Exiting from a Joint Venture: What You Need to Know

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Mining and energy projects throughout Australia are frequently conducted as joint ventures. But these are highly speculative endeavours and, on occasion, a participant may wish to voluntarily withdraw, sometimes to avoid on-going financial obligations.

In an arm’s-length business, it is essential to know how to exit without permanently damaging relationships and reputation. Since joint ventures are contractual relationships, that process is generally carefully spelled out in the joint venture or preliminary agreement. What you need to know, then, begins with the contract.

Joint venture agreements tend to have common features, however, so it is possible to make some generalized statements, as long as all involved understand that the specific terms of the agreement will control. Reputation

Exploration vs Operating Project

At the earn-in or sole-funding stages of a project, a participant may not be able to withdraw until the agreed-upon funding requirements have been met or work completed.

When those requirements have been satisfied and participants hold a percentage interest in the joint venture, they are often able to exit simply on written notice to the other participants.

When the project advances beyond the exploratory stage, however, participants in a joint venture may be prohibited from exiting because of the financing demands of an ongoing project.

Where a participant in an operational venture may exit, he or she may be required to provide security for obligations arising prior to the withdrawal. Alternatively, the withdrawal may trigger the rights of other venturers to exit and to wind up the project.

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Earn-in/Sole-funding stage

EXIT

WRITTEN NOTICE

Exploratory stage

EXIT

Exception: Participant in an operational venture

Payment of Duties

Transfer duty, applied by state and local jurisdictions will apply to a wide variety of transactions including the transfer of an interest in a joint venture involving real property, as would be the case with a mining enterprise. The joint venture agreement will likely specify which party is to be responsible for the payment of costs, including duties, associated with the exit and transfer.

Where the agreement is silent or the withdrawal takes place at a pre-operational stage, the question of who bears the responsibility for the tax may be governed by local legislation. In these situations, the calculation of the duty payable can be the source of considerable contention.

Planning an Exit

It is often said that the planning for any new business venture should involve planning for an exit. The decision to withdraw early from a joint venture should hardly be taken lightly, but it would be a mistake to view that step as rare.

It requires, above all, defining the terms of withdrawal in the joint venture agreement. All venturers should clearly understand the circumstances and consequences of such a move. That kind of clarity from the outset may make it possible to preserve a cordial business relationship and perhaps even the potential for future collaboration.