Mechanism

Explanation

Comments

Lock in period

Prohibition on a party from selling its shares for a specified period.

To ensure that an important partner stays involved and to incentivise the party to achieve the objectives of the JV.

Consent of other participants not to be unreasonably withheld

Prohibition on a party from selling its participation without the consent of all other participants not to be unreasonably withheld.

Where the participation of the private sector party is considered critical, this could be a compromise to a lock-in period. It is important to question whether a party who is refused consent to sell will still be willing to contribute to the JV , or whether they will feel aggrieved; the mechanism is therefore sometimes linked to a winding up provision if the sale of shares is refused.

Approval of Board

Any transfer to be subject to approval of the Board.

This mechanism may favour a sale by a majority participant who has greater board representation than a minority participant.

Put and call options

Where a party may have an option to require the other party to buy or sell its participation. 

The option for a compulsory transfer could be exercisable at will or on a trigger event depending upon how the participants have structured the JV.

This option can enable a party to require the other party to sell or buy its participation. As these provisions may force an unwilling buyer/seller, they may not be appropriate for a JV. They may be a useful mechanism for minority participants to prevent a lock in.

Pre-emption rights

Any participation for sale must first be offered to the other participants in accordance with agreed procedures and a participation valuation mechanism to prevent opportunistic pricing by the exiting party. 

This standard provision is a useful mechanism for the remaining party to consolidate control (subject to being able to raise the cash for the participation and any classification consequence.

Intra-group transfers

Allows members to transfer participations to other companies within a group of companies. 

A fairly standard mechanism. It is important to define carefully the parties who are in the "group" e.g. is it a "wholly owned subsidiary" or any subsidiary (or equivalent partnership interests)

Piggy back

Variation to pre-emption rights mechanism which allows a party to sell its participation to a third party provided that if the remaining participants wish, the third party buyer also buys the entire equity interests of the other participants.

This is a useful mechanism for a minority participant who may wish to sell out where its partner has found a buyer. The effect of this clause is that it is the sale of the entire the entire JV to a third party. Consideration will need to be given to the status of any subsidiary contracts.

Drag along

Where a party (generally a majority participant) is permitted to sell its participation to a third party it can also force its JV partners to sell their participations to the same third party.

The rationale for this mechanism is that a business is far more saleable where it is a sale in its entirety or of a majority of participations sufficient to give buyer effective control. The effect of this provision is that it is the sale of the entire JV to a third party.

Tag along

A minority participant can force a sale of its participation to a third party buyer of a majority equity interest at the same price.

This mechanism provides an exit route for a minority participant so that it does not find itself in a JV with a completely different JV partner. Tag along and drag along provisions usually go together. They need to be treated with caution in JVs focused on long-term partnership and not simply about investment and realisation of an investment.

"Russian roulette"

Halfway between a voluntary and compulsory exit, this mechanism allows a party wishing to exit a JV at any time to offer its participation for sale to the other party. If the other party rejects the offer to buy, it must offer its own participation to the original seller upon the same terms.

This mechanism can only be used where the parties are on an equal footing. It cannot work where one party is weaker in its ability to buy participations (e.g. because of funding constraints), as the party forcing the issue may take advantage of this to force a sale of participations by the other party. Given that this method makes it difficult to prove VfM, it does not seem appropriate to a public-private JV. 

"Texas shoot out"

A variant of Russian roulette where one party applies to buy the other party's participation. If this offer to buy is rejected, a counter offer for the purchase of the "buyers" participation must be given at a higher offer. Then the parties may go to sealed bids with a sale to the highest bidder.

This is more akin to form of compulsory transfer. As with Russian roulette, a mechanism where the price paid for the shares is not open to scrutiny is unlikely to be appropriate to a public-private JV.