Chapter 6: Joint Ventures (unincorporated)
IN THIS LESSON
If a participant wishes to sell its interest in the joint venture, as part of your due diligence, you must consider whether there are any restrictions on the participant doing so.
Background
The following applies to “unincorporated joint ventures” which can be described as a business arrangement where two or more parties come together to work on a specific project or business venture. Unlike a corporation, an UJV is not a separate legal entity. Instead, it is a contractual relationship between the parties involved, each referred to as a “participant”. The parties typically define the terms of the venture through a joint venture agreement (JVA) or a joint operating agreement (JOA).
Compare this to an incorporated joint venture which is not dealt with here (see here).
Let’s dive in.
Restriction or prohibition on selling an interest in the joint venture
If a participant wishes to sell its interest in the joint venture, as part of your due diligence, you must consider whether there are any restrictions on the participant doing so.
Pre-emption rights
A common type of restriction on selling an interest in a joint venture is called a “pre-emption right”. One type of pre-emption right that may apply is called a “right of first refusal”.
A right of first refusal gives the other parties to the joint venture the opportunity to match any bona fide offer that the selling party has received for the sale of its participating interest in the joint venture by a third party bidder. If the other parties choose to exercise their right of first refusal, they must match the terms and conditions of the third party’s offer, including the bona fide consideration, in order to purchase the sale interest. If the other parties do not exercise their right of first refusal or are unable to match the offer, the selling party is free to sell the sale interest to the original bidder.
Transaction structure
When you are reviewing the pre-emption right, you will need to review it in light of the proposed transaction structure and whether this structure will trigger the pre-emption right. Namely, is the participant selling an interest in the joint venture only (asset sale) or are shares of the company that owns the participating interest in the joint venture being sold (share sale)?
Asset sale (participant selling an interest in the joint venture only)
Share sale (shares of the company that owns the participating interest in the joint venture being sold)
Do pre-emption rights apply if the buyer purchases the shares of the company that owns the participating interest in the joint venture?
It depends on the specific terms of the joint venture agreement. Pre-emptive rights typically apply to the sale of a participating interest in the joint venture, rather than the sale of shares in the company that owns the participating interest (Participant A in the above example). However, it is possible that the joint venture agreement includes a provision that gives the other parties a right of pre-emption in the event of a sale of shares in the company that owns the participating interest.
A buyer (and/or its advisors) should carefully review the joint venture agreement to determine whether there are any pre-emptive rights that apply in the event of a sale of shares in the company that owns the participating interest.
For more information on transaction structures see here.
