Joint Venture Termination agreement: How to End and What Happens After Termination?
Two parties are joining two puzzle pieces to indicate that they are drafting a joint venture termination agreement

Joint Venture Termination agreement: How to End and What Happens After Termination?

Joint venture termination agreements and procedures require consideration of several legal aspects and formalities as the benefit or loss of one member of a joint venture closely relates to the benefit or loss of the other member since multiple parties join together to augment their capital, skills, and workforce. 

The parties entering a joint venture remain extremely careful about the clauses and conditions they are entering. Still, there are times when it is necessary to terminate the joint venture for XYZ reasons. 

What is the procedure for terminating a joint venture, and what you need to consider once the joint venture ends is what will be discussed in today’s article.

Let’s begin. 

Introduction

Two parties shaking hands after joint venture termination agreement

A joint venture occurs when two or more individual entrepreneurs or businesses join together to achieve a specific goal. These individual entrepreneurs or enterprises need not be of the same business size or business discipline. 

This business partnership enables each company to profit from what its partners offer, such as capital, skilled and experienced workforce, or enhanced advertising or marketing capacity to reach a broader or formerly undiscovered market.

Most of the joint ventures operate under a partnership agreement, which specifies:

  1. The specific business objectives that the companies are attempting to achieve collectively,
  2. The obligations of each partner,
  3. Distribution of revenues and losses

A joint venture partnership agreement includes a “preplanned exit strategy” to safeguard all parties after the partnership achieves its goal.

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Why do Joint Ventures Terminate?

Several factors lead to a Joint venture termination agreement. These are: 

In case of a joint venture termination agreement between the parties

If members terminate a joint venture agreement to end the joint venture at a specific time or upon fulfilling a condition (being an intrinsic part of the agreement), then at the given time or upon the completion of the given requirement. Then, in that case, the Termination of the joint venture agreement is enforced.

When the joint venture is no more profitable or practicable

A joint venture may cease if it becomes unprofitable or impractical to avoid further loss or gross insolvency.

When the project under joint venture is accomplished

The joint venture has already achieved its purpose, so it does not need to be retained. So, either the parties can terminate it, or it automatically terminates if there is such a clause in the Joint venture termination agreement.

Wooden blocks of DEAL that shows Joint venture termination agreement and cancellation of deal.

When one or more parties to the joint venture commit a breach of the agreement of the Joint Venture

In some situations, one or more parties to a joint venture commit a breach of one or more terms of the agreement to a joint venture, owing to which the functioning of that joint venture becomes practically impossible or at a loss to other members. Such a case will result in joint venture termination, as may be specified in the termination agreement.

Other reasons for termination of joint venture agreement

The other reasons include:

  1. Insolvency of one or more parties, or the joint venture itself, due to an acute shortage of assets, and thus, the joint venture cannot exist further and terminate.
  2. When one or more parties to a joint venture opt to exit the joint Venture, Termination of the joint venture agreement occurs.
  3. When the parties to it do not agree on a disputed issue and opt to terminate the Joint Venture instead.

What are the key Considerations when Terminating a Joint Venture?

Two parties signing contract for Joint venture termination agreement

Before dissolving a joint venture or enforcing a Joint venture termination agreement, all parties must weigh all the options. It is essential to consider the following things, regardless of the reasons behind terminating a joint venture agreement.

Change of control

There can be significant consequences for the counterparty of a joint venture if any change occurs in the ownership of a business party to a joint venture. There should be a clause requiring mandatory permission from the counterparty before the shift in business control occurs.

Considering the risk

When a party to a joint venture consents to a joint venture termination agreement, any other party or parties may choose to continue the joint venture. In such a situation, it is necessary to do “risk analysis,” which would lead the continuing parties to go for the Termination of the joint venture agreement altogether or make them manage the risk.

Financial considerations

Terminating a Joint venture agreement may lead to a dispute regarding the status of the company’s financials between the member parties. Drafting a binding clause for the leaving party in case of any financial assistance extended to them would be a reasonable consideration.

Considerations regarding the distribution of assets

One of the most common issues that arise after the Termination of a Joint Venture is the distribution of assets, which could also lead to disputes. Whether the joint venture bought assets or used intellectual property, the continuing party or parties must decide to either purchase the assets or continue without them. 

It is therefore essential to specify the ratio in an agreement clause so that assets can be distributed fairly. Suppose the parties to a joint venture do not reach a conclusion or there is no explicit clause about the distribution of assets after the Termination of the Joint venture agreement. In that case, the courts can be approached to resolve the issue.

Considerations regarding tax implications

When one or more parties to a joint venture opt for the termination of the joint venture agreement, they should be mindful of the joint venture tax implications. It is important to note that whether they wind up the company or sell their shares to an outside business, tax applies in both cases. The joint venture may also be subject to additional taxes depending on the circumstances and method under which the joint venture terminates.

What are the Steps for Operationalizing a Joint Venture Termination Agreement?

A man tearing a page indicating Joint venture termination agreement

Satisfaction regarding fulfillment of certain conditions before termination

The first condition to be satisfied before the final step towards joint venture termination agreement is the terminating party should have consented to the same. That consent should be free of undue influence, threat, or fear. Secondly, consent must be communicated adequately to the other party explicitly. 

A notice of intent of Termination of the contract must be served to all members in due time using the method specified in the contract.

Exit plan/strategy for joint ventures

The terminating party should make an exit plan or strategy to terminate the joint venture. A standard exit plan may have the following steps:

  1. Sale of the assets
  2. Transfer of the interests from one joint venture member to the other
  3. Listing of the Joint Venture on a public exchange
  4. Sale of the interests to a 3rd party

Distribution of profit among the joint venture member

A member’s share could be proportionate to the number of shares or contributions they have made to the Joint Venture or by the terms in the Joint Venture agreement.

Distribution of debts among the joint venture member

The debt distribution will also be dealt with as said for profit, i.e., based on each member’s share or according to the explicit terms given in the contract.

What Happens after the Termination of a Joint Venture?

Regarding the fate of the Joint Venture after member(s) leave; there are two possibilities, which are as follows:

The joint venture will continue without the leaving member

In most cases, the joint venture will continue. One party will buy out the other and go it alone because it would be in neither party’s interest if the business dissolves, the assets are liquidated, or a sale is forced.

The joint venture will be altogether dissolved and ended

If a member leaves a joint venture after fulfilling the Joint venture termination agreement, without which it is impossible for the joint venture to continue, or the joint venture’s object is met or fulfilled. In such a case, the joint venture will cease to exist entirely.

Conclusion

A joint venture is a business partnership that aims to complete the deficiencies of the member parties by mutual sharing of capital, skills, assets, or workforce, ensuring a win-win situation. These associations have a specific goal to be collectively achieved to establish such partnerships. Joint venture agreements contain all the rules and regulations, terms, and conditions regarding the joint venture’s operation. 

Thus, clauses regarding the termination of the joint venture agreement can be found in the memorandum or the text of the joint venture agreement. This termination follows a procedure, and it is vital to consider certain factors before the formal termination of a joint venture agreement. These considerations are regarding the distribution of financial resources and assets, liabilities as to tax, and debt. Once all the situations are fulfilled, the joint venture gets dissolved. 

If you want to know more about the joint venture, the best thing to do is to consult with an expert who can explain the consequences and conditions in the agreement in greater detail. You can always hire an experienced lawyer from LegaMart directory to provide the complete information to help you make a sound decision.

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