A common form of conducting business, particularly where different parties come together to pool their resources, is by way of joint venture. A good example is a partnership where partners combine to undertake a common business but joint ventures may also be contractual and, more typically outside professional firms, through shareholdings in a limited liability company. The limited company is generally preferred because of the limited liability and the flexibility the shareholding structure potentially allows, particularly in relation to voting rights, distribution of profits, and the substitution of parties to the joint venture.
As with most relationships, long term success depends on each party fully understanding what is expected of it, what its rights and obligations are, how disputes might be resolved and what happens if, in the worst case, the relationship fails and one party wishes to withdraw. In the enthusiasm of forming the joint venture, with eyes firmly fixed on the sunlit uplands of future success, it is all too easy to dismiss planning for the worst. This is a mistake – a sure way of avoiding the worst is to plan for it.
This was made abundantly clear in a case we are working on which is currently before the court which is text book example of how not to structure a joint venture. Two shareholders established a joint venture company with equal management board representation and shareholdings of 50.5 per cent and 49 .5 per cent respectively of the votes exercisable at a shareholders’ meeting. Valid resolutions requite to be passed by a 51 per cent majority. The parties have fallen out. The company’s articles of association provide no mechanism to resolve disputes and there is no shareholders’ agreement. The company is well and truly dead-locked.
It need hardly be said that no lawyer worth his salt should allow a client to leave the office with a dead-locked joint venture without a method of resolving the deadlock structure – however loud the client’s protestation that this is exactly what is wanted.
In our case, since the shareholders are unable to agree on anything at all, the only solution is litigation under Polish commercial companies code which is simply not the ideal dispute resolution mechanism being costly and time consuming. The majority shareholder is seeking to have the minority shareholder excluded from the company based on the minority shareholder’s alleged non-cooperation in the running of the company which action, if successful, would result in the shares of the minority shareholder being compulsory acquired at a price set by a court appointed expert. If the majority shareholder is unable to pay the price then the court’s decision is revoked and the shareholder is back at square one. Meanwhile, in a separate action, the minority shareholder is seeking to have the company liquidated by the court on the grounds that the majority shareholder’s lack of cooperation has made it impossible to achieve the objects of the company. Needless to say, a shareholders’ resolution to liquidate the company proposed by the minority shareholder was opposed by the majority shareholder.
We would all agree that this is the sort of legal nightmare that any business would be well advised to avoid. If you are forming a joint venture avoid any structure which could result in a dead-lock company unless there is also a clear and enforceable mechanism to resolve the deadlock. The alternative is simply not worth the risk: hope may spring eternal but dead-locks are not so easily sprung and the death of the compny may come first