Continued from Part I.
Rights of First Refusal, etc.
Many joint-venture agreements fail to cover the contingency that one of the venturers may want unilaterally to sell its interest, giving rise to controversy whether a right of first offer or first refusal should be implied. A more difficult issue is posed if the success of the joint venture is dependent on the continued operation of a segment of one of the venturers' main businesses. Reportedly, Sony was prepared to sue CBS to enjoin the sale of CBS's record division to anyone other than Sony, based on a long-standing joint-venture agreement between the two firms respecting, among other things, the manufacture of compact discs. If the venture is a general partnership, it is easier to imagine court-enforced restraints on the introduction of new proprietors called "partners" in view of the historical intimacy of the partnership relationship. This is no excuse, however, for failing to codify the parties' intention on this subject in a formal, comprehensive document—whether a partnership agreement or an agreement amongst shareholders. The touchiest area for negotiation, vide the CBS/Sony dispute, will be the responsibility of each venturer to maintain necessary infrastructure. If software company A joint ventures with hardware company B to exploit a particular system should B be required to stay in the hardware business? What if B is losing money on that line? If B's agreement is all-embracing, is the joint venture something B's shareholders should vote on-what amounts to "hypothecation" or "lease" of substantially all B's assets, perhaps?
Drag-Along Rights and Other Exit Levers
If the joint venture has a lengthy time horizon, one of the venturers may want to exit prematurely; perhaps it could use an earnings spike if unrealized appreciation were in fact to be realized. The unilateral sale of a venturer's individual interest is often inopportune, either because of contractual restrictions or economic realities. Accordingly, the drafting should (and often doesn't) cover a relatively lengthy menu of exit issues: registrationrights (rarely employed as written), tag-along rights, compulsory liquidation, compulsory sale (herein called "drag-along" rights), and so forth.
Frequently, the assets of a joint venture are intangible: intellectual property, marketing "support," future services. In the event of liquidation, how is the ownership of such intangibles to be allocated? Assume the core asset is a trade secret, an item of property which can no longer be possessed exclusively (meaning it is no longer legal property) if it is no longer a secret: Can the noncontributing joint venturers be required to forget the secret? To discharge or reassign the employees who have become versed in it? To refrain from making or distributing products which are a direct or indirect consequence of the secret? If the assets of the venture are to be sold because the venturers can't agree, can a venturer be compelled to maximize the value of such assets (as in continuing to support software in the hands of the new owner) after the venture has been liquidated? "Ownership" is a complex concept, best analogized to a bundle of rights; the fact that "joint-venture law" is as yet unformed further complicates the problem. Joint tenancy in real-property law is outlined by well-developed concepts, but it would be a mistake to import the same to cover all possible joint ventures. As Walter Wheeler Cook once said, "The tendency to assume that a word which appears in two or more legal rules, and so in connection with more than one purpose, has and should have precisely the same scope in all of them runs all through legal discussions. It has all the tenacity of original sin and must constantly be guarded against."
The moral, of course, is careful drafting.
Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com
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