Russian Roulette Clauses: A Strategic Solution for Deadlock Situations in Joint Ventures

Budoor Al Halwachi ([email protected]) – Associate

In today’s corporate landscape, joint ventures have become increasingly relevant as a strategic tool in facing geopolitical turmoil and economic uncertainty. According to recent surveys by the Boston Consulting Group, joint ventures are now seen by many experts as more significant than traditional merger and acquisition activities.[1] Since the end of the COVID-19 pandemic, numerous joint ventures have emerged, many of which feature two shareholders with equal share participation or voting rights (50:50).[2]

To address governance crises in these 50:50 joint ventures, the Russian roulette clause imported from Anglo-American legal practices has gained traction in Italy, France and broader Europe. It allows one party, upon reaching a deadlock, to propose a solution that involves either buying the shares of the other party or selling its own shares to the other party, but not both. In this context, deadlock refers to a situation where the parties involved in the joint venture are unable to reach a consensus on a specific decision or course of action, whether at the board or shareholder level.

The Russian Roulette Clause

1. Issuing the Deadlock Resolution Notice: In the event of a deadlock, one party may issue a Deadlock Resolution Notice to the other party, where one party proposes to buy or sell all its shares in the Joint Venture Company (JVC) at a pre-determined price. The offer cannot be served before the first anniversary of the agreement nor is it irrevocable.
2. Timeline for Resolution: If the deadlock persists for 14 days after being referred to the chairpersons for resolution, the affected party may serve a Deadlock Resolution Notice within 28 days from the end of that initial period. This timeline encourages timely decision-making and helps prevent prolonged disputes.
3. Recipient’s Options: Upon receiving a Deadlock Resolution Notice, the recipient has 28 days to respond with a counter-notice. The options available to the recipient are clear: they can either accept the offer and buy all shares from the offering party or reverse the offer and sell their shares at the specified price. This mechanism ensures that both parties are engaged and accountable in the resolution process.
4. Deemed Acceptance: If the recipient fails to serve a counter-notice within the stipulated timeframe, they are deemed to have accepted the offer, binding both parties to the transaction outlined in the Deadlock Resolution Notice. This provision safeguards against inaction and ensures that the deadlock resolution progresses.
5. Competing Notices: If both parties issue a Deadlock Resolution Notice, only the first notice served or the one with the highest price per share will be considered effective. This stipulation adds a layer of competition and urgency, encouraging parties to act decisively.
6. Winding Up the Joint Venture: If neither party serves a Deadlock Resolution Notice by the end of the 28-day period, either party can elect, through written notice, to wind up the JVC according to the specified terms. This clause provides a clear exit strategy, ensuring that prolonged deadlocks do not result in financial or operational stalemate.

Implications of the Application of the Russian Roulette Clause

While the Russian Roulette clause is intended to be fair, it is crucial to assess its appropriateness based on the financial dynamics between the shareholders. In cases where significant financial disparities exist, the mechanism may not be suitable, as one party may find it challenging to purchase shares at the price specified by the other. The clause is only really viable when both parties have equal or nearly equal shareholding. If not, it can be vulnerable to abuse, especially if one shareholder triggers the process knowing the other lacks sufficient funds to buy its shares. This scenario could lead to the initiating shareholder offering to purchase the shares at a price below the fair market value.

Additionally, the clause may create practical challenges if one or more parties provide essential services or assets to the joint venture, which would be lost upon termination. The involved parties might opt to find a commercial resolution to the deadlock, potentially by directing the matter to the chairperson of each party. Alternatively, they could consider implementing a compulsory transfer mechanism that allows for the transfer of shares from the defaulting party to the other party in situations of deadlock or when fault can be attributed to one side.

Enforcement of the Russian Roulette Clause Across Various Jurisdictions

Following a slow initial acceptance, recent judicial rulings have reinforced the legitimacy of the Russian roulette clause under Italian law.

The Italian Supreme Court (Corte Suprema di Cassazione) examined the enforceability of the Russian roulette clause for the first time in 2023 and affirmed its validity in Decision No. 22375 of 2023. The Court held that “the structure of the Russian roulette clause appears to be consciously conceived in order to avoid one of the parties being subject to the mere arbitrariness of the other party.” Furthermore, the Court stated that it is a covenant whereby, in the event of a deadlock at the shareholders’ meeting—meaning the shareholders cannot reach a decision—one shareholder can propose to buy out the other shareholder’s shares at a predetermined price.

Overall, the potential application of the Russian roulette clause in the Middle East, especially in the Kingdom of Bahrain, presents a noteworthy opportunity for exploration. The region’s dynamic economic landscape may significantly influence the clause’s effectiveness in resolving deadlocks in joint ventures.

Concluding Remarks

While the Russian roulette clause can lead to the termination of a joint venture, it is often considered a last resort. In practice, parties may prefer to resolve deadlocks through alternative commercial solutions, such as referring the matter to the chairpersons of each party for negotiation. Another option might be compulsory transfer mechanisms, where fault can be apportioned, and the defaulting party is required to transfer its shares to other party.

Nonetheless, a Russian roulette clause can remain a powerful tool for managing deadlock situations. It provides a clear and structured process for resolution, ensuring fairness and accountability between the parties. For those entering joint ventures, particularly in 50:50 ownership structures, incorporating this clause into their agreements could offer a strategic approach to resolving potential deadlocks.

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