Documenting the Termination of a Joint Venture

August 2, 2016

1662While some joint ventures last for many years, the reality is that most of these types of collaborations reach an end within five to ten years after formation and the parties will need to consider the steps required for an orderly termination of the joint venture business.  Termination of the joint venture leads to liquidation and dissolution of the business entity, a process which is largely dictated by applicable law and any agreements between the parties regarding the distribution of specified assets of the joint venture.

Assuming, for illustration purposes, that the joint venture has been formed and operated as a corporation, a number of documents may need to be prepared during the dissolution and liquidation process, including a notice of intent to dissolve; notices, proxies, ballots, and resolutions for board and shareholder actions; articles of dissolution; a plan of liquidation and distribution; a notice of liquidation for publication; notices to creditors, employees, government agencies, and taxing authorities; if responsibility for the liquidation is being given to an independent trustee, a liquidating trust that appoints the trustees and lays out the rules they are to follow with respect to orderly payment of the obligations of the corporation and distribution of the remaining assets to the shareholders; transfer documents relating to sale of assets by the corporation and “in-kind” distributions of assets to the shareholders; settlement agreements with creditors; and final tax returns. Examples of many of these documents are available in Dissolution and Liquidation of Corporations (§§ 305:1 et seq.) in Business Transactions Solution on Westlaw.

One of the most important documents will be the dissolution agreement.  While the procedures for termination and dissolution of a joint venture are generally laid out in the original partnership or shareholders’ agreement, it generally makes sense to enter into a separate agreement at the time that the joint venture is actually terminated to insure that responsibility for all of the steps in the dissolution process is allocated. Moreover, circumstances may dictate that the original procedures must be modified in light of events occurring during the relationship.  At a minimum, a dissolution agreement should cover liabilities during liquidation, the rights and powers of the parties during the liquidation process, allocation of the final liabilities of the joint venture and procedures for sale or transfer of joint venture assets and liquidating distributions to creditors and the parties themselves.

Gutterman WLEC bannerSeparate from the dissolution agreement, or perhaps integrated therein, the parties should memorialize their specific understanding regarding the termination of the joint venture and the ongoing rights and obligations of the parties with respect to one another and the assets and business relationships associated with the activities of the joint venture.  In a small number of cases, the parties will agree to form a joint venture and then fail to move forward with the actual formation and organization of the joint venture entity.  In that situation, the parties should nonetheless formally terminate any prior agreements relating to the proposed joint venture and establish procedures for unwinding any informal activities that may have started before the decision was made to abort the project.  If appropriate, such an agreement might also cover determination and payment of any damages if a party fails to perform in its obligations leading up to the formation of the joint venture. 

A more common situation is that one of the parties decides to continue the activities of the joint venture as a wholly-owned and the other party agrees to sell all of its equity interests to the continuing party along with any related assets that might be needed in order to continue to conduct the activities.  See Specialty Forms at §251:39 (sale of all shares and related assets with variable purchase price and payment methods) and §251:40 (sale of all membership interests in a joint venture limited liability company and grant of license for use of seller’s intellectual property) of Business Transactions Solution on Westlaw.  Key issues obviously include the purchase price and payment methods and it is also important to consider whether the selling party should license some of its technology to the purchasing party and/or agree to provide ongoing service and support for the products that were previously manufactured by the joint venture for a limited period of time after the joint arrangement itself has terminated.  An interesting variation on the customary method for one party exiting full participation in a joint venture calls for the party to sell a significant portion, although not all, of its equity interests to the other party and/or a mutually agreed third party such as the chief executive of the joint venture company (and/or additional members of the joint venture company management team).  In that case, the joint venture company survives as a separate entity controlled by the non-selling party but the non-selling party retains a minority stake in the business. The termination agreement in that instance typically removes most of the ongoing obligations of the non-selling party, as well as certain rights that party may have had with respect to management and control, and the non-selling party becomes a passive investor in the enterprise.  See Specialty Forms at §251:42 (sale of substantial equity interest to executive of joint venture with retention of minority stake) and §251:43 (agreement for transfer of shares of joint venture company) of Business Transactions Solution on Westlaw.

Of course, the parties may decide to completely liquidate and dissolve the joint venture company and distribute the remaining cash and other assets between them.  In appropriate situations, the parties may provide for co-ownership of intellectual property rights developed jointly during the relationship and enter into an agreement that cover their individual use and/or transfer of such rights after the joint venture is over.  For example, the parties may agree that each of them is free to use its co-owned rights subject to sharing of revenues with the other party and/or rights of the other party to participate in any new venture based on the co-owned rights.  If one of the parties wishes to transfer its intellectual property rights it must first offer such rights to the other party.  See Specialty Form at §251:41 (including agreements regarding post-termination commercialization of intellectual property rights conceived during joint venture) of Business Transactions Solution on Westlaw.

For further discussion of the issues related to termination of  joint venture, see §§ 251:14 and 251:15 of Business Transactions Solution on Westlaw

Titles by Alan Gutterman