Joint ventures: deadlock provisions

A corporate joint venture (“JV”) is a business arrangement in which two or more parties (through the use of a separate company owned by the JV partners) collaborate on a specific business endeavour, sharing resources, control, risks and profits while maintaining their separate legal identities. This is distinct from contractual joint ventures, which are not discussed within this blog.

A key early consideration when deciding to pursue a JV is ownership and control. Some companies may prefer a majority stake (for decision-making efficiency), while others may favour a minority position (for reduced responsibility and risk). A third option is a 50:50 JV, which involves equal ownership. Whatever structure is chosen, there is a potential for a “deadlock” to arise, where JV parties cannot agree - at board or at shareholder level - on material decisions, causing the business to stall. This is especially common in 50:50 JVs.

JV documentation often includes deadlock resolution clauses, to either resolve disputes or facilitate the exit of one or more parties from the JV. These are typically contained in a JV agreement or shareholders’ agreement (and, less commonly, in the articles of association). We have provided a brief overview of key deadlock provisions below. Whatever provision(s) is(are) used, it is important to clearly define the circumstances that trigger its application.

Continuation provisions

Continuation provisions aim to resolve the root of the deadlock while preserving the JV. Common provisions include:

Chairperson casting vote

The chair of the relevant meeting has a deciding vote in the event of a tie. The chairperson could either be independent or appointed on a rotating basis.
Third-party decisions

An independent expert, arbitrator or mediator is appointed to assist in resolving the dispute. Each option has its own process and may be binding, so the approach should be carefully considered before being incorporated into the JV documentation.
A cooling-off period

Allows the parties to reflect and negotiate further within a specified time frame.
Escalation to management level

Senior individuals from each party attempt to resolve the issue, however this may not be helpful where the deadlock arises from fundamental differences of opinions.

Each method has its own advantages, such as speed or neutrality, but also potential drawbacks, including perceived bias or no guaranteed resolution. These provisions are not mutually exclusive and can be used in combination to create a more flexible deadlock resolution framework.

Exit provisions

Where the deadlock cannot be resolved, exit provisions offer a structured way for one or more parties to leave while allowing the business venture to continue.

Russian roulette
- Encourages fair pricing
- No formal valuation is required
- Defined timelines
Key disadvantages include:
- May favour the party with greater financial resources
- The initiating party cannot choose whether it will buy or sell
- Risk of mispricing
Texas shoot-out
This provision is also commonly used in a 50:50 JV. There are two alternative ways that this can be structured:
- Multi-stage process – one party serves notice of a cash offer to buy the other’s shares; the other party may accept or counter. If countered, sealed bids are submitted and the highest bidder is entitled, and bound, to purchase the other’s shares at the price stated.
- Sealed bid process – both parties submit sealed bids simultaneously to buy the other’s shares. The highest bidder (selected by an independent party) is entitled, and bound, to purchase the other’s shares at the price stated.
The advantages and disadvantages of the Texas shoot-out are similar to those of Russian roulette. The key distinction is that, in a Texas shoot-out, sealed bids mean neither party is required to “show their hand” first; however, this may result in inflated offers and potential overpayment.
Other potential provisions
- Put and call options – allow one party to require the other to buy or sell their shares at a predetermined price or formula. These can be difficult to implement in 50:50 JVs as parties may attempt to engineer a deadlock for strategic gain.
- Buyback provisions – the JV buys back shares, subject to available funds and compliance with the Companies Act 2006 (“Act”).
- Pre-emption or third-party sale – a shareholder may exit by selling to the other party or a third party.

Court remedies

In the absence of agreed provisions, a party to a JV may seek to resolve a deadlock through the courts. Litigation can be costly, time-consuming and often leads to the breakdown of the JV, and should therefore be a last resort.

Specific implement (in England, specific performance) – a shareholder can apply to the court for an order that another shareholder, or the company, does something. If a JV deadlock arises out of non-performance by a party of an obligation, such as acting reasonably in approving a budget, the court can order them to comply with that obligation.
Interdict (in England, injunction) – conversely, a shareholder can also apply to the court for an order that another shareholder, or the company, refrains from doing something, for example, a transfer of assets out of the JV, or a breach of an exclusivity or non-compete obligation in the shareholders’ agreement.
Unfair prejudice – a minority shareholder may apply to the court under section 994 of the Act where the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members, or where an actual or proposed act or omission of the company is or would be so prejudicial. A JV being deadlocked can constitute unfair prejudice, for example, if it means that the company cannot operate, or essential decisions can’t be taken. The court has wide powers under section 996 of the Act, including ordering the purchase of the minority shareholder’s shares at fair value (see our insight, Resolving Shareholder Disputes).
Compulsory winding up – in circumstances where a JV has broken down and can no longer function, a shareholder may apply to the court to have the company wound up on “just and equitable” grounds under section 122(1)(g) of the Insolvency Act 1986 (see our insight, A remedy of last resort in shareholder disputes).
Interim remedies – where there is an element of urgency, for example, an immediate risk of the JV being stripped of assets, heritable property, or funds, remedies such as interim interdicts/injunctions and asset freezing can be granted on a protective basis to prevent this.

How can Brodies help?

The appropriate deadlock provision will depend on the nature of the corporate JV and the relationship between the parties. It is important that these are considered, with legal advisors, at the outset to minimise disruption and avoid potentially lengthy (and costly) negotiations around resolutions and/or exits further down the line, should an unforeseen dispute arise.

If you would like more information about JVs and deadlock resolution, please contact a member of the Corporate Team or your usual Brodies contact.