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05 February 2014

Do joint business ventures need the equivalent of a pre-nup?

As the economy continues to recover, 2014 looks set to see an increasing trend in mergers and acquisitions or joint venture arrangements, with many companies seeking to pool their assets and combine their strengths to tackle new market opportunities and expansion plans.

But what happens when those initial heady days are over and the first stumbling blocks appear?

Whilst there may not be a divorce lawyer for warring business partners, issues are common and there’s plenty you can do in advance to plan for the unexpected further down the road, as Simon Carroll, an associate in the litigation and dispute resolution practice, explains: “When joint ventures run into problems, it’s all too easy for the parties involved to find themselves in deadlock. Often neither can afford to back down and costs can quickly escalate,” he said.

“Our role is two-fold – to provide advice and guidance before any agreement is drawn up and secondly, if problems have already arisen, to help manage any conflict and reach a resolution.”

Simon advocates the adage "prior preparation prevents poor performance" and he says taking account of all eventualities beforehand will help save considerable time, cost and frustration, rather than trying to resolve them once something has gone wrong.

Having spent time as in-house litigator at a top 25 FTSE 100 company, Simon is well versed in commercial practice and has considerable experience in dealing with a variety of disputes.

“Joint venture agreements should set out the scope of how parties will work together and what their rights and obligations are – in effect it works in the same way as a commercial arrangement between two individuals,” he said.

“The source of a dispute can vary; it may be commercial if one person wants to do something with the business that the other doesn’t agree with, so their business interests are no longer aligned, or it may arise from a breach of a legal obligation.

“No-one sets out intending to fall out, but if two parties reach a deadlock stage where neither can move forward because they are equal partners, that isn’t good for either the business or the individuals involved.”

While there are legal mechanisms such as a winding-up orders that can be actioned to bring ventures to an end and break the deadlock, these often have disadvantages, such as the likelihood of not realising a good value for joint assets and the cost involved.

Simon says the preferred option is to ensure that joint venture arrangements (as with shareholder agreements) include an internal escalation mechanism in case disputes arise, and to have a fixed timetable for procedures.

He recommends a three-tiered process to cater for different levels of dispute severity, as shown in this example:

Q. Two investment partner companies in a joint venture have fallen out and the parties have been unable to resolve the situation.

A.  In the first instance, escalate the problem to CEO level for consideration. If still unresolved, the issue might go to an internal resolution panel or a neutral mediator appointed by both sides. The final stage would be a referral to arbitration or litigation.

“The key is to ensure there is a defined process in place which all parties know must be adhered to,” continued Simon. “While some may prefer to try a more informal approach to resolving differences, we know from experience that this doesn’t always work and, if one party isn’t satisfied and simply refuses to co-operate, it can cost a great deal more time and money.

“Planning ahead is invaluable and we can provide advice and support to any business which plans to make 2014 the year of the new joint venture.”

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