Corporate Joint Ventures in the Media, Sport and Entertainment Sector. 17 January 2019

Transcription

1 Corporate Joint Ventures in the Media, Sport and Entertainment Sector 17 January 2019

2 Presenters Jon Kenworthy Partner, London T: Tom K.Ara Partner, Los Angeles T: Robert J. Sherman Partner, Los Angeles T:

3 Agenda Stage 1 pre-jv issues 3 Stage 2 JV operation phase 9 Stage 3 JV exit/termination 14 UKG/

4 Stage 1 Pre-JV Issues 4

5 What is a JV and why do one? Umbrella term - commercial arrangement between 2+ economically independent entities for the purpose of executing a particular project / business Why JV? Lack of requisite rights/assets to pursue independently Way of sharing costs/risk (e.g. new market / geography) 'Try before buy' the whole ('path to control') Access to commercial opportunities (e.g. first look rights) Realise synergies from strategic partners (where whole = greater than the sum of parts) 5

6 JV Structures a number of legal forms possible Purely contractual (e.g. cooperation agreement) Partnership/ LLP/ LP Corporate JV 6

7 Pre-JV issues commercial drivers No "one size fits all" approach crucial to identify commercial drivers at outset Why is each party investing and what are its objectives? (e.g. commercial opportunities; risk sharing; path to control) What is the size and importance of the investment? (e.g. monetary value; shareholding level; strategic importance)? Who are other parties (initial and future) and what is each party contributing (now and in future)? (Restrict involvement of competitors? Outright contribution of assets (infrastructure / IP etc) or licence? What happens to contributed assets on termination of the JV? Commercial agreements? Initial and future funding debt / equity? JV parties commit to fund in future (if so, on what terms)? 7

8 Other structuring considerations Antitrust Structure and extent of control Tax Consolidation 8

9 Corporate JV set-up documentation Preliminary (confi.; exclusivity; HoT / term sheet / LOI / MoU etc) JV / shareholders' agreement and articles of association: deal with ongoing relationship (stage 2) and exit (stage 3) Other documentation Asset/business transfers, IP licences, debt documents, etc Subscription/acquisition agreement Other commercial agreements? 9

10 Stage 1 JV Operation phase 10

11 JV governance/operation Key Issues Decision making 50:50 (deadlocked) JV vs. non-deadlocked JV Director appointment rights Veto rights (negative controls) Positive rights (right for minority to impose a decision customized for deal/negotiating position e.g. right to hire/fire key execs; right to impose the budget etc) Deadlock resolution Restrictive covenants Other rights e.g. rights to information; positive good business practice' covenants 11

12 JV governance/operation Key Issues Rights to hire/fire director(s) & board composition Proportionate to shareholding? Maximum number of directors Weighted voting Chairmanship Board observers Committees Conflicts Meetings Quorum Minimum requirements (e.g. notice, frequency, location, agenda, information, etc.) 12

13 Most Operational Most Fundamental Governance/ operation Reserved matters/ veto rights Winding-up Material change in scope of business Changes to organizational documents, share capital/rights Issuing new shares / options (carve -out if pre-emptive?) Dividends Approval/amendment of budget/business plan Partnerships / entering into other JVs Non-arms' length / non-ordinary course transactions Material acquisitions/disposals Related party contracts Borrowing / security / lending Changing auditors or accounting policies Change in key personnel or their remuneration/benefits Material contracts (interplay with commercial rights granted to each party?) Pursue or settle material litigation Other matters specific to company / industry 13

14 JV goverance/operation Deadlock resolution Escalation: reference to shareholders' senior management before mediation and/or arbitration Non-binding mediation Trigger exit mechanism Forced sale process, etc. Casting vote (rare)? Third party expert (technical only e.g. valuation) Status quo (role forward of key matters e.g. budget) 14

15 JV goverance/operation Restrictive covenants Consider in context of your deal Are certain business opportunities intended to be exclusively routed through the JV company? Are other opportunities to be offered to the JV company, e.g. on a "first look" or pre-emptive basis? Is it appropriate to restrict shareholders from competing with the business (or are appropriate restrictions imposed by other means e.g. terms of IP licence)? If so, to what extent? non-compete; non-solicitation of employees; customers and suppliers time frame and territory reach beyond shareholders? carve outs required e.g. for material acquisitions where overlapping division? 15

16 Stage 3 JV Exit/ Termination 16

17 JV exit/termination Mechanisms Sale of part Sale of whole IPO Winding up Tag along Drag along Russian roulette/ shoot outs/ waterfall approach Put and/or call options 17

18 JV exit/ termination Share transfers Restrictions on transfer Absolute bar (except intra-group), save with consent? If sale of shares permitted: - need initial "lock-in" period?; whole shareholding only or sale of part permitted? Pre-emption right of first offer, or right of first refusal (& universal application?) At third party price or expert valuation? Outright restriction on sale to competitors? Compulsory transfers (@ discount to FMV?) Change of control of shareholder Insolvency Material breach Other? 18

19 JV exit/ termination Drag and tag along rights Drag along: When a majority shareholder (or holder(s) of some other trigger proportion) receives an offer for its shares, it will want the ability to force the other shareholders to join in the sale. As a minority each party should consider seeking: restrictions on drag (e.g. veto?; matching right; value hurdle) no less favourable terms but consideration that is liquid (i.e. cash or marketable securities) Tag along: Often a minority shareholder may have a right to ensure that it can tag along and sell when a shareholder wishes to sell control (or some other trigger proportion). 19

20 JV exit/ termination Put and/or call options The holder of the option is entitled to require the other party / parties to: sell some / all of their shareholding to the option holder (call option); or buy some /all of the option holder's shareholding (put option) In each case consider: Trigger events/timing (e.g. specified window; default; deadlock?) Price (e.g. FMV/pre-agreed formula; discount for fault) 20

21 JV exit/ termination Mechanism: "Russian Roulette" Stage 1 A Offer to (i) buy or (ii) sell at specified price B Stage 2 Option 1: Elects to sell to A Option 2: Elects to buy from A A A A buys from B B buys from A 21

22 JV exit/ termination Mechanism: "Shoot Out" Stage 1 A B Offers to buy out B at specified price Stage 2 Option 1: B accepts Option 2: B offers to buy out at higher price A A A buys shares from B Option 1: A accepts Option 2: A rejects Stage 3 B A & B each make sealed bids or auction process B buys shares from A Sale to highest bidder 22

23 JV exit/termination Mechanism: waterfall approach Both parties = buyers Competing bids 1 party = seller & 1 party = buyer Sale at agreed price or FMV Both parties = sellers Sell to third party or IPO 23

24 JV exit/ termination Valuation of shares Pre-agreed formula? Fair market value Process to agree Role of an expert (if no agreement) Valuation methodology arms' length sale between willing buyer and seller & going concern? data / documents to be taken into account detail (or exclude) detailed methodology? pro rata to value of whole? 24

25 To summarise Who (JV company and other investors) and what contributed (now and in future)? Why (key drivers for JV / investing?) When and how exit (duration of JV; path to control / exit)? 25

26 Thank you 26