Joint Ventures Flashcards
Key commercial issues to negotiate
VETO RIGHTS
- matters that require consent of all (e.g. allotment of shares, appointment/removal of directors, changing articles of JVC, borrowing, expenditure above thresholds etc.)
DIRECTORS
- Right to appoint and remove (how many per party?)
- Quroum (e.g. an amount from each JV party?)
- Unlikely to give chair casting vote; chariman appointed on rotational basis
- If not 50/50, representation at board meetings likely to be proportionate to each party’s ownership of JVC
SHAREHOLDER MEETINGS
- Similar - quorum etc.
FINANCING
- How many shares each?
- Class rights on shares
- Contribution of assets from both parties (and how divided at end of JV)
- Further funding obligations (e.g. contingent on JVC achieving milestones in its business) - or a cap on further funding obligations.
PROFITS
- How to be distributed: when? frequency? how much?
- Policy not to take dividends for first few years?
CONFLICT and DEADLOCK
- Way out?
- See separate entries.
TERMINATION
- Rights to terminate (e.g. other party commits material breach or Shareholders’ Agreement , goes insolvent, change of control), or by reference to a milestone in the JVC’s business.
- Procedure and notice period?
- Right to buy the other’s shares?
- Agree mechanism for valuing shares
- How property and assets of JVC to be divided up - logical to receive back what you contributed - but what about new propety acquired?
TRANSFER OF EXISTING SHARES
- Term requiring new shareholder enter into deed of adherence, to be bound by shareholders’ agreement
ISSUE OF NEW SHARES
- Anti-dilution rights
- Deed of adherence
DEPARTURE OF SHAREHOLDERS
- Restrictive covenant - e.g. not to use know how, solicit customers etc. of JVC - but draft carefully! - Only what’s strictly necessary to protect the legitimate business interests of the company concerned.
Deadlock
50/50 partners may be deadlocked at both shareholder and board level - means no resolutions can be passed!
Shareholders’ Agreement will commonly require parties to take certain steps to BREAK THE DEADLOCK
For example:
- a cooling off period (providing that the deadlocked meeting will be reconvened the following week)
- referral to the respectiev chairmen of each of the joint venture parties (to sort issue themselves)
- referral to mediation or ADR.
If parties still cannot agree, may invoke a specific DEADLOCK PROCEDURE - essentialy enables one party to buy the other one out.
Various mechanisms exist:
(1) RUSSIAN ROULETTE
- A serves notice on B, offering to transfer or buy all of a’s shares in JVC to B at a price specified by A.
- B must accept A’s offer and buy A’s shares or must sell its shares to A at the same price.
- Effectively therefore, A, in its notice, is stating the price at which it is prepared to buy OR sell.
(2) MEXICAN/TEXAN SHOOTOUT
- Similar process, but can lead to sealed bids going to third party (e.g. Senior Partner of JVC’s auditor) - auction process.
Winding up JVC should be LAST OPTION.
If JV brought to an end, each party’s liability to the JV and/or entitlement to remaining assets will have to be settled according to the termination provisions.
- But this may result in substantial loss - thus often better to arrange for one party to buy the other out through the deadlock procedure (keeps the JVC going).
International aspects of a JV
- JVs could be subject to review under Articles 101 and 102 TFEU - whether the agreements between competitors amount to an ‘APPRECIABLE RESTRICTION ON COMPETITION’.
- EU Merger regulation: If:
> both parents exercise joint control over the JV or one parent has sole control; and
> the JVC itself is a full-function joint venture undertaking
it falls within the definition of “concentration” and will then have a “community dimension” is specified turonver thresholds met - in which case, would need to be notified to the European Commission. - TUPE
If transferring employees from one of the JV parties to the JVCs, MIGHT amount to tranfer of employment within TUPE: - IF it does:
the employees will be transferred with the benefit of their existing terms and conditions of their employment.
Any changes could give rise to a claim for compensation.
Could be problematic if employees coming from both JV parties, but would be on very different terms of employment.
