Monday, September 26, 2011

Joint Venture: Have a Shotgun Clause (Buyout Provision)

You have been very fortunate and found a company that is willing to manufacture and distribute your product in a targeted market, and the other party is proposing you enter into a joint venture whereby both parties would share certain expenses and net income from the venture.  Potential joint venturers obviously enter into a venture with the best of intentions and as a result often fail to consider what happens if a dispute arises.  Therefore, it is very important you work with an attorney to draft a well drafted joint venture agreement that should include a "Shotgun Clause"  (buyout provision).

Under a typical Shotgun clause, one or both parties will have the right to buy out the other party based on expressly stated terms.  The clause should detail both:

          (A) The method of determining the value of the interests to be purchased:  for example, the price can be fixed in the JV Agreement or the value can be determined by an independent third party; and

          (B) The mechanism for exercising the buy out, including notice, payment terms and closing details.

Also, make sure that the JV agreement addresses indemnification with respect to liabilities arising in connection with the JV:  the former JV partner should not be liable for claims arising from events after the buy out, and may also want to try to avoid liabilities for claims from events prior to the buy out.  These are points that should be negotiated and then addressed in the JV Agreement.


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