Joint venture exits in Australia: where execution risk is shifting in sale processes

At the outset of any joint venture, participants focus on a familiar universe of contractual exit mechanisms – pre-emptive rights, put and call options, drag and tag along rights, affiliate transfers, IPO or trade sale exits and associated valuation regimes. While these provisions remain important, they do not fully capture where execution risk in a sale process sits. 

Recent disputes, including the high-profile proceedings involving Dexus and the other investors in Melbourne Airport, illustrate the potential impact of confidentiality and information access frameworks. While these provisions are effective in a ‘business as usual’ environment, they can become points of friction in a live sale process. Investors should stress-test these regimes upfront, to ensure they can support a controlled and executable exit when a participant’s commercial objectives have changed.

Confidentiality provisions: the challenge of strict compliance

The Melbourne Airport dispute underscores the significant consequences of failing to comply strictly with a contractual confidentiality regime when conducting a sale process. It also highlights that confidentiality is not a static contractual obligation, but a constraint that must be actively managed in the context of a live transaction.

There can be an inherent tension between the joint venture’s interest in preserving the confidentiality of joint venture information and an exiting participant’s desire to run a successful third-party sale process. Confidentiality regimes will typically accommodate disclosure to bona fide third-party potential purchasers, but provide limited guidance as to how that disclosure is to be practically implemented. For example, there may be a contractual requirement for an exiting participant to enter into a non-disclosure agreement (NDA) with a purchaser in a form to be “reasonably agreed” between the participants, or for that NDA to provide protection “to the same degree” as the joint venture’s own confidentiality restrictions, with enforceability by all participants. 

These concepts can be difficult to apply in practice, particularly where participants are unlikely to have a commercial desire to agree the form of that NDA in detail at the time of joint venture establishment. The consequence is that key aspects of the disclosure framework may need to be negotiated at a point in time when the participants’ commercial interests have diverged. 

The position becomes more complex in ‘look through’ investments involving multiple layers of ownership, where separate confidentiality regimes may apply and do not necessarily align. In that context, managing disclosure becomes less a question of strict compliance with a single regime, and more an exercise in navigating overlapping – and potentially inconsistent – information controls.

Against that backdrop, the challenge for an exiting participant is to manage the sale process in a way that is both effective and compliant, including remaining transparent with fellow participants as to the proposed approach to disclosure and the protections to be put in place. As Justice Hammerschlag observed in the Melbourne Airport proceedings, “An inadvertent disclosure is one thing. A deliberate or reckless one which is subsequently wholly or partially concealed, is another.”

Information access rights: control and purpose in a live sale process

In an incorporated joint venture, securing board representation is a significant focus at the point of entry. In addition to voting powers, director information access rights are broad and useful for investment monitoring in a ‘business as usual’ context. Shareholders’ agreements will often also acknowledge that directors may share information with their nominating shareholders. However, those nominees remain subject to their directors’ duties to the joint venture company. 

Where a nominating shareholder is undertaking a sale process, the position of their board appointee can become strained. In the context of information access, directors must carefully consider the purpose for which information is obtained and how it is used to ensure they are continuing to comply with their duties to the joint venture company. Routine information flows may become constrained, requiring clear delineation between information obtained and used in a governance capacity, and information sought for the purposes of a third-party transaction. Shareholders will need to consider alternative contractual pathways to obtain information for use in a sale process, rather than relying on director-level access.

In an unincorporated joint venture, participants will typically have broad contractual rights to access joint venture information. However, those rights should be considered alongside any applicable confidentiality regime and should not be treated as a means of circumventing on-disclosure restrictions. A right to access information does not carry with it an unfettered right to on-disclose to third parties, and governance mechanisms – such as management committees – may control the terms on which disclosure occurs.  In that sense, information access rights do not operate in isolation, but form part of a broader framework governing how information can be controlled and deployed in the context of a potential exit.

The duty of good faith: competing obligations 

Australian courts have recognised that a duty of good faith and cooperation may be implied into joint venture agreements, and in some cases it may be expressly provided for as a contractual obligation. 

In a sale process, that duty can create an inherent tension. A selling participant is seeking to maximise value for its own investors, including by disclosing the information necessary to run an effective sale process. At the same time, that participant must avoid acting inconsistently with its duty of good faith, which extends beyond compliance with specific contractual terms and can encompass a broader obligation to act honestly and engage transparently with its co-venturers about the approach to disclosure. 

This tension also creates practical difficulties for non-selling participants, and for the board of an incorporated joint venture, when deciding whether to pursue a selling participant for any alleged breach of confidentiality. Enforcement decisions must be taken in a context where ongoing relationships, transaction dynamics and overlapping duties are all in play.

Default regimes: triggers and execution risk

If there is a breach of confidentiality by a selling participant, the question will be whether this triggers the joint venture’s default regime. In some contractual regimes, a breach of confidentiality is expressly identified as a material or irremediable default, attracting severe consequences including compulsory transfer of the defaulting participant’s interest. In others, this may require a more nuanced assessment of the materiality of a particular breach of confidentiality and the loss suffered. 

There may also be flow-on uncertainties in the joint venture agreement, even where the default regime is triggered. For example, if compensation is payable, how is that to be valued in the context of a confidentiality breach? If a mandatory sale is the consequence, does that regime clearly supersede other agreed exit pathways? 

These issues can have practical implications in the context of a sale process, particularly where the consequences of breach are uncertain or contested. It is therefore important at the outset of a joint venture for participants to construct a default regime that is fit for purpose in the context of a confidentiality breach, and capable of operating effectively where a transaction is underway.

Joint venture exits: aligning contractual frameworks with transaction reality

Traditional exit mechanisms remain a necessary foundation of joint venture arrangements. However, they are no longer where the primary execution risk sits. Rather, the ability to deliver a successful exit increasingly depends on whether confidentiality, information access and governance frameworks can operate effectively when tested in the context of a live sale process.

Exit planning must therefore extend beyond transfer mechanics and valuation to include a more holistic consideration of how information will be controlled, disclosed and governed where participants’ commercial objectives have diverged. This includes consideration of who will have the benefit of, and the ability to enforce, any confidentiality protections imposed on third-party recipients – particularly after the departing participant has exited and may have limited continuing interest in enforcement. The focus for investors is therefore not only on securing exit rights, but on ensuring that the broader contractual and governance framework can support a controlled and executable sale process when required.