Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate Joint Ventures, October 2010
Most joint venture agreements specify that a joint venture participant may not dispose of or encumber its interest in the project without the consent of the other joint venture participant unless otherwise expressly permitted by the agreement. A principal rationale for such restriction is that joint venture participants do not want to be forced to accept a new joint venture participant in place of the joint venture participant with which they originally chose to do business.
Restrictions on transfer, though protecting the interest of the joint venture participant that is not selling, generally reduce the marketability and value of the interest of the joint venture participant that is selling. A balance must be struck.
A "transfer" is often deemed by the joint venture agreement to include a change of control unless the shares of the joint venture participant or its parent are listed on a public stock exchange.
Financing Restrictions and Partial Transfers
Many joint venture agreements specify that the transfer of the interest of a joint venture participant is not permitted if the transfer is prohibited under the terms of existing financing or if only a part of the interest of the joint venture participant is being transferred.
To permit corporate and tax planning, most joint venture agreements permit transfers to affiliates, provided that:
(i) the transferee affiliate enters into an assumption agreement with the other joint venture participants, expressly assuming all of the transferor affiliate's obligations under the joint venture agreement from and after the date of the transfer as if it had been an original party to the joint venture agreement;
(ii) the transferor affiliate and the transferee affiliate continue to be affiliates of one another during the remainder of the term of the joint venture agreement;
(iii) the transferor affiliate and transferee affiliate remain jointly and severally liable under the joint venture agreement; and
(iv) the transferor affiliate and the transferee affiliate speak with one voice.
Right of First Refusal
Most joint venture agreements contain a right of first refusal. It typically requires that if a joint venture participant receives a bona fide offer to purchase its interest from an arm's-length party that the participant is prepared to accept, that participant must deliver a written notice to the other joint venture participant offering to sell such interest to such other joint venture participant at the same price and on the same terms as those contained in the offer. Usually the other joint venture participant has 30 days from the date on which it receives such written notice either to elect to purchase the interest of the selling joint venture participant or permit the sale to proceed.
A joint venture agreement usually prohibits the exercise of a right of first refusal by the other joint venture participant while such participant is in default of its obligations under that agreement.
There are variations to the right of first refusal, such as the right to offer to purchase the respective interests of all of the joint venture participants if one joint venture participant obtains an offer to buy the whole project from a third party.
Rights of first refusal are usually made continuing: if the selling participant is unable to complete its sale to the third-party purchaser by the deadline for doing so, then the seller is required to go through the process once again before being able to close the sale.
Occasionally, joint venture participants will want an early warning that the other joint venture participant wishes to dispose of its interest in the project, whether because that participant no longer believes that the joint venture arrangement is viable or desirable, or for some other reason. Unlike the right of first refusal, which is initiated by a third party, a right of first offer is triggered by the joint venture participant that is selling.
Accordingly, joint venture agreements often provide that the joint venture participant intending to sell its interest must first deliver to the other joint venture participant a written notice advising of the price and terms on which it wishes to sell its interest and giving such other joint venture participant, say, 30 days to decide and notify the selling participant whether it wishes to purchase such interest at such proposed price and on such proposed terms.
The non-selling joint venture participant usually has two options. The first option is to buy the interest of the selling joint venture participant. The second option is for the non-selling joint venture participant to decline to purchase and, as a result, enable the selling joint venture participant to market its interest for a stipulated period of time (180 days being the norm) with a view to finding a third-party purchaser willing to purchase for a price no lower and otherwise on terms no more advantageous, in the aggregate, to such third-party purchaser than those offered to the non-selling joint venture participant.
This second option could play out in a number of ways. Firstly, the sale may be completed in accordance with the stated specifications in the joint venture agreement. Secondly, if due to timing problems the sale may not be completed within the 180 days, then the selling joint venture participant would be required to go through the sale procedure a second time. Thirdly, the selling joint venture participant may find a third-party purchaser within the prescribed period but the price and the terms that such purchaser is prepared to purchase are more advantageous to the purchaser than those offered to the non-selling joint venture participant.
In such event, the selling joint venture participant would be required to give the non-selling joint venture participant a reasonably brief period of time (say, 20 business days) either to match price and terms offered by the third-party purchaser or to allow the sale to proceed.
Piggyback and Drag Along
Other exotic variations of the right of first offer typically found in joint venture agreements include a "piggyback". This means that a third party intending to purchase the interest of one joint venture participant must offer to purchase the interest of the other joint venture participant on the same terms and conditions and the same per unit price.
Another variation is a "drag along". This means that if the majority joint venture participant sells its interest to the third party, the minority joint venture participant can be "dragged along" and required to sell its minority interest to the same third-party purchaser on the same terms and conditions and the same per unit price.
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