Inevitably in the current circumstances participants in joint ventures will be focused on critical operational matters which can be moving exceptionally rapidly, for instance where supply chains have been fundamentally disrupted, or where previously identified sources of funding are now unattainable. Decisions may need to be taken quickly and the issue of due process may not be uppermost in participants' minds. However, hindsight is 20-20 and actions taken in haste now could be looked at less generously in the future.

Where possible parties should seek to manage risks and take decisions in compliance with the existing agreements. Where these are not workable in the circumstances, parties may take steps such as agreeing emergency decision making protocols and delegated authorities, and discussing in advance how they might handle a good faith strategic disagreement. Doing so will establish a sound commercial footing for current activity, preserve a good working relationship between the parties and minimise the risks of disputes further down the line.

This note asks a number of questions which are intended to prompt joint venture participants to consider issues which are important but which may not currently be front of mind. 

Joint venture / shareholders' agreement

  • Parties:
    • Have both/either party used a project specific SPV to enter into the JV?
    • If either party has used a larger group company, insolvency events of default will be of particular interest (see below).
    • If SPVs, have either party given PCGs, and if so what are the terms?
  • Business plan:
    • Is there a requirement to revisit the business plan?
    • What if parties disagree? >>> See deadlock below
  • Funding:
    • Obligations on parties to provide funding:
      • What funding is committed? 
      • Does a drawdown require a unanimous board decision? >>> See deadlock below
    • Actual provision of funding
      • What if parties disagree over funding requirements or calls for funding? >>> See deadlock below
      • What if a party defaults on committed funding? >>> default
      • How is shareholder debt to be repaid if a shareholder leaves (see below)? 
      • What if funding is required but only one party is prepared to fund?
      • Shortfall/excess funding regimes
      • Cure loans
      • Catch up loans
      • Consider the impact of excess funding regimes and cure loans on the order of priority on the return of income (and ultimately capital) to JV principals 
  • Decision making:
    • What potentially relevant decisions are upcoming?
    • Can they be made by directors or are they reserved for JV principals?
    • Is unanimous consent required (or are they reserved/major matters)?
    • What happens if the parties disagree on a reserved/major matter? >>> See deadlock below
    • Are any conflict matters relevant?
  • Deadlock:
    • Exactly what constitutes a deadlock?
    • What is the process for resolving a deadlock which arises?
    • What are the consequences of an unresolved deadlock?
    • If there is a buyout process, and what is the mechanism for valuing the assets? Note that determining market valuation at present may be particularly difficult.
  • Events of Default (EoD)
    • Is there any insolvency event of default, and if so what precisely does it mean – for more detail see , see COVID-19 UK: Protecting your JV operations – Insolvency and Default
    • What other events of default exist which one or other party might seek to invoke?
    • Are there any cross default provisions to any security arrangements? 
    • What are the consequences of an event of default? Commonly:
      • Suspension from management;
      • Default transfer >>> See Transfers and Exit below
    • What remedy periods or other mitigations exist?
    • If there is a buyout process:
      • is it linked to market value and if so how is market value determined, particularly in the current environment?
      • is a discount applied to market value for (a) insolvency (and if so consider enforceability), or (b) other EoDs?
  • Dispute resolution:
    • Are there any bespoke dispute resolution provisions in the agreement?
    • If so, what is the potential impact on any issues raised above?
  • Transfers and Exit 
    • Permitted transfers - are JV principals permitted to transfer shares to their Group/Affiliates without consent or engaging pre-emption provisions?
    • Mandatory transfers - are there any triggers (e.g. bankruptcy/insolvency of a shareholder or material breach of the JV/shareholders' agreement) and is there a mandatory value?
    • Do you or your JV partner(s) have the right to compel transfer of shares in the absence of default e.g. are there any Drag/Tag rights? 
    • What restrictions apply to transfers to third parties (e.g. pre-emption) and what are the accompanying valuation mechanisms?  
    • How will any financing be repaid to JV principals upon termination and what restrictions are there (e.g. obligations to third party funders)?
    • Are there to be any restrictive covenants to be considered after you exit and what will the impact be.

Related security arrangements 

  • What security has been granted by the joint venture parties / their group companies in relation to the obligations of the JV and what is the extent of exposure –recourse/non-recourse, capped, several or joint and several? 
  • What security has been granted by over the JV / its assets to third party funders and what restrictions do these impose? 
  • What are the EoDs under the relevant security documents / facilities?

JV principal loan agreements

  • Are there standalone JV principal loan agreements?
  • What events of default exist, with particular focus on insolvency?
  • If there is an insolvency EoD, what are the precise triggers?
  • Confirm that JV principal loans are only repayable in accordance with the JV/shareholders' agreement (not on demand).
  • What is the impact of an EoD?

Articles of association

  • To what extent are key JV provisions reflected in the articles?
  • If key provisions exist in the JV/shareholders agreement only, should the articles be updated and if not, what are the potential consequences of this?

Directors appointed as JV principal Representatives

  • Consider competing dual role as director and shareholder, which will become more pronounced in the context of any deadlock, default, exit or insolvency
  • Directors obliged to act first and foremost in the best interests of the JV company, regardless of any obligations to the shareholder. Director can incur personal liability (for instance if favouring the interests of the shareholder above the JV, or failing to abide by rules in relation to conflicts). 
  • Are there any clean team / conflict arrangements in the SHA? These should be reviewed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.