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Nuts and Bolts of Equity Joint Ventures. Association of Corporate Counsel, Charlotte Chapter April 2, 2014. Presented by: Karen Gledhill Matthew Churchill. 7 Basic Structural Considerations. Key JV Terms. Governance. Transfer. Competitive Restrictions. Affiliate Transactions.

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Nuts and bolts of equity joint ventures

Nuts and Bolts ofEquity Joint Ventures

Association of Corporate Counsel, Charlotte Chapter

April 2, 2014

Presented by:

Karen Gledhill

Matthew Churchill


7 basic structural considerations
7 Basic Structural Considerations

Key JV Terms

Governance

Transfer

Competitive Restrictions

Affiliate Transactions


Jv scenario
JV Scenario

Current Relationship

Joint Venture

Customer, LLC

Newco, LLC

Parts, LLC

Supply K

10%

30%

Customer, LLC

Parts, LLC

Key EE

60%

Key EE


Assets in

Business operating assets

Tangible Assets (free and clear of liens)

Intellectual Property (contribution/license)

Key Permits

Key Talent (Employment Agreements)

Assets In


Assets in1

Operator Concerns

Tax-free Contribution

Valuation of Business

Debt & Key Contracts Assumed

Investor Cash Received

Commitment of Key Employee

Assets In


Assets in2

Investor Concerns

Business assets contributed free and clear

Protection from pre-closing liabilities

Employee Concerns

Employment Agreement/Benefits/Taxes

Assets In


Assets in3

Address Working Capital Needs

Line of Credit/Member Loans

Working Capital Contributions per Budget

Assets In


Assets in4

Address Future Capital Needs

Ability to Issue Equity/Preemptive Rights and Anti-Dilution Protection

Mandatory Capital Calls

Voluntary Capital Calls

Remedies for Breach of Capital Call Requirements

Assets In


Money out

Structure Waterfall (Freedom of Contract)

Pro Rata Distributions

Investor Receives Preferred Return on Investment and Return of Capital First

Money Out


Money out1

Tax Distributions

Profits-Only Interests for Employee

Cash Distributions versus Tax Allocations

See Waterfall on p. 13 of JV Handbook

Money Out


Governance

Often Manager-Managed

Board structures common

Consider entities as managers

Control over Day-to-Day Decisions

Veto Rights/Super-Majority Votes

Governance


Governance1

Fiduciary Duties/Ability to Disclaim and Exculpate

Affiliate Dealings

Manager vs. Member Decisions

Dispute Resolution/Deadlock

Governance


Transfers

Free Transferability

Outright Prohibition

ROFO/ROFR

Drag-Along/Tag-Along

Indirect Transfers/Change of Control

Transfers


Transfers1

Estate Planning/Affiliate Transfers

Focus on Boilerplate

Securities law restrictions

Ability to obtain guaranty releases

Prohibitions on sales to competitors

Transfers


Nuts and bolts of equity joint ventures

Call Rights

Put Rights

Rights exercisable upon breach or termination of key contracts (supply)

Capital Contribution/Noncompete/Transfer breaches under LLC Agreement

Exit


Nuts and bolts of equity joint ventures

Buyouts of Employees upon termination of employment

Forced Marketing and Sale Provisions

Buy-Sell Provisions

Exit


Nuts and bolts of equity joint ventures

Valuations may differ due to cause of termination

FMV with or without discounts for minority interest and lack of liquidity

Lower of FMV and capital account balance

Appraisal process and timing of payouts

Exit


Competitive restrictions

Confidentiality

Nonsolicit of Employees, Customers and Vendors

Noncompetition Agreements (tail provisions) or express agreement to allow competition

Competitive Restrictions


Affiliate transactions

Approval and Negotiation Procedures

Key to document in detailed separate agreement

Avoid single paragraph in Operating Agreement detailing agreement

Affiliate Transactions


Red flags

Antitrust and HSR Act Implications

Securities Laws Implications

Employment/Benefits Issues

Red Flags


Nuts and bolts of equity joint ventures

Karen Gledhill

704.377.8365

kgledhill@rbh.com

Matt Churchill

704.377.8388

mchurchill@rbh.com