Alliances are typically finite arrangements with terms set at formation. Since there are a number of different issues to deal with upon termination, it is helpful to anticipate key termination issues upfront. Exit provisions written in the formation documents typically seek to create liquidity, address disputes, or act as a mechanism to enforce the agreement. While awkward to think about planning for the end of a marriage, identifying these issues upfront can limit surprises and disputes. The reasons why the alliance is terminated will drive the form of the termination. The termination of the alliance starts with whether an alliance is terminated because it was successful, a failure, or something in between.
There will also be instances that an alliance is terminated as neither a “success” nor a “failure.” The alliance may have done what it was supposed to do, but the owners decide to pursue alternative strategies. In this case or for other reasons, the alliance term may just expire. Since alliances are typically finite arrangements, there are generally terms set in the initial agreements that the alliance will dissolve at the end of the term. These terms are also known as triggers. Well-structured triggers can resolve or deter disputes. Poorly constructed triggers or triggers that are too easy to invoke can result in an untimely dissolution of an alliance, without truly working out the disagreements. Triggers will typically contemplate common termination events, such as change of control of one of the owners, material breaches, or extreme deadlock. Put or call options to transfer ownership interests are typically set at formation to allow for transfers for negotiated exercise prices at particular dates. At a minimum, the term expiration and key dates for such items should be marked on the owners’ calendars. This way, upcoming dates to plan any re-negotiations to continue with the alliance are completed on time, if necessary.
While it may be awkward to plan for the exit from the alliance, upfront planning ensures that in each probable outcome (and maybe some unexpected outcomes), the owners know what to do and agree upfront how to handle the exit, thereby reducing the expenses of a dissolution.
Financial Services Deals Leader, PwC US