USA Law and Practice Contributed by: Olesya Bakar, William “Bill” Jackson, Daniel E. Levisohn and Steven D. Lear, Holland & Knight LLP
6.3 Funding JVs are typically funded by equity capital contributed by the venturers but may also incorporate in kind con - tributions and/or debt from venturers or third parties. • Initial capital contributions: The venturers typically fund capital to the JV for initial start-up activities. • Additional capital contributions: (i) These may be mandatory or optional – or mandatory under certain circumstances (such as up to a specific capped amount) and optional otherwise – and are generally funded on a pro rata basis based on the venturers’ ownership percentages of the JV. (ii) Capital contributions that are mandatory would typically follow an approved budget/business plan or other specific circumstances described in the JV agreement, such as emergency or non-discre - tionary expenses (eg, debt service, taxes and other mandatory payments). (iii) The managing venturer may be required to fund certain cost overruns in excess of the budget/business plan. • Default: If a capital contribution is mandatory, the JV agreement will typically include punitive con - sequences for a venturer who fails to fund. These may include punitive (non-pro rata) dilution, default loans by the non-defaulting venturer(s) at escalated interest rates, the ability by the non-defaulting venturer(s) to buy the defaulting venturer’s interest at a discount, lost voting rights and/or, if applica - ble, removal as the manager. Mandatory capital contributions may also be guaranteed by a deep- pocket affiliate of a venturer. • Debt: JVs may also incur debt (by venturers or third parties) to fund the business, which is often a major decision. A venturer (or its affiliate) may pro - vide guaranties to the lender, and the JV agreement should address how liability is allocated among the venturers if a guaranty is triggered. 6.4 Deadlocks How deadlocks are resolved is highly negotiated and specific to each JV. There is no single approach, and common ways to resolve deadlocks include the fol - lowing. Status Quo Prevails It may be appropriate for certain deadlocked deci - sions to result in nothing happening if the Venturers
cannot agree. For example, if the Venturers cannot agree on a new budget, then the old budget may con - tinue to apply to the JV until the deadlock is resolved. Escalation to Senior Management Escalation to senior management is aprocess where the deadlocked issue is escalated to the upper man - agement of each venturer to resolve the issue. Arbitration or Mediation In certain industries and/or for certain issues, binding arbitration or non-binding mediation may work bet - ter than in others. The JV agreement may designate which deadlocks are mediated or arbitrated and which deadlocks would trigger other resolution mechanisms, as well as who is the arbitrator or mediator. Buy/Sell This refers to the case where one venturer buys the ownership interest of the other venturer(s), thereby breaking the deadlock. In common “shotgun” buy/ sell, one venture offers to buy the other venture(s) at a certain price, and each venturer that receives the offer can choose to either: • sell its interest to the offering venturer; or • purchase the interest of the offering venture at a price based on a valuation of the JV determined from the purchase price in the offer. Often, there is a lockout period at the start of the JV during which the venturers cannot exercise their buy/ sell rights. This gives the JV a chance to ramp up its operations and appreciate in value. A buy/sell may not be a fair deadlock resolution procedure, however, when one venturer lacks the same financial ability to buy the other venturer(s). Forced Sale One or more venturers may have the right (which may follow a lockout period) to force the marketing and sale of the JV or its assets to a third party. If a forced sale is triggered, the venturer(s) that do not trigger the forced sale may have a right of first refusal or first offer to acquire the JV or its assets.
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