By Arjun Ahluwalia

COVID-19 is a time of extreme stress to companies and individuals alike.  In relation to joint ventures (JVs), the stress of negative economic sentiment can lead to friction among key stakeholders about priorities and direction of the business.  As a shareholder, knowing what you have in your JV documentation and being prepared for such friction can keep you a step ahead - calm and serene while the storm rages around you – increasing the chances of longevity for your business and your relationships.  As the ancient Greek and Roman Stoics believed:

"The art of living is more like wrestling than dancing, because an artful life requires being prepared to meet and withstand sudden and unexpected attacks." - Roman Emperor Marcus Aurelius

Much of the manner in which the ancient Stoics approached a negative situation apply today.  A typical response by a Stoic philosopher to a troubled merchant in the days of ancient Athens or Rome to bad news would be:

1. Assess and get control of what you can
2. Focus on what you’re going to do about the bad news
3. Look for some good in the situation
4. Practice mental preparation for the worst-case scenario to be better prepared and gain confidence in your resilience

Centuries forward from the ancient worlds, the same principles apply. In regards to assessing your position as a shareholder in a JV in this business environment, it is critical that you assess your contractual position vis-a-vis the JV and the other shareholders in order to truly prepare and have peace of mind with your fellow stakeholders and in respect of your business.  The following guiding principles can be used to formulate a decision tree or scenario analysis to aid your preparation:

·       From the vantage point of a shareholder... As an equity stakeholder in a joint venture, assess what rights and obligations you have in respect of the ongoing business.

·       From the vantage point of a director... If you hold board seats you likely owe fiduciary duties to the company.  Assess past corporate governance and your role and direction going forward at the board level.

·       Evaluate your level of control... Review your ability to approve or veto which matters and types of decisions in respect of the business (whether as a shareholder or director) keeping in mind any required thresholds to the extent they apply.

·       Assess the funding requirements of the business... COVID-19 presents unique challenges for many if not all businesses in their efforts to trim costs and batten down the hatches.  Assess what funding is likely required in a worst-case scenario.

·       Understand the debt/equity balance of the business... The business has likely been funded via equity contributions by shareholders (perhaps in exchange for sweat or capital contributions) or through debt (perhaps shareholder loans or third party creditors).  Evaluate the appetite of the shareholders and creditors to continue to fund the business and assess dilutive impact.  Ensure you keep an eye on solvency for the purposes of the business not falling into any statutory liquidation-related pitfalls.

·       Evaluate how the interests of key decision-makers may diverge... Executive management, directors, shareholders each may have divergent interests and priorities in a time of crisis.  Critically thinking through different scenarios from the perspective of each unique role and its attendant incentives is vitally important to be prepared and to understand the various perspectives.

·       Evaluate any breaches or events of default...  Factually it is important to give thought to any historical, continuing or potential breaches or events of default under the JV documentation, either committed by your side or the other shareholders.

·       Assess your transfer rights and exit options... Joint venture agreements often include explicit permitted transfer rights and if addressed in the drafting stage, voluntary exit rights (and sometimes even forced exit clauses) based on certain circumstances occurring.

·       Understand the dispute resolution clause, it will help you to make decisions... Whether it’s a local court under a familiar law, or arbitration in a far-off country, or with an embedded mediation clause, it’s critical to know what is in the dispute resolution clause as it informs you about the true cost of an unresolved dispute. Most contractual disputes will never end up in a formal resolution process, but knowing what your ultimate resolution backstop is can enable you to make more informed decisions and work on a strategy for a successful negotiation.

COVID-19 is a time of unprecedented crisis - but it also presents an opportunity to stress-test the resilience of your business, your relationships with your shareholders, officers and directors.  As the ancient Stoics understood, if the worst does not come to pass, you have simply prepared and ultimately more intimately known your situation (in this case your JV’s business) so much better, priming it for future successes as you navigate the troubled waters of these unprecedented times.

Argentum Law lawyers are highly experienced and skilled in helping companies navigate the complex and intricate web of contractual and practical concerns arising between the different stakeholders in joint ventures globally.  Contact us to learn more.

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