all the issues.
And so usually it's we pick one, they pick one, and then the two pick an independent.
And we have been very successful with that process.
I would say usually the same thing, but it depends who you're going to business with too, because there are some people you'd rather deal with in the court system.
So it depends on who you're getting into business with.
And you get some confidentiality protection in arbitration, but you have probably faster process in court.
So it's also sort of sui generis, very specific decision in a particular type of situation.
Thank you all again.
You guys have been wonderful.