Joint ventures in the clean energy sector: Terminating a joint venture

Joint ventures (JVs) play a crucial role in facilitating innovation and collaboration among businesses. For that reason, JVs are particularly necessary in the rapidly evolving clean energy sector. Terminating a JV can, however, be a pivotal moment for your business. The stakes are often high, consequences significant, and the process may present a number of complex legal, financial, and strategic challenges.

To avoid potential pitfalls, it’s essential that you take the time to understand the termination process and what that means for you and your business.

In this article, we explore the top 10 key points to keep in mind when preparing for the possible termination of a JV.

1. How will termination occur?

Typically, the JV company’s shareholders’ agreement (SHA) will contain specific provisions on how parties can trigger termination of the JV, the process for termination, and the consequences of termination.

It’s essential that you understand these provisions at the time they are being negotiated and drafted into the SHA. Termination provisions are usually strict and are often required to be followed to the letter. There is likely to be little scope (if any) for amending the agreed process after the SHA has been entered into.

Your lawyers should be instructed early in the process so they can work closely with you to ensure that you understand and are comfortable with the potential outcomes for your business if the JV were to be terminated.

2. Going it alone

One of the potential outcomes of triggering the termination process may be that one or more of the parties acquire the whole interest in the JV and continue to run it without the outgoing party. In which scenario, unless otherwise agreed, all risk would sit with the continuing parties.

The remaining partners, whether one or more, will then usually consider whether a new JV partner should be brought in. The remaining partners will likely assess the viability of the JV and, in particular, whether it’s financially sensible to continue the business without a new partner.

If the decision is taken to bring on a new JV partner, careful consideration should be given to whether they possess the attributes that the project needs in the next stage of its lifecycle, whether that be specific expertise and experience, or whether a primarily silent financial partner is more appropriate at that time.

3. Regulatory considerations

One key regulatory point JV partners should be aware of, particularly in energy projects, is the restrictions imposed by the National Security and Investment Act (NSIA).

If your project falls within the scope of any of the 17 qualifying sectors of the UK economy under the NSIA, changes to the ownership of the project may require UK government approval before the change can take place. Qualifying sectors include projects in the energy, civil, and nuclear sectors.

If NSIA approval is required for a transaction but not obtained, the transaction is void and the UK government can call in the transaction for an NSIA assessment if it reasonably suspects it may give rise to a national security risk.

An acquiring party which fails to obtain NSIA approvals when required can in some circumstances be subject to civil and/or criminal penalties.

4. Funding

If a single JV partner does intend to acquire the entire interest in a JV, how that partner will fund its acquisition of the outgoing partner’s interests will be an important consideration.

In addition to the value of the outgoing partner’s equity interest in the JV, there may be outstanding shareholder loans which need to be repaid on their withdrawal. If the project can’t repay those loans from its own balance sheet, the continuing partner will have to consider whether it will advance loans to the JV to enable it to repay the outgoing partner’s loans, or whether it might seek third party financing.

5. Change of Control

Depending on the stage of the project, the JV may be party to a number of commercial contracts relating to the project (for example, with suppliers or funders). Some or all of those contracts may contain change of control or termination provisions, which could be triggered by a change to the JV parties.

Where possible these contracts should be carefully reviewed before any such change takes place. Particular attention should be paid to whether any consents are required under those contracts for a change of ownership of the JV.

It’s important that all material contracts are reviewed, as often the consequences of not obtaining consent to change of control provisions under a third party contract are to allow the third party to terminate the contract without notice.

6. Assets

The exiting partner may have loaned assets to the JV, some of which the JV may require to continue operating. For example, the JV may use the exiting party’s IT systems.

The partners should discuss whether the JV will purchase any of those loaned assets, or whether a transitional agreement would be appropriate to allow the JV to continue to use the assets for a specified period of time post-exit.

Unless specific provisions have been made in the JV documentation to confirm that an exiting partner will continue to allow the JV to use certain assets following a partner exiting, they will be under no obligation to do so. So, if there are any project critical assets being loaned in by partners, it’s worth JV partners considering whether any transitional arrangements should be baked into the JV agreement.

7. Goodwill

In many cases, the JV agreement will include restrictions on the actions of an exiting partner, which will continue for a period after its departure.

Common restrictions include restrictive covenants prohibiting the exiting partner from directly competing with the project or poaching staff working for the JV for a specified time, and confidentiality provisions preventing the exiting partner from disclosing, or exploiting, private project information for its own purposes.

The restrictions in the JV agreement will depend on the nature of the JV and may apply to some but not all parties.

Careful thought should be given to these provisions when the JV agreement is being prepared and negotiated to ensure they’re appropriate for all parties.

While the parties will want to be comfortable that they’re not unduly restricted if they do exit, these provisions can be critical to protecting the value of the project for a continuing partner.

8. Employees

Often in JVs, and particularly for clean energy projects, JV partners will second members of staff into the JV vehicle itself, whether part-time or full-time. For example, a JV partner may second members of its legal, operational, and project management teams into the JV full time to run the project, and others part-time to assist with accounting, secretarial, and management services.

If an exiting partner has staff seconded into the project, the parties should discuss arrangements for those staff, including whether they’ll remain in the JV, and if not whether any transitional arrangements will be put in place.

Please note, in some circumstances the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) may require that the secondee’s employment contract be transferred into the JV on no worse terms than their existing employment. This is particularly relevant where a secondee’s work is primarily dedicated to the business of the project. Staff employed by the JV may also have TUPE rights to transfer to the exiting partner.

Where applicable, TUPE requires specific processes to be adhered to and there may be a lead time to the process. To ensure compliance with the process and to avoid undue delay to the exit arrangements, you should consult your lawyers on the application of TUPE regulations as early as possible in the process.

Again, the parties should give thought to what will happen to seconded staff on an exit when they are drafting the JV agreement. While some arrangements, like the application of TUPE, cannot be contracted out of, the partners can make arrangements to, for example, hold each other harmless from the costs of any unintended TUPE transfers.

9. Pensions

Where there is any change to employment arrangements as a result of the exit, the JV partners should be alert to any possible pensions implications.

Relevant changes could include where the JV has employees who will be made redundant as a result of the exit, secondees who will be transferred to the JV, or employees who transfer out of the JV.

Where the JV has existing pension arrangements in place with staff who are leaving, including where it has been required to auto-enrol staff into a pension scheme in accordance with statutory obligations, specific actions will depend on whether the staff are transferring out to another employer, or whether they’re being made redundant.

Alternatively, the JV may outsource its pension arrangements to one of the partners. If those arrangements are with an exiting partner then the parties will have to agree what happens post-exit.

If the JV has staff transferring into it from an exiting partner, the JV may need to establish pension arrangements for those staff.

Pension considerations can have a significant cost implications and administrative burden on a project. Where possible, parties should confirm what they intend to happen to pension liabilities on termination of the JV at the point of entering into the JV, and at the point of putting the pensions arrangements in place.

10. Tax implications

Different joint venture vehicles will have different tax implications upon termination.

If the JV is a company, any sale of shares by one of the JV partners may be able to benefit from the substantial shareholding exemption, otherwise corporation tax may be payable. For partnerships, capital gains tax may be payable when transferring the assets back to the remaining partners.

Again, you should consult your lawyers and your tax advisers on potential tax implications as early as possible in the process.