The Importance of Planning Joint Venture Exit Strategies

by Bilzin Sumberg Baena Price & Axelrod LLP
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With the Miami real estate market making a resurgence, there is a new rush for companies to come together in a joint venture to acquire real estate and develop projects.  With the excitement of a new deal, the joint venture partners often do not want to discuss what happens if the project or the joint venture do not go as planned, and it is easy for the joint venture partners to overlook planning for future deadlocks and exit strategies.  A recent Delaware case illustrates the pitfalls of not addressing deadlocks and exit strategies in the joint venture agreement and allowing a judge to make business decisions.

In the recent Delaware case, In re Interstate General Media Holdings, the parties formed a joint venture to acquire the Philadelphia Inquirer, the Philadelphia Daily News and related assets.  Less than two years after forming the joint venture, the two main joint venture partners were deadlocked on all decisions related to the joint venture, but the only method for resolving deadlocks in the joint venture agreement was judicial dissolution.  As the case illustrates, there are several problems with judicial dissolution.  First, judicial dissolution is a lengthy, time consuming and expensive process.  During the judicial dissolution, the joint venture is left without any direction, damaging its value.  Finally, judicial dissolution puts business decisions in the hands of judges.  In this case, the limited liability company agreement was silent about the best way to dissolve and liquidate the joint venture, so this critical business decision was left to the judge.

Instead of having a judge make the critical business decision about the best way to liquidate or to resolve a deadlock situation in a joint venture, the joint venture partners can agree on the method at the outset.  The main method for resolving deadlocks in a joint venture is with a buy-sell provision.  Buy-sell provisions allow for joint venture partners to resolve a dispute or deadlock by having one joint venture partner buyout the other joint venture partner through an agreed upon process.  While there are many issues to consider when drafting a buy-sell provision, buy-sell provisions provide a streamlined process for resolving disputes and exiting a joint venture.

For various reasons, joint venture often do not go as planned.  Before entering into a joint venture, the parties should plan for potential problems and how to resolve them. Although this will require some difficult discussions and negotiation as part of entering into the joint venture, in the long run this can save everybody time and money.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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