Almost all businesses are facing unprecedented challenges in the global COVID-19 pandemic. But these challenges are, in a number of ways, heightened in a joint venture (JV) situation.
With greater risk of misalignment between shareholders, JVs could be slower to deal with issues in the short term and left in a very different shape to navigate the medium and long term.
COVID-19 is creating new pinch points in corporate JVs, including:
- Straining the ability of boards to maintain existing governance standards, not least given the increase in remote working. Shareholder-appointed directors on JV boards will be focused on ensuring that reporting lines are maintained (if not enhanced), and management continue to be held to account.
- The need to make quick and difficult operational decisions to respond to the rapidly changing environment created by the pandemic. These may meet reserved-matter thresholds or trigger veto rights under the JV agreement (JVA), and could give shareholder-appointed directors reason to pause when considering their fiduciary duties.
- Heightened risk of deadlock mechanisms being triggered if shareholders cannot agree on a reserved matter, or on the business plan or budget. A period of escalation and/or mediation may follow. The status quo may prevail, which could be unworkable in the rapidly changing business environment resulting from the pandemic, or forced buyout provisions may be activated.
- The requirement for further funding to mitigate the liquidity challenges resulting from COVID-19. Competing priorities among shareholders as to their own capital allocation and, where the JV is consolidated with a shareholder, the balance sheet impact of further debt financing, could prove fertile ground for misalignment.
- JV partners seeking a swift exit as a means to raise much-needed cash for other parts of their business or portfolio.
- Increased risk of shareholders defaulting under the JVA, whether from breach of the JVA (eg failure to fund) or other triggers such as insolvency. Consequences of default vary significantly under JVAs, from call options allowing non-defaulting shareholders to purchase the defaulting shareholder’s stake (possibly at a discount), to a loss of economic and governance rights or, less commonly, winding-up of the JV.
Click here for further detail on these JV pinch points, and how a JVA may help or hinder parties when dealing with the impact of COVID-19.