A Joint Venture (JV) is a contractual structure for different companies to conduct business together. In an increasingly volatile business environment, cross-border JVs where companies of different nationalities collaborate are also growing dramatically. This can be described as a business "marriage," but collaboration between two companies with different corporate cultures and business practices can sometimes lead to unexpected misunderstandings and conflicts of interest that were not anticipated at the outset. Naturally, JV parties engage in good faith dialogue to resolve issues, but sometimes irreconcilable differences in positions become apparent. This is what is commonly referred to as a "deadlock" situation.

In such cases, how to rationally dissolve the JV becomes important. Pre-agreeing on this in the JV contract can be crucial. In Western countries, there are cases where "prenuptial agreements" (contracts that predetermine property division in case of divorce) are signed before marriage, and similar "prenuptial agreement" clauses are incorporated into JV contracts. Naturally, the most important issue becomes who will buy out the stakes at what price when the JV is dissolved. Today, we introduce one of the main approaches for stake buyouts during JV dissolution: the "Texas Shootout."

Origin of the Texas Shootout Name

The name "Texas Shootout" comes from the "duel" (shootout) that appears in Westerns. This method gets its name from the fact that it requires a duel-like decision where two opposing parties decide whether to buy out or sell the other's shares. Like a duel in the vast wilderness of Texas, this method is designed to encourage swift and clear decisions. "Want to see who's faster?" This evokes the famous scene from Clint Eastwood's "The Good, the Bad and the Ugly." However, in the case of M&A (JV dissolution), it becomes "Want to see who's (buyout price is) higher?"

Overview of Texas Shootout

In a Texas Shootout, first, one partner (hereinafter, A) submits an offer to sell their JV shares to the other partner (hereinafter, B) at a specific price. This offer includes the price per share. Next, B chooses whether to buy A's shares at the price A presented, or to sell their own shares to A at the same price. In other words, B has the right to choose whether to become the seller or buyer at the price A presented.

Advantages and Disadvantages of Texas Shootout

The main advantage of the Texas Shootout is ensuring fairness. The party submitting the offer faces the risk of being forced to buy at that price if they set it too high, so fair pricing is expected. Additionally, since this method enables rapid decisions, it serves as a means to avoid prolonged negotiations and achieve swift resolution. Furthermore, it is easy to execute as it only requires simple procedures of price presentation and selection.

On the other hand, the Texas Shootout has several disadvantages. For example, there is potential for imbalanced negotiating power. The party presenting the price may gain an advantage, and psychological pressure is placed on the counterparty to make appropriate judgments regarding the presented price.

A Variation of Texas Shootout: "Mexican Shootout"

One method to address these disadvantages of the Texas Shootout is called the Mexican Shootout. We will clarify the differences from the Texas Shootout. (Note: However, what constitutes Texas-style versus Mexican-style is actually ambiguous, and interpretations differ depending on the user. What this column calls the Texas Shooting method may also be referred to as the Russian Roulette method, because the bullet (price) you fire may come back to you (creating a buyout obligation).)

Overview of Mexican Shootout

In a Mexican Shootout, both partners (A and B) submit buyout prices for their respective shareholdings in a sealed bid format. They present the buyout prices in sealed envelopes to a third-party organization with no conflict of interest with any JV parties (most likely a law firm). Then, with both companies present, the lawyer opens the envelopes, and the partner who presented the higher price buys out the other partner's shares at that price.

The advantage of the Mexican Shootout is higher fairness since both parties independently present prices. Additionally, the bidding format requires more strategic price presentation. However, disadvantages include a somewhat complex process that takes time due to the sealed bid format.

Compared to the Texas Shootout, the Mexican Shootout can be said to be superior in terms of fairness. This is because both parties present prices, allowing for more equitable pricing. However, the Texas Shootout is superior in terms of speed, as its simple process enables rapid decisions and shortens negotiation periods.

How Does This Differ from Right of First Refusal, Tag Along Rights, and Drag Along Rights?

In JV contracts and startup shareholder agreements, it is common to stipulate so-called Right of First Refusal, Tag Along rights, and Drag Along rights. So how do JV dissolution provisions like the Texas Shootout differ from Drag Along and Tag Along rights? The difference is that the former primarily aims at JV dissolution, triggered by deadlock (conflicts over important management policies), while the latter primarily aims to secure exit opportunities for investors. Therefore, the latter is designed primarily for sales to third parties rather than sales to management shareholders who are essentially JV partners for investors.

Since we grew up in different environments, misunderstandings are inevitable.

Shootout clauses, Right of First Refusal, Drag Along, and Tag Along rights can sometimes make contracts extremely complex and consume time and costs. Unnecessarily concluding complex contracts when nothing has yet begun is somewhat futile. If a couple hoping to embark on a hopeful married life spends six months negotiating tough prenuptial agreements, it might be wiser not to marry at all. However, if we grew up in different environments, misunderstandings are inevitable. Making necessary and minimal preparations will not be detrimental to all parties involved. Most importantly, in operating a JV, it is crucial to accept that misunderstandings and deviations from initial assumptions will inevitably occur on both sides, engage in sincere discussions before reaching a deadlock, properly share the JV's long-term vision and goals, and make continuous efforts to move forward together.