The Winner Takes it All (and other exit strategies)
SUPERYACHT LAWYER JONATHAN WATSON EXPLAINS HOW TO MAKE CO-OWNERSHIP A SUCCESS THROUGH A
WELL-THOUGHT-OUT JOINT VENTURE ARRANGEMENT.
Superyacht co-ownership is now a mainstream business in today’s sharing economy, a way for people to realise their dream of being a superyacht owner with less cost and risk than would ever have been possible otherwise.
Co-ownership is not just an end in itself, it is a joint venture (JV) arrangement that plays out over time. How long it lasts, and how successful it is, depends on how well the participants adapt to changing circumstances.
You and your fellow owners will start with a unified vision, plus the time and financial commitment to make it happen. But that might not always be the case, and at some stage, the arrangement may no longer be right for one or more of you. When that happens, as with any other form of joint venture, an agreed exit may be required.
What might that look like, and how do you make sure that your JV agreement can accommodate such changes
should the time come?
Planning for all eventualities
Understandably, when people start a JV, they tend not to focus on issues of exit and termination. They think about the positive aspects, namely, acquiring the status of superyacht ownership with a fraction of the risk and commitment. Those that market co-ownership, are keen to do the same. Their agreements might include some ‘standard’ clauses about exit, but they might not be at the centre of any meaningful discussion, or tailored for the individual circumstances of each set of co-owners. Unless you address your mind to these issues on the way in, there may be unpleasant surprises on the way out.
Push or Pull?
There are two questions that you need to ask yourself regarding exiting a JV. First, what will stop me from selling my share of the yacht, should I feel like it? In other words, how do I go about a voluntary exit?
Conversely, what is the position on compulsory exit? By keeping these two questions at the forefront of your venture discussions and strategy, you can mitigate the downsides of coownership and relax into the many pleasures on offer.
In terms of a voluntary exit, it might seem logical for you to agree with your fellow owners that everyone can sell their share in the yacht, whenever they want, if they give the others a right of first refusal. That way, if someone wants to leave, then the others have no obligations eitherway. They can buy the share on sale or not, as they choose.
Contractually, that might be the case but is that the end of the story? What if the leaver is proposing to sell to someone with very different views on, say, maintenance and refit? Or on commercial chartering? Or on the Captain? Or on rights of use? There could be differences of opinion over a range of issues that could make your co-ownership unworkable, after the leaver has departed. When the time comes, you might feel that whatever the contract says, you must buy, to avoid those risks. With that in mind, make sure your JV agreement is clear on where you stand on the two key issues of timing (how long you have to decide whether to purchase) and price. With regards to price, bear in mind potential areas of contention. For example, a contractually-stated “fair” value sounds reasonable, but valuing a superyacht is not an exact science. Valuing a fractional share of one, is even less so, not least because the rights conferred by each fractional share, affect that value. If I get to choose when I use the yacht before you do (and if otherwise our rights are the same), then my share is worth more than yours, whether I have 90% or 10%.
The issue of how fractional interests are valued, and what is/is not relevant for that purpose, must be discussed and agreed, to ensure fair and even treatment. Setting a price at the outset avoids these valuation issues, but can be a source of tension when that price ceases to reflect the yacht’s market value. Should it become much higher, then the parties might start looking for ways to take advantage of the situation – they might behave unreasonably, to force the others to buy them out. If much lower, then the parties are at risk of being forced to sell, under compulsory exit provisions. For these reasons set prices need to be future-proofed as far as possible with appropriate adjustments to avoid windfall losses and gains.
Three does not go into two
What if it is not you that buys-out the departing owner, what if it is one of the other co-owners? In that situation, your relationship is going to recalibrate. A co-ownership structure with three equal parties is very different to one with two, where one has a controlling interest. If the party with the largest share determines issues of use and spend, then the yacht will start looking more and more like it belongs to them, as they use and equip her, in their discretion, consistent with their new rights. To address this issue, agree to a list of things that cannot be done without everyone’s consent, regardless of percentage ownership (e.g. change of flag, capital expenditure, hiring and firing of crew, and so on). There might be a ‘standard’ list in your agreement - check what it says, so that you know what you can/cannot do without everyone’s approval (and vice versa). And, another iceberg on the horizon: ‘what happens if I can’t get a unanimous decision on something that requires it?’
Party overboard: compulsory sales
What then about compulsory sales—when might you want to force someone to sell their interest in the yacht? Standard terms might anticipate situations where a co-owner goes bust or dies. What
about breach? A co-owner who keeps breaking the rules on, say, sub-chartering or repositioning for the next owner’s use, might well cause offence and can over time, become intolerable. Anticipating this, the parties might say that, in the case of persistent or serious breach, then not only can the defaulting owner be forced to sell, but they must do so
at a discount.That then feeds back into the issue of what you agreed at the outset, for valuing a leaver’s share. If that price is low relative to market value, then, if someone breaks the rules, the remaining shareholders have an incentive to force them out. That can intensify arguments over whether a particular breach was serious, or whether it was a breach at all, or whose fault it was.
Pick your poison: Russian Roulette or Texas Shootout?
Even if there are no breaches and everyone plays by the rules, co-owners can still fallout. Often, these disputes can manifest themselves in an inauspicious circumstance which requires a unanimous vote. Whenever a decision requires unanimity, it offers an opportunity for any co-owner with a grudge to dig-in their heels. In these situations, you might have to fallback on what your JV agreement says about dispute resolution. It might oblige the parties to have discussions in good faith to resolve the issue or perhaps refer the issue to someone else to decide.
Ultimately, however, if the deadlock cannot be resolved, then a buy-out is the only option. What does your agreement say about a ‘no fault’ exit where there is no agreement as to who must leave, or for what price? There are various ways to structure these arrangements, such as sealed bids, or, more excitingly, ‘Russian Roulette’ or ‘Texas Shootout’ procedures.
Time to disembark?
Selling your share of your yacht will begin the process of ending your co-ownership, but you will not be completely ‘out’ until you have unravelled any associated arrangements and tidied-up the loose- ends. Even then, after you have left, there might be contractual obligations that you still have to honour. Have a clear closing schedule in your agreement so that, on a parting of the ways, everyone knows where they stand in terms of, for example: accounts payable, personal effects on-board, artwork, outstanding insurance claims and so on. It’s all worth it for the Good Life
Co-ownership is a way for people to experience what it is like to own a superyacht at a fraction of the cost and risk that would otherwise be involved. It is also a journey into the future that you take side-by- side with your fellow owners and where success is a function of how long you share the same views about the direction of travel. Address this point with
your co-owners at the outset, before you start that journey. Take advantage of that spirit of shared confidence and optimism to agree sensible, workable arrangements for a parting of the ways, so all participants can see their way out, before they venture in.
Jonathan is a superyacht lawyer with particular expertise in high-value, complex transactions - including sale & purchase, construction/refit, finance and charter. His deals have involved some of the largest yachts in the Mediterranean with clients based in London, Monaco, Russia and the Middle East. He has a detailed understanding of the superyacht business and is well known for his ability to analyse structures and contracts and to bring deals to a swift conclusion. He is his firm’s liaison for MYBA, Superyacht UK and ABYA events and organises its business development through speaking engagements, conferences and yacht shows.