Joint ventures: what to consider in a transfer?
A party in a joint venture (JV) may wish, for various reasons, to dispose of their interest in the JV. Typically, when setting up an agreement the parties involved will want to ensure that there are restrictions around the circumstances in which a party may dispose of its interest. This is to ensure that the other parties retain a degree of control over who is involved in the JV, and to protect the future viability of the JV. Key areas to think about when putting these controls in place include:
- Permitted transfers. It is often the case that the JV documentation will contain a general prohibition on transfers other than in specific permitted circumstances. This is to allow a degree of flexibility for the parties by allowing them to, for example, transfer within the group.
- Pre-emption rights. Where transfers are permitted, should the transferring party first be required to offer its interest to the remaining parties?
Drag-along and tag-along sales
When considering a transfer you need to take into account the structure of the JV. Depending on the number of parties to a joint venture and the size of their respective interests, it may not be appropriate for all parties to benefit from both drag-along and tag-along rights. Consideration will also need to be given to the nature of the JV and the extent to which it relies on the assets or skills of one or more of the parties being involved
In the case of a drag-along sale
A party selling its interest in the JV to a third party buyer can require any remaining JV parties to sell their interest to the buyer on the same terms (including price), which may make the sale more attractive to the third party.
In the case of a tag-along sale
A non-selling JV party (usually a party holding a minority interest) can make it a condition of sale that the third party buyer also acquires its interest on the same terms.
The above is a summary of transfer considerations. For details on other key considerations when entering into a joint venture please refer to our guide 'Joint ventures: what are the key considerations when entering into a Joint Venture'.
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