Joint Ventures Flashcards
What is a deadlock in terms of voting and what is an important provision to have in a JV in case of deadlock?
If two JV parties have equal voting rights in shareholders’ meetings, and equal rights to appoint an equal number of directors, it is possible that they may reach a deadlock at shareholder and board level.
Therefore, to counter act this issue, a JV company should have provisions in the shareholders’ agreement to deal with deadlock.
What are some specific provisions which should be included to address a deadlock in a JV co?
Provisions may include:
1) the need for a cooling off period whereby a meeting would adjourn and reconvene after a week if there is a deadlock;
2) refer the issue to a chairman of the JV company, who in the case of complete conflict, could be given the casting vote;
3) refer to the respective chairman of the JV parties;
4) referral to mediation or some other form of alternative dispute resolution.
How to deal with deal with issues relating to the buying out of one JV party by the other - consider the following:
- 1) Which JV party will buy the other out?
- 2) On what terms?
- 3) At what price?
Russian Roulette:
• One JV party (A) serves notice on the other JV party (B) offering to sell all of A’s shares in the JV company to B at a specified price
• B must accept A’s offer and buy A’s shares, or must sell all its shares to A at the same price per share
Mexican/Texan Shootout:
• One JV party (A) offers to buy the other JV party’s (B) shares at a specified price
• B is then entitled to either accept A’s offer or reject A’s offer and state that it wishes to buy A’s shares at a higher price than the one specified by A
• A and B then submit sealed bids in an auction - the person who bids the highest is
entitled to buy the other out
What is an MoU?
It is an initial document setting out the agreement between the JV parties, shareholdings, and contributions.
Are the terms in the MoU legally binding?
Which terms are legally binding?
Most terms not legally binding, but morally binding; also forms framework for future negotiation
Some terms will be legally binding – governing law, jurisdiction, confidentiality, and exclusivity
What is a shareholder’s agreement?
It is an agreement between shareholders of company and company, regulating relationship and recording the rights/obligations in operation of a JVC.
What are some examples of provisions which need to be included in a shareholder’s agreement?
Veto rights: to be included in major constitutional changes
Directors: in case of a deadlock, will there be a chairman? and will the chairman run on a rotational basis?
Quroum, notice period, voting should be designed to be commensurate with proportionate ownership of JV.
Shareholder meetings: make sure that parties have a right to participate in shareholder decisions and no GM resolutions can be passed until all JV companies are in agreement.
Finance: pooling of assets and property. Need to determine how who owns what and who is contributing assets to the JVC.
Distribution of profits: provision must state how the money will be distributed, which may depend on growth potential and timeline of JV.
Share transfers: must consider the possibility of including pre-emption rights when selling shares outside of the company. In a JVC preemption rights are available for issues of new shares but not share transfers.
Deadlock provisions and alternative cooling off periods.
