In the context of a joint venture (JV), a “deadlock” refers to a situation where the decision-making system of the JV company becomes dysfunctional due to irreconcilable differences between JV partners (shareholders). While efforts should be made to resolve the deadlock and continue the joint business, there may be situations where dissolution becomes the only viable option.
1. Resolving Deadlock Through Share Transfer
In many cases, dissolving the joint venture involves one shareholder buying out the other. Typically:
– The majority shareholder purchases the JV shares from the minority shareholder, turning the JV company into a wholly-owned subsidiary of the majority shareholder.
If both parties can agree on the terms and conditions of the share transfer, including the price, this approach is straightforward. However, disagreements on share valuation or other terms are common, which is why many joint-venture agreements (JVAs) include mechanisms such as call options and put options:
Call and Put Options
– A call option gives one shareholder (usually the majority shareholder) the right to purchase shares from the other shareholder.
– A put option gives one shareholder (usually the minority shareholder) the right to sell shares to the other shareholder.
These options are typically exercisable only in the event of a deadlock. For example, a deadlock may be defined as the failure to pass a resolution at the shareholders’ meeting twice consecutively. Please note that allowing these options to be exercised without a deadlock could destabilize the joint venture.
2. When Dissolution Is the Only Option
In some cases, the joint venture cannot operate without the cooperation of both shareholders. If this is the case, share transfer to other JV partner is not a viable option to address deadlock, and there is no other choice but to dissolve the JV and cease the business.
Legal Recourse for Dissolution
Under the Japanese Company Act, a shareholder holding at least one-tenth of the total shares or voting rights can file a lawsuit for dissolution if the JV company has become deadlocked and the company’s decision-making system is severely impaired, making it impossible to operate effectively, such as the case where it cannot elect directors.
Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.