USA Law and Practice Contributed by: Olesya Bakar, William “Bill” Jackson, Daniel E. Levisohn and Steven D. Lear, Holland & Knight LLP
9.2 Asset Redistribution and Transfers The distribution of assets in kind is often a major deci - sion for the venturers. When making in-kind distribu - tions, the JV agreement should provide a valuation mechanism for the assets to ensure they are distrib - uted consistent with the distribution provisions and the economic arrangements of the venturers. If the venturers cannot agree on a value, they may need a third-party appraisal. If a venturer contributes in-kind assets to the JV, it may want the right to receive them back through distribu - tions, at an appraised or an agreed-upon value, when the JV terminates or that venturer exits. If assets have been created or developed by the JV, the venturers need to decide how to share or allocate ownership of those assets when the JV terminates. For example, the rights and responsibilities of the ven - turers related to jointly developed IP should be care - fully spelled out to avoid potential conflict. 9.3 Exit Strategy Exit rights should be thoughtfully considered and carefully drafted into the JV agreement. In most com - mon forms of JVs, such as LLCs, the venturers are generally granted wide latitude under applicable law to agree upon exit rights (common exit rights are described in 9.1 Termination of a JV ). A common issue related to exit rights is how to value the JV, particularly if one of the venturers will buy out the other venturer’s JV interest. The venturers should set forth in the JV agreement how value will be deter - mined, such as through an independent third-party appraiser or through a buy/sell mechanism. Many ways exist to measure a JV’s value, and it may be appropriate to engage a sophisticated financial advi - sor to help determine the most appropriate valuation methodology at the time the JV is formed.
Post-Termination Asset Distribution If a JV is terminated, the venturers need to consider what happens to its assets. In many cases, it may be appropriate to liquidate the assets and distribute the proceeds to the venturers. If, however, they do not want to liquidate certain assets, such as newly developed IP, the venturers will need to determine how the ownership and use of these assets can be shared among or allocated to one or more venturers. A terminating JV will need to wind down its business by liquidating its assets, terminating or transferring existing contracts, terminating licences or registra - tions and paying off creditors. In addition, as required by its entity statute, the JV will need to reserve funds or make provision to pay for any future known or con - tingent liabilities (eg, indemnities related to a sale of an asset) and file final tax returns, if applicable. The distribution of the liquidated proceeds will also need to be carefully considered, particularly if there is a waterfall that requires distributions in a particular order of priority. If a venturer has the right to receive distributions based on performance, it may be entitled at liquidation to receive additional proceeds. If the JV has not been successful, or if at the end of the ven - ture a venturer has received more distributions than it was otherwise entitled to, there may be a required “claw-back” (ie, repayment) of certain distributions it previously received. Claw-backs are often guaranteed by a deep-pocket guarantor affiliate of the applicable venturer.
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