Did you accidentally get married when you established a joint venture?

16.12.2009

Toomas Prangli
Partner
Ph +375 17 306 2102
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Anne Adamson
Senior Associate
Ph +372 6 400 912
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Statistics show that, in times of economic bliss and growth, far more marriages are registered than in times of economic downturn.

Statistics also show that many marriages end in divorce as the economy stalls. Financial cuts in family budgets lead to conflicts and disputes, with little left to spend on happy events to make up for the bad fallout. Yet, at some stage of an economic downturn the statistics improve – why? Because at a certain stage it seems better to remain in a lousy marriage than to scrape the bottom of the barrel by your lonesome self. So people stay married as divorce is a costly luxury and they have to wait for the finances to improve.

Is break-up the only solution?

The same statistics and trends apply in the business world. At some point, many joint ventures terminate in shareholder disputes and some previously smoothly-working management-shareholder relationships end up in civil or criminal cases with zero trust and proliferating damages claims.

Yet again, at a time when the economy is uncertain and unstable and no prediction sounds plausible, the trend changes; people realise that disputes are costly, take time, and end in half-truths and half-victories. Parties who in any other situation would end in break-up now stick with each other and sit quietly, waiting until the storm dies down. Some learn their lesson and try to find a compromise as the light dimly starts to show itself at the end of the seemingly endless tunnel. Others still opt for a break-up.

If you recognise your story and feel that you have exhausted all your resources to figure out alternatives how to exit a failed joint-venture, we would be happy to provide a list of options for a getaway from an uncomfortable situation in bad times – without losing out. One option may be to sell your shareholding to a third party.

Of course, this option would be easier to use if the shareholders have already (at the beginning of their relationship) concluded an agreement setting out the procedure for dealing with such situations: (i) a drag-along clause – the obligation to sell to the same buyer to whom your partner sells; (ii) a tag-along clause – the right to sell to the same buyer to whom your partner sells; (iii) deadlock provisions, such as a Texas shoot-out or a Russian roulette provision.

Another possibility is to split the company's areas of activity between different entities by way of division. This option also allows you to consider selling or reorganising an area of activity or letting it go bankrupt.

Would it be worthwhile renewing and expanding the relationship?

Another trend in tough times is an increase in mergers. When things were good and the seed you planted blossomed in basically every field you picked, mostly acquisitions lay on lawyers' tables to be consulted. Now that the tide has turned, we see people cooperating more and merging into one.

Mergers happen between parent and daughter companies, between sister companies, and between independent entities both vertically (eg between manufacturer and reseller) and horizontally (between competitors). Our experience shows that cross-border and cross-regional mergers are a rising trend.

Just as people tend to move in with relatives when times get rough, so do companies. The number of mergers has been increasing since 2007. Could this be an option for you, too? Could merging with a competitor keep your company alive in the economic turmoil?  You could come out as a winner in this time of opportunities if you know how to find and exploit the possibilities.

Merging with a competitor to secure your place in the market or even to increase your market share may be the means to ensure the survival of your business and make your competitors' life more difficult. Similarly, an intra-group merger, helping to save administrative and other operating costs, may give you a competitive edge. Cross-border and cross-regional mergers also serve the purpose of saving human resource costs.

Building a regional structure as "one entity, several branches" enables you to escape net asset and other equity requirements applicable to the subsidiaries of companies under strict supervision.

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