Resolving deadlocks in nuclear joint ventures

The essential relevance of the key matters regarding the nuclear power sector is emphasised by the unanimity usually required by the agreements to take a decision on those topics. If, however, the members of the board of directors of the SPV fail to reach a decision, and – usually but not always – the SPV’s ownership structure falls into the category of “joint-control”, parties are given the possibility of enforcing the deadlock clauses. Umberto Salvi of legal firm Clifford Chance takes us through the options available.

Broadly-speaking, deadlock clauses are contractual provisions inserted by the parties in the JV agreement with the aim of determining how disagreements on key issues are to be resolved in relation to the management of the SPV. In other words, the purpose of these clauses is avoiding the risk that a successful business is no longer able to operate, solely because the two partners are unable to agree on a core issue. Indeed, to preserve the value of a profitable business activity, deadlock clauses offer the possibility for the parties to put an end to their disputes, providing different methods by which one party can buy out the shares of the other, to allow one party to bow out with fair compensation for giving up its ownership in the venture.

Given the wide variety of deadlock clauses that are part of current market practice, the parties, while drafting the agreement, are able to choose from a wide range of provisions, depending on which best suit their needs. There is, however, a number of specific types of deadlock clauses which have come to be used fairly regularly in “joint-control” JVs, and which have acquired characteristically descriptive names.

Cooling-off – Escalation clause

This clause usually is the first step in any attempt to remedy a deadlock situation, and allows the partners to mediate until a solution is found, by re-submitting the matter that caused the deadlock to the governing body of the JV partners (cooling-off) or referring the matter to a higher hierarchy level of the partners (escalation). Whilst sounding like a “soft” option, such clause is, in the business practice, very useful in cases where the partners are unable to mediate the dispute. With this resolution method, however, the enterprise will be usually dissolved.

Russian roulette

One of the most famous and widely-used resolution mechanism for JVs in which the partners are not able to make a joint decision on a subject that by agreement requires unanimous approval, is the Russian roulette clause. In this case, either partner can serve notice on the other to value the other’s shares or sell its own shares to the other party at a specified price. The party receiving the notice must either accept the offer or reverse it at the same price to the party that originally made the offer. This risk of reversal acts as an inducement to the party who triggers the process to offer a fair price for the other party’s shares.

Texas shoot-out

Another method used to define disputes arising from the lack of agreement between the parties on a certain matter relating to the management of a JV is the Texas shoot-out clause. Similarly to the Russian roulette clause the Texas shoot-out clause also ends the relationship between the parties, though ensuring the continuation of the business of the venture. Usually applied when both parties are interested in buying the JV vehicle company, each partner sends a sealed all-cash bid to an arbitrator, defining the price at which they are willing to buy out the other party. The sealed bids are then opened together, and the party that made the highest bid will be obliged to buy out the other half share of the JV at the price it set out in its sealed bid.

Dutch auction

There are two types of Dutch auction clauses: one is referred to as the “descending price auction”, and it is mostly used by listed companies wishing to sell their securities at the optimal market price – that is, the lowest price at which a company can sell all the available securities.
The other type of Dutch auction clause, on the other hand, is more suitable for the settlement of disputes regarding the partners of a JV. This version works similarly to the Texas shoot-out clause: the parties indicate the minimum price that they would be prepared to sell their half share for, and, as for the Texan shoot-out bid, the highest bid “wins”. There is however a fundamental difference between the two clauses: whereas the Texan shoot-out clause provides that the winner has to buy out the other party’s shares at the price previously bid by the winner itself, hence, at the highest bid price, in the Dutch provision the winner of the bid buys out the “loser’s” shares at the price set out in the loser’s bid.

Multi-choice procedure clause

Commercial practice has, however, outlined an open format resolution mechanism as well. This clause provides a series of options regarding the ways partners are able to resolve an impasse on a certain relevant matter; the most common options chosen by the parties to reach a solution to the disagreement are either conferring to the chairman of the board a casting vote or referring the dispute to a neutral mediator or arbitrator, who may provide a series of options, one of which the parties must agree on, if the deadlock cannot be resolved. If they cannot agree, the mediator then makes a final choice for the partners.

The main benefit of an open format clause like this is that the parties are thought to be better able to find a compromise when they face dire consequences deriving from the lack of an agreement on an essential topic for the management of the SPV.

Deterrence approach

Often the termination clause in deadlock provisions provides a punitive element for the party initiating the deadlock procedure. In those clauses, a deadlock is only said to arise when one party serves a notice to other indicating that a deadlock has arisen (instead of a failure to resolve on a key matter at a certain number of meetings). The provisions will then provide for the determination of the “fair market value” of a half share in the business, usually by having it valued by an expert or auditor, or sometimes both in consultation. Once the valuation is made, the party who served the notice must either buy all the other party’s shares in the business at 125% of the fair price, or sell its shares to the other party at 75% of the fair price.

The downside to such clauses is that deadlocks rarely get resolved, and can lead to the business being paralysed by indecision.

Liquidation clause

If an exit notice is served, either party may request that a fair price for the shares or for the assets be ascertained. Each party will then notify an independent expert, usually an investment bank, of whether it elects to sell all of its shares or buy all of the other shareholder’s shares at the fair price.

If one party elects to buy and the other to sell, the shares shall be sold at the fair price within a specified period. In this case, the appointed investment bank sets up an auction or another similar process – to which the partners may either not be allowed to participate or granted a right of last call – in order to find the most suitable buyer; if no purchaser is found within the specified period, the parties arrange for the company to be wound up. If, on the other hand, both parties elect to buy or to sell, they may then attempt to reach an agreement; if however even this attempt fails, the partners will arrange for the company to be wound up in this latter case as well.

Swim-man clause

This peculiar deadlock clause is based on the mechanism by which a third independent party has the power to decide which of the JV partners must prevail in a deadlock. To implement such mechanism, at the start of the JV the two partners appoint a third, independent party, granting to such third party one share of the SPV. In case the two partners disagree on one of those specific matters, the third party will cast its vote to support one of the two proposals, effectively making the decision instead of the two major shareholders. The dispute is therefore settled and the JV is able to carry on in the implementation of its project.

Expert panel clause

Another deadlock resolution mechanism parties might use to settle a dispute arising from the lack of agreement on one of the above mentioned governance and management matters is the expert panel clause, which is slightly different from all the above provisions. Here the partners, at the drafting stage, set up a panel of highly reputable experts in the nuclear field; upon occurrence of a deadlock, either party may ask the panel to consider the matter that has caused the deadlock.

The panel, based on the As Low As is Reasonably Practicable (ALARP) principle, shall indicate the most appropriate solution with respect to the matter. If a common view comes out from the panel meeting, the governing body of the JV shall then be convened and hold a meeting to decide on the matter that has caused the deadlock, taking into account the indication rendered by the panel. On the contrary, if no common view comes out from the panel, the governing body of the JV shall then be convened and hold a meeting to examine the different solutions indicated by the panel, taking the decision on the matter by giving full motivation of its decision. In the event the Board decides for a remedial action plan without the favorable vote of at least one member designated by one party, such party shall be entitled to sell its shares on the market.

Umberto Penco Salvi is a partner at Clifford Chance, Milan. With more than 18 years of experience in the M&A sector, Umberto has been involved in several key transactions in the energy industry. Based on his remarkable experience and strong background in the energy field, Umberto, together with his international team of professionals, is a trusted advisor of top-tier players in Europe, to which he provides legal counseling on a regular basis. Umberto also lectures at the SDA Bocconi, Milan, and is an active participant in the public consultation process conducted by governmental agencies.

Clifford Chance is one of the world’s leading law firms, represented by 33 offices in 23 countries. Its 3200 legal advisers operate in six core areas of commercial activity: capital markets, corporate/M&A, finance and banking, real estate, tax/pensions and employment, and litigation and dispute resolution. For more information, visit: Clifford Chance

This feature is based on a paper first presented at “Nuclear Power Europe 2011″, Milan, Italy.