WHY DO FOOLS FALL IN LOVE?
(Dealing with Instability in Joint Venture Marriages)

Scott T. Fenstermaker

International Counsel
Ford Motor Company^*

Cite as 1 ALSB INT'L BUS. L.J. 51

I. Introduction | II. Are We Sure We Really Want to Get Married? — The Advantages and Disadvantages of JVs | III. Reasons for a Divorce — Why do JVs Break Up? | IV. Avoiding divorce by not getting married — Alternatives to JVs | V. The Basis for a Solid Marriage? — Building Stability into the Joint Venture Agreement | VI. Implementing the JVA: Administering a Stable JV | VII. The end has come! How do we split up the assets, liabilities, and kids and get on with our lives? — Handling a JV Breakup | VIII. The Joint-Venture-Dissolution Agreement | IX. Conclusion

I. Introduction

The Dark Side of Joint Ventures. Much has been written about the benefits of joint ventures and how to set them up. This article looks at joint ventures from a different angle. It first examines potential problems with joint ventures, with a focus on their principal drawback—instability. It then discusses ways to deal with instability in planning, negotiating, and administering a joint venture. It concludes with a discussion of how, if necessary, to break up a joint venture.

Unfortunately, this article will not present any easy solutions for dealing with the issue of joint venture instability. There probably are none. In fact, it has been said that if you are negotiating a joint venture with someone who claims to have easy solutions for that issue, you are doing business with either a fool or a genius. In either case, you should be worried.

What is a Joint Venture? Before proceeding further, we need to ask, What is a "joint venture"? Despite common use of the term "joint venture", the answer is not as obvious as it might seem. Black’s Law Dictionary (1991) defines a joint venture as:

An association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and a duty, which may be altered by agreement, to share both in profit and losses. Russell v. Klein, 33 Ill. App. 3d 1005, 339 NE2d 510, 512.

Traditionally, a joint venture (a "Traditional Joint Venture") would be used to carry out a one-time project, e.g., the construction of a building or the production of a play. That is, a Traditional Joint Venture would be set up with a defined life span, e.g., ending on completion of the building or closing down of the play. The Traditional Joint Venture is, in essence, a partnership established for a one-time purpose, and the joint-venture parties are personally liable for the obligations of the joint venture. Since the Traditional Joint Venture is planned with a defined life span, the termination or breakup of a Traditional Joint Venture should not be particularly troublesome.

In recent years, however, the term "joint venture" has come to generally (but not always) mean an "equity joint venture". To capture this modern meaning, the following italicized changes should be made to the Black’s definition:

An association of persons or companies (the "JV Parties", often incorrectly referred to as the "JV Partners") jointly undertaking some commercial enterprise through their ownership of a separate corporate entity (the joint venture company–"JVCO"); generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and a duty, which may be altered by agreement, to share both in profit and losses. The terms of the association are generally set forth in a written Joint Venture Agreement ("JVA").

The rest of this article will discuss equity joint ventures and will use the term "JV" to mean an equity joint venture. Unlike the Traditional Joint Venture, a JV is almost never set up for a one-time project with a defined life span. Indeed, the very use of a corporate entity as the JV–implementation vehicle brings a degree of permanence.

The Distinction Between the JV and JVCO. In common parlance, JVCO is frequently referred to as the "joint venture", but technically, JVCO is not the joint venture. As indicated above, JVCO is a corporate entity that is the vehicle for carrying out the JV between the JV Parties. There are practical implications to this distinction. From the perspective of ongoing operations, JV Parties are liable for the obligations of the JV. However, the JV Parties are not, merely by virtue of the existence of their joint venture, liable for the corporate obligations of JVCO.

From the perspective of a JV breakup, the distinction between JVCO and the JV is crucial. When a JV breaks up, JVCO may, or may not, remain intact. Thus, when negotiating breakup provisions in a JVA or (if and when the time comes to break up a JV) negotiating a joint-venture-dissolution agreement, the question of what happens to JVCO after the JV breakup is going to be one of the central issues.

The Love-Marriage-Divorce Analogy. In talking about, negotiating about, and writing about JVs, virtually everybody¹ uses the love-marriage-divorce analogy, and it is a good one. Thus, in trying to enliven an article about the morbid subject of JV divorces, the temptation was to refer to the Righteous Brothers’ You’ve Lost That Loving Feeling:

"You’ve lost that lovin’ feeling,
Now it’s gone...gone...gone...wooooooooh."

However, on reflection, it seemed that Tina Turner’s more cynical question, What’s Love Got to Do with It?, really gets to the heart of the matter. The reason for this is that, in JV negotiations, one always hears a lot of romantic talk about intercompany love—sharing, mutual interests, synergies, two can live more cheaply than one, etc. While a JV is often the appropriate vehicle to attain a corporate objective, a JV is not a panacea. What is often lacking is a dispassionate look at the objectives of the JV Parties and the best way to attain them. This dispassionate look requires considering the disadvantages, as well as the advantages, of doing a JV.

II. Are We Sure We Really Want to Get Married? — The Advantages and Disadvantages of JVs

Don’t Rush into a Marriage. The first place to take a dispassionate look at a prospective JV is within your organization. The first time to take a dispassionate look is before even deciding to try to negotiate the JV. The following will provide some premarital counseling.

A Summary of the Advantages and Disadvantages of a JV. The advantages of a JV are widely publicized. The disadvantages are not. The following is a summary of both:

Advantage	Disadvantage
1. You gain access to other JV Party’s knowledge and resources	1. Other JV Party gains access to your knowledge and resources
2. JV can result in economies of scale and other efficiencies	2. There are operational inefficiencies inherent in JVs: · Lot of time and resources to set up · Lot of time and resources to administer · Conflict of interest in all JV Party / JVCO deals (sales, purchases, services, licenses, etc.) · Corporate and national cultural differences All of these may prevent the JV from ever attaining its contemplated efficiencies.
3. JV can reduce cost of failure by sharing it with other JV Party	3. Because of the operational inefficiencies, the risk of failure may be higher with a JV
4. Owner of company may demand JV as condition of selling you shares	4. If seller’s demand is only reason for your doing a JV, it may indicate that seller is not bringing ongoing value
5. Host-country legal requirement of a JV	5. Host-country JV legal requirement may indicate lousy business environment + xenophobic policies that can worsen

There is one additional disadvantage of JVs. It is probably the most important one: JVs frequently end in a breakup, and JVs are difficult to break up. This will be the focus of the rest of the article.

JV Divorces: Frequent and Difficult. JVs are even more unstable than marriages. JVs appear to have a breakup rate (i.e., a breakup of the basic arrangements set forth in the JVA, prior to the time originally contemplated by the JV Parties) considerably in excess of 50%.² The problems inherent in the high breakup rate are compounded by what I will call the "Great JV Dilemma". The Great JV Dilemma is that, even though it is statistically likely that a JV will eventually breakup, for a JV to be successful, it must integrate the contributions of the JV Parties into a single operation. This integration means that "Breaking Up is Hard to Do" (Neil Sedaka).

While the analogy of a JV breakup to a divorce is a good one, the Great JV Dilemma results in two major differences between JV breakups and marriage breakups:

First, even a simple JV breakup is tremendously more complex than a divorce.

Second, a JV breakup is generally much more expensive than a divorce.

Despite these differences, an important similarity between JV breakups and divorces is that they both generally happen because things are not working as well as was originally contemplated. In fact, I have never heard of a joint venture or a marriage that broke up because the parties thought that the union was doing great, but felt that they could do even better by breaking it up. Thus, the JV’s business may well be going down the drain while the JV Parties are trying to break the JV up. This adds an atmosphere of urgency and acrimony to the breakup process, all of which increase the inherent breakup difficulty arising from the Great JV Dilemma. The difficulty of the breakup process is still further exacerbated by the fact each JV Party typically has another, primary business that is in some way impacted by what happens to JVCO.

III. Reasons for a Divorce — Why do JVs Break Up?

Why do JVs so frequently end in divorce? Some writers have tried to group the reasons into defined categories.³ My own view is that, aside from "emotional" breakups, JVs generally break up when the JV Parties perceive that the above-listed advantages no longer outweigh the above-listed disadvantages, and that there are countless possible reasons for this perception.⁴ Some of the reasons are external to the JV Parties (e.g., new governmental policies, changes in the market, or changes in technology). Other reasons are internal to the JV Parties (e.g., failures or mistakes in planning and structuring the JV, inability to operate the JV, changed business methods, or changed objectives). The exact reasons will depend on the JV, and when taking that first dispassionate look at a possible JV, one of the main things to consider is the potential reasons for a future breakup.

IV. Avoiding divorce by not getting married — Alternatives to JVs

What are the implications of all this? The cardinal rule in structuring international transactions is: Choose the simplest structure that accomplishes your objectives. Unnecessarily complicated structures bring unnecessary costs and surprises. Costs are always bad, and in international transactions, surprises are rarely good. Thus, before deciding to enter into the marriage of a JV, you should consider all the following basic alternatives, set forth in approximately ascending order of complexity:

Saying "To hell with it", and walking away from the project (this is an easy alternative to overlook in the mating frenzy that typically accompanies a proposed JV);

Being antisocial — being a hermit and doing the project alone;

Dating — long-term contracts: purchase/sale, license, distribution, etc.;

Living together — non-equity joint ventures;

Acquisition;Merger; or

JV.

While the details of the non-JV alternatives are beyond the scope of this article, consider them when someone proposes a JV. They are sure-fire ways to avoid the problems of a JV breakup. Applying the cardinal rule, you should determine that none of them will meet your needs better than a JV, before deciding to try to negotiate a JV.

V. The Basis for a Solid Marriage? — Building Stability into the Joint Venture Agreement

General Considerations. So, you’ve dispassionately weighed the advantages and disadvantages (including possible breakup) and decided a JV is the way to go. How should the JVA deal with the issue of stability? As a starting point, it is worth stating the fairly obvious: Theoretically, the individual goal of each JV Party, would be to have the unilateral right to break up the JV, at will, on terms favorable to itself. However, obtaining such a right will likely be impossible and even trying to negotiate it will be counterproductive. Therefore, the mutual goal of the JV Parties should be to structure the JV in a way that builds stability into the JV and reduces the chances of a breakup, except in situations where the JV Parties both conclude that the breakup would be desirable.

In building stability, an important principle is that JVs should be structured so that circumstances do not arise under which one JV Party can gain unfair advantage over the other by creating a dispute or threatening to break up the JV. For example, consider carefully the stability implications of JVA provisions concerning JVCO’s products, market exclusivity, and rights to intellectual property (including trademarks). JVAs should also contain provisions so that routine disagreements do not escalate into JV-breaking disputes. In other words, the JV Parties should be careful not to turn the JVA into a mutual-suicide pact. The following is a brief discussion of major JVA provisions that are especially relevant to the subject of stability.

Mutual Consent and Deadlock. JVAs almost invariably provide for certain JVCO actions ("mutual-consent actions") to be subject to the mutual consent of the JV Parties (either directly or through their designees in JVCO). To streamline the operation of JVCO, mutual-consent actions should be restricted to major JVCO actions that are vital to the interests of the JV Parties. Even so, what happens if there is no mutual consent? Does the JV end? Various alternatives are often put on the table during JVA negotiations:

dissolving the JV (How?);

buyout (Who buys, how, and at what price? More importantly, if a buyout is feasible, one JV Party must not be contributing anything of real value on an ongoing basis, so why are you doing a JV in the first place?);

third-party arbitration of some kind (While arbitration is standard for breach-of-contract claims, do you really want to put business decisions in the hands of a third party who could take goodness knows how long to reach what kind of decision?); or

referring the matter to top-level executives of the JV Parties.

For the parenthetical reasons noted in the preceding paragraph, I generally favor the last alternative. If the top-level, JV Party executives cannot agree, JVCO does not take the proposed mutual-consent action and that is generally the end of the proposal. Not taking the vast majority of disputed mutual-consent actions will not cause JVCO to grind to a halt. On the other hand, if the action at issue is one of the small minority, both JV Parties go down together. Therefore, each JV Party has incentive to negotiate a reasonable solution to prevent that from happening.

Sale of Shares to Third Parties. If both JV Parties are contributing to the success of JVCO, the sale of one JV Party’s shares to a third party would seem potentially fatal to JVCO. Therefore, providing in the JVA for a right of first refusal on the part of the non-selling JV Party may not solve anything. On the other hand, in most instances, the selling JV Party probably will have a hard time finding a buyer without the agreement of the nonselling JV Party. In summary, you have to look at this issue in the context of the particular deal, but formbook solutions could lead to instability. I generally favor a blanket prohibition on sale, other transfer, or encumbrance of JVCO shares without the other JV Party’s consent. If and when one Party wants to sell its shares, the JV Parties can then negotiate a solution.

Breakup Provisions. Obviously, the simplest way to break up a JV is to leave JVCO intact and for one of the JV Parties to sell its shares of JVCO to the other JV Party. My reaction, however, to the wisdom and viability of the various types of JVA provisions providing in advance for this kind of breakup is one of skepticism. A mathematical-formula approach to the buyout price will be hard to negotiate, will probably be quite complex, and may give unexpected results. It may also engender JV instability by incentivating one JV Party to engineer or threaten a breakup if circumstances tilt the formula’s outcome in that Party’s favor. Alternatively, relying on appraisers to set a price is a crapshoot. Providing in the JVA for a roulette provision ("I will either buy or sell at a price as set forth in my offer.") is probably a little too much like Russian roulette to suit many business people. Under any approach, the really difficult challenges will be, potentially years in advance of any breakup, to: (a) define the triggering events that will enable the buy/sell option to be exercised, and (b) decide how JVCO will operate after the exercise of the option (think about ongoing sources of JV Party technology, services, trademarks, components, etc.).

If negotiating a JVA buyout/sellout provision is difficult, negotiating a workable JVA breakup provision other than a buyout/sellout is generally impossible. In fact, if you find that a detailed JVA breakup provision is easy to devise, this is a clue that you should not be doing the JV in the first place. My feeling is that the JV Parties should take a shot at a detailed breakup provision in the JVA (it will at least force the JV Parties to put the breakup possibility on the table). The JV Parties should not, however, agonize too much if they cannot come up with one. In the end, probably the most-practical solution is to simply provide for good-faith negotiations in the event that the JV Parties decide to break up the JV. Who knows exactly what such a provision means? However, at least it is simple, allows completion of the JVA within a reasonable time, and does not give one JV Party a potential future edge if the JV heads downhill.

Along the same lines, I would be careful about boilerplate provisions saying that the JVA will end in the event of insolvency, bankruptcy, breach, etc. by, or of, a JV Party. If those provisions kick in, what happens next? Despite the termination of the JVA, you still have a JVCO. JVCO still has the same shareholders (or the receiver or trustee in bankruptcy of one of them), the probable need for continuing support (technology + services) from both the JV Parties, and no governing agreement. Solutions to these issues, if there are any, are beyond the scope of this article. Suffice it to say that a JV breakup that automatically results from any of the events contemplated by the boilerplate might be an unnecessary breakup and probably would be a particularly messy one.⁵

VI. Implementing the JVA: Administering a Stable JV

Formalizing Administrative Procedures. As discussed above, the JVA will almost certainly have provisions concerning mutual-consent actions. This consent is usually provided by either JVCO directors named by the respective JV Parties or by the JV Parties themselves, usually at a shareholders’ meeting or by consenting in their role of shareholders. The JVA will generally not, and probably should not, get into the nitty-gritty of the mechanisms to make this system function. It is advisable, however, for the Parties, early on in the life of the JV, to flesh out this mechanism (perhaps via a written procedure adopted by JVCO itself). The procedure can cover such subjects as the contents, logistics, and timing for proposals relating to mutual-consent actions. Furthermore, as the JV Parties gain experience with the JV, they should consider delegating to JVCO management even more decision-making authority concerning mutual-consent actions.

Living with the Great Joint Venture Dilemma. On the substantive level, given the odds of an eventual JV breakup, one might think that planning for a possible breakup should be a major factor in making JV decisions. However, because of the Great JV Dilemma discussed above, a JV cannot achieve its hoped-for benefits if the JV Parties are planning all their actions based upon the possibility of a breakup. Furthermore, once a JV is up and running, you cannot very often even bring up the subject of a possible breakup without harming the relationship.

While you cannot keep the subject of a possible breakup constantly on the table, a prudent JV Party will always bear in mind the mathematical probability of an eventual JV breakup. That is, you will want to consider what your position will be, as the result of a proposed action, in the event of a JV breakup. If, however, you have reached the point where this factor is causing you to take positions or make decisions that you would not otherwise make, it is probably time to put the breakup issue squarely on the table with the other JV Party. This is because, as a JV runs into trouble, it is not a good time for either JV Party to develop a selfish, hidden, agenda. As a JV breakup looms in the future, the adage about all hanging together or hanging separately applies.

The People Aspect. One should also not ignore the "people" aspect of building JV stability. To the extent possible, rapid rotation of the JV Party personnel handling JVCO matters should be avoided. Those personnel should strive to build a good working relationship with, and mutual trust and respect among, their colleagues at the other JV Party and within JVCO, itself.

VII. The end has come! How do we split up the assets, liabilities, and kids and get on with our lives? — Handling a JV Breakup

Preparing your Breakup Plan. If, despite taking all the steps suggested above, you have reached the point of breaking up a JV, what do you do?⁶ First, assuming that things are not so bad that you put JVCO into bankruptcy or liquidation, remember a basic rule: Much to the chagrin of lawyers, in most transactions, a good business plan is more important than nifty contractual provisions. Thus, before broaching the subject of breakup with the other JV Party, you had better develop a detailed business plan (your "Breakup Plan") as to where you want to be after the breakup, how you would like the breakup structured to get you there, and how long it will realistically take to accomplish all this.

In formulating the Breakup Plan, remember that there are only two basic possibilities:

JVCO remains intact, or

JVCO is somehow split up.

The transaction will be much simpler if JVCO will remain intact. Thus, under the keep-it-simple principle, this is the preferred route if it meets the needs of the JV Parties. Nevertheless, even if JVCO remains intact, JVCO will not remain unchanged. This is because both JV Parties were presumably contributing to its operation.

Consequently, even a "simple" buyout of one JV Party’s shares in JVCO by the other is usually not so simple. Frankie Yankovic best summarized the heart of the problem, when he wrote the immortal polka, You can have her, I don’t want her, she’s too fat for me. At the time of the JV breakup, JVCO is probably not going to be very attractive. In addition, the JV Parties will have to figure out how JVCO will be able to continue to operate without the continued involvement of the selling JV Party. Thus, post-breakup licenses, service agreements, etc. will likely have to be part of the breakup process. If one or both JV Parties will want to "retrieve" contributed or licensed intellectual property, this could be a major hurdle in developing a Breakup Plan.

Basic Issues in Your Breakup Plan. In addition to the business issues, any Breakup Plan will have to address the following three, additional basic issues:

Valuation. Book values will probably not reflect the real values of the assets. Thus, adjustments will have to be made to compensate for this difference. You will also have to sort out liabilities (and some potential assets) that either (a) have been specifically identified, but cannot be quantified or (b) cannot not yet be specifically identified, but might pop up later. You may be able to handle the "unbooked liabilities" area by grouping potential liabilities into general categories and spelling out how each category will be treated.

Taxes. Tax effects on JVCO and on each JV Party of alternative approaches will have to be considered. If a clear win-win-win tax strategy cannot be developed, that kind of situation is what negotiations are all about.

Host Country’s Corporate Law. The corporate law of the host country will have to be studied in order to determine the best mechanical way of effectuating the breakup envisioned in the dissolution business plan.

The Salability of Your Breakup Plan. In formulating your Breakup Plan, you will, of course, have to reread the JVA (and its ancillary agreements—licenses, supply agreements, etc.) to see how you stand in terms of a breakup. For purposes of the following discussion, let’s be realistic and assume that either:

you were not lucky or skillful enough, and the other JV Party was not unlucky or unskillful enough, for the JVA to give you a unilateral buyout or sellout option on terms favorable to yourself; or

if such an option in your favor does exist in the JVA, the other JV Party will find a dozen reasons (or arguments) why the option is not enforceable under the present circumstances.

Given these assumptions, in order to implement your Breakup Plan, you are going to have to convince the other JV Party that a break up is mutually beneficial and then negotiate a mutually acceptable Breakup Plan. This, in turn, means your Breakup Plan not only has to be good for you, it has to be reasonably good for the other JV Party (or at least better for the other JV Party than the other JV Party’s alternatives of staying with the JV or otherwise causing you problems). It will be the negotiated Breakup Plan that forms the basis for the Joint-Venture-Dissolution Agreement (the "JVDA").

The Breakup Negotiations. No matter what form the JV breakup takes, do not expect a JV breakup to be easy to negotiate. The following general observations about JV-breakup negotiations may save you some time and grief:

Negotiations likely to be arduous. The breakup negotiations will probably take place during a period of business difficulty. During the negotiations, major challenges will be keeping the business of JVCO going smoothly while negotiating its breakup. Meanwhile, the JVCO employees will be apprehensive about their futures and some of them may become the subject of bidding wars between the JV Parties. Remember that you will probably need the participation of some key JVCO employees in planning the breakup. Therefore, the chances of keeping the impending JV breakup secret for very long are scant.

A lot of resources. Negotiating a JV breakup is generally at least as, and often more, complicated than negotiating a JVA. For obvious reasons, you should complete the breakup process as quickly as possible. Staff up for this. You will may well need a JV-dissolution team at least as big as the one you used to negotiate and set up the JV and with approximately the same composition. You will also probably need to involve some key people from JVCO.

A lot of time. While you will want to complete the JV breakup process as quickly as possible, be realistic. Even with adequate resources, breaking up a JV may well take as long as did setting it up did.

A lot of collaboration. Breaking up a JV will not be nearly as much fun as was the process of setting it up. Gone will be the romantic talk about love—sharing, mutual interests, synergies, two can live more cheaply than one, etc. Tempers may become short. Nevertheless, try to turn the dissolution into as much a collaborative effort as possible and make reasonable compromises.

Team members. Have people on both teams who know the JV well and who personally know the people on the other team.

Location of negotiations. Conduct the negotiations at or close to JVCO—easy access to JVCO data and personnel may well become be crucial.

Team-member priorities. Make sure that the breakup project is job-priority #1 for the team members.

Collaborative effort. Most importantly, once the JV Parties agree upon the financial parameters, the breakup negotiations should be treated as a mutual-problem-solving exercise by the negotiating teams.

Memorandum of Understanding. As with any complicated transaction, it may be useful to pin down preliminary understandings in a nonbinding MoU.

Pre-JVDA Implementation. A practical problem in negotiating a JV breakup is that you are shooting at a moving target. The JV business is continuing while the JV Parties are talking about breaking it up. Therefore, you will want to consider implementing preliminary breakup actions within JVCO, via director resolutions and management actions, even before the JVDA is finalized. To safely implement pre-JVDA actions, two conditions are needed: (a) an atmosphere of trust should exist in the negotiations (a nonbinding memorandum of understanding may be useful), and (b) the pre-JVDA implementing actions should be neutral in the event the JV breakup does not happen as tentatively planned.

VIII. The Joint-Venture-Dissolution Agreement

The Form of the JVDA. The negotiated breakup plan will segue into the JVDA, but what does a JVDA look like? JVA's have become fairly standard over recent years. Despite the mortality rate of JVs, try to find a JVDA in a formbook. There is a reason for this absence. With a JVA, you basically have one standard structure that you are striving to set up—see the definition of JV, supra. However, when you take apart a JV, you can end up with numerous different kinds of structures and relationships. For that reason, it is hard to imagine a one-size-fits-all JVDA. JVDAs range from a fairly straightforward stock purchase and sale (if one JV Party sells its shares to the other) to ones of mind-numbing complexity. Unfortunately, you cannot simply open the old JVA word-processing file, shift your computer into reverse, and print out a JVDA. Nevertheless, the best checklist as to the types of the basic issues that the JVDA will have to address is the JVA (and its ancillary agreements).

Issues in the JVDA. The following are some thoughts about the way to approach the basic issues in a JVDA (note the similarities to JVA issues):

Representations and Warranties. Unless the JV breakup involves a sale of shares to a third party, this area will be one aspect of the JVDA that is likely to be considerably simpler than the JVA. Presumably, both JV Parties have essentially the same information about JVCO. Therefore, the representations and warranties about JVCO will probably be limited to those relating to matters of which the warranting JV Party has unique knowledge.

Survival and Indemnification. These provisions can pretty much track the JVA.

The Dissolution Steps. These will be unique to the way the JV breakup will be effectuated.

Allocation of Assets and Liabilities. Refer to the valuation discussion, above. If a JVCO is broken up, allocating net worth (i.e., assets and liabilities) can be a negotiating, drafting, and accounting nightmare. Consider the preliminary steps of setting up either one or more subsidiaries or divisions.

Pre-Closing Actions. This is one aspect of the JVDA for which reference to the JVA will not help. The actions to be taken after JVDA signing and prior to the JVDA Closing (e.g., settlement of certain claims) will be unique to the breakup business plan that underlies the JVDA.

Conditions Precedent to Closing. These also will be unique.

The Closing. The Closing actions will depend on the breakup business plan. However, one common issue will be the effect of the Closing on the continued validity of the JVA. A knee-jerk reaction is to provide that the consummation of the Closing constitutes termination of the JVA, but do not assume that this is true without carefully considering the contents of the JVA. At the Closing, it will probably be necessary to attend to the signing of any ancillary agreements that are necessary for the implementation of the breakup business plan, e.g., service agreements; supply agreements; distribution agreements; technology, patent, and trademark licenses or assignments; and trade-name agreements. The Closing is also the time to sign any settlement agreements winding up any then-pending disputes between the JV Parties. In other words, try to use the Closing as the occasion to set everyone’s house in order for the future.

Post-Closing Actions. In addition to the rights and obligations set forth in the ancillary agreements described in the preceding paragraph, you will probably have to provide for certain post-Closing actions to be taken by the (then ex-) JV Parties and by JVCO (or its successor companies). Three examples to consider are administration of, and liability for, third-party claims; administration of, and liability for, taxes; and noncompetition.

Dispute Resolution and Arbitration. These should track the JVA provisions. Obviously, any pre-arbitration steps that involved JVCO will have to be reconsidered.

Miscellaneous. Probably most of the boilerplate can be salvaged, almost verbatim, from the JVA.

IX. Conclusion

To summarize: In contemplating a JV, there is always a lot of romantic talk about intercompany love--mutual interests, synergies, two can live more cheaply than one, etc. In fact, a JV is often the appropriate means to attain a corporate objective. However, JVs are complex; are time-consuming to negotiate, implement, and administer; and have inherent operational inefficiencies. Most importantly, JVs have an even higher breakup rate than marriages, with a majority of JVs ending in a breakup of some kind.

Therefore, before even entering into JV negotiations, one needs to remember Tina Turner’s cynical question, "What’s Love Got to Do With It?" That is, a prospective joint venturer should take an objective, unemotional look at the disadvantages, as well as at the advantages of the prospective JV, consider the alternatives to the JV, and be sure that a JV is really appropriate under the circumstances. If a JV is formed, then the JV Parties should focus on ways to build stability into the JVA and into the administration of JVCO. However, a prudent JV Party will keep in mind that the JV may not last forever. If the time comes to break up the JV, the JV Parties should try to handle the breakup in an objective, collaborative, unemotional manner that minimizes the pain to themselves, as well as to the JVCO and to the employees, customers, and suppliers of the JVCO. If you can successfully do all these things, you may never have to confront the question posed by Frankie Lymon: Why Do Fools Fall in Love?⁷

ALSB International Business Law Journal

WHY DO FOOLS FALL IN LOVE? (Dealing with Instability in Joint Venture Marriages)

WHY DO FOOLS FALL IN LOVE?
(Dealing with Instability in Joint Venture Marriages)