8.18 Exit provisions are needed to enable participants to realise their investment in the JV (and thereby extract value), and to protect their investment when other participants wish to exit or if the JV or other participants fail to perform their respective obligations or act in accordance with the agreed objectives.
8.19 Agreeing provisions for participants to exit from the JV is likely to be one of the most difficult issues to resolve. This stems from the difficulty in determining the value of equity participations held in the JV where they have no readily established market value. It is important to ensure that the public sector body avoids the situation where it is forced to buy shares, unless appropriate, or to buy at an inflated value. This is a complex area, but typical mechanisms for calculating the value of participations include:
● net present value of future earnings;
● underlying asset value, e.g. calculated on the basis of depreciated replacement costs or net book value;
● break-up value; and
● the use of an expert valuer.
8.20 It will be important to draft appropriate provisions in the JV agreement from the outset setting out when and how participations in the JV can be sold and the JV wound up, taking account of the consequences of these actions. Before attempting to draft such provisions, the parties must be clear of the underlying intention behind setting up the JV, i.e. what are the objectives of the parties in setting up the JV? How are these objectives to be realised? The following questions will need to be considered:
● To what extent can the JV exist without the founders' involvement?
● Is the JV being set up for a specific task or duration, so that when it iscompleted or reached the JV will cease to operate?
● Does any participant intend to sell its interest when the JV's business achieves a certain milestone and, if so, is it expected that this party would sell to a founder or a third party?
● In what other circumstances would changes to the participants be permitted?
● How are management deadlocks or disputes to be resolved?
● In what situations would changes to the participants be required?