I was reading the book “Season Finale,” which is about the beginning of the WB and UPN and how they went on to merge. In case you don’t know UPN was a venture between Paramount and Chris-Craft (Viacom later bought Paramount and it became Viacom and Chris-Craft. Viacom also bought CBS which it later spun off unto a seperate company). Viacom and Chris-Craft owned 50% each.
Anyway according to this book Viacom was trying to purchase Chris-Craft’s TV station (they owned WWOR (NYC), KCOP(LA) and other big stations in big markets), but the stations were huge money makers while UPN so far cost Chris-Craft 800 million (from 1994-2000)
While Chris-Chraft was entertaining offers (from Viacom, FOX and Tribune) Viacom decided to trigger a provision called “forced buy/sell.” (In order to push Chris-Craft into selling Viacom the TV stations)
Basically this provision said either Viacom or Chris-Craft would name a price for the other’s 50% interest in UPN. After triggering this clause either party would have 45 days to buy the other out.
So Viacom offered Chris-Craft $5,000,000.00 for it’s 50% stake of UPN. That ment Chris-Craft would could either sell to Viacom it’s 50% interest for five million dollars or it could buy Viacom’s 50% for five million dollars.
Chris-Craft sold to Viacom for five million. (As a side note, Chris Craft later sold it’s TV station to FOX ,thus giving FOX control over UPN’s two biggest TV stations WWOR and KCOP).
My question is what is the point of such a clause? I mean either side can name any price and force the sale? Why would anyone agree to put such a clause in their anyway?
I am assuming it’s common in business but I don’t see the point to putting something like that in there.
Well, I can’t answer the question of whether or not this is common practice, but parties to such a contract can’t name any price. Remember that the other party has the option to buy out the first partner at that price. If Viacom said $1, Chris Craft could have picked up half of UPN for a buck. I am sure that the assets were worth at least that. Therefore the party forcing the buyout has to name a reasonable price.
In setting up joint venture like that, the parties and their lawyers will often set up some “divorce” provisions.
A mutual buy/sell like that is not uncommon. The key to it is that one side offer to buy at a price it sets, and then the other gets the first chance to buy at that price. If the first side sets a price that is too low, the other side will snap the first side’s interest at that discount price. If the first side sets a price that is too high, the other can decline, requiring the first side to buy at what the other side thinks is an excessive price.
It’s sort of like the way to have kids divide up a snack, with one kid splitting the snack and the other choosing he wants. The consequences of losing pushes the first side to be fair.
Yeah, the analogy to ‘I cut you choose’ immediately hit me too. A way of reaching an agreement that both sides should consider ‘fair’ even if they don’t necessarily see the facts in the same light.
Well considering FOX eventually paid 5 BILLION dollars for the TV station (that Viacom wanted that forced the buyout), the five million seemed like a token amount by comparison.
I guess that explination does make sense, it just seemed like an odd clause, but I guess if you view it as a “pre-nup” it does make sense
As Billdo noted, when you have a partnership like this, you’ll often want to account for the possibility that the parties might have a falling-out at some point, which makes it very difficult to run a business together. Giving one or both parties the right to buy out the other is a common solution. However, you can’t effect a buy-out without setting a price, and you often can’t set the price when you draft the contract, because you don’t know what the company will be worth in the future. You could just say that the buyout will be at “market value,” but then you’d have a big argument (and possibly a lawsuit) over what that value is when the time comes. The kind of provision described in the OP is one way to avoid that – theoretically, the party triggering the buy/sell provision will be motivated to name a fair price.