Joint Ventures and Shareholders' Agreements Written by ANDREW COMBEN Simmons & Simmons and specialist contributors Edited by CHRIS WILKINSON Simmons & Simmons Butterworths London, Charlottesville, Dublin, Durban, Edinburgh, Hong Kong, Kuala Lumpar, New Delhi, Singapore, Sydney, Toronto, Wellington 2000
Préface List of contributors Table of statutes Table of statutory instruments Table of cases v vii xix xxi xxiii PART A Preliminary considérations I 1 I What is a joint venture? 1 Reasons and motivations for establishing a joint venture 4 Alternative forms of joint venture 5 5 Agency agreement 5 Distribution agreement 6 Intellectual property licence 6 Franchise 7 Collaboration agreement 7 Consortium agreement 8 Partnership 8 Limited partnership 9 Limited liability partnerships 9 Limited company 10 European Economie Interest Grouping 11 Overseas entities 12 The importance of adéquate documentation 13 Clarity of obligations 14 Aspirations and objectives 14 Minority protection 15 Deadlock 15 Termination and exit routes 16 Ensuring the structure works 17 2 Matching the aims and expectations of the parties 19 19 Long-term and short-term investors 20 Achieving early exits 20 Achieving earlier or additional income 21 IX
Différent classes of shares Dealing with other expectations and requirements Case study showing the matching of aims and expectations 3 The contributions of the parties to the venture General Physical assets and undertakings Intellectual property Supply of goods and management of other services Termination and exit provisions 4 Employment and pensions Transfer of employées Transfer without an undertaking Transfer with an undertaking Restrictive covenants Transfers of subsidiary companies Secondment of employées Pension issues Types of scheme Transfers of pensionable employées Joint venture vehicle participating in existing scheme Establishing a new pension scheme for the joint venture Taking over an existing pension scheme Establishing a new scheme without transfers of existing employées Unapproved schemes Specialist advice 5 Share option and share incentive schemes General tax position Types of scheme Approved discretionary share option scheme Approved profit sharing schemes Approved savings related share option scheme Employée share ownership plans (ESOPs) Non-approved share option schemes Long-term incentive plans (L-TIPS) Phantom options Establishing a new scheme for a joint venture vehicle Réalisation mechanisms Valuations Consents and regulatory issues Joint venture employées participating in a scheme established by one of the joint venturers under which its shares are issued Joint venture employées participating in a new scheme using shares in one or more of the joint venture partners The effect on employées transferring to the joint venture who are members of existing schemes New developments 22 22 24 25 25 26 27 28 30 31 31 31 33 35 36 36 38 38 40 41 42 44 44 44 45 47 47 48 48 48 50 50 51 51 52 52 53 53 54 54 55 56 57 58
6 Financing the venture 61 61 Loan finance or share capital? 61 Loan finance from the parties 63 Structuring 63 Other gênerai considérations 65 Tax considérations 65 Outside finance 66 Equity finance 66 Security and guarantees 66 Contribution and subrogation 67 7 Tax considérations for UK joint ventures 69 69 UK corporate joint ventures 69 Transfer of assets into the venture 69 Operational tax issues 73 Tax issues on the termination of a joint venture 77 Corporate partnerships 78 Contributions of assets 78 Profits 78 Capital gains and losses 79 Termination 79 Contractual joint ventures 79 Tax issues dealt with elsewhere 80 8 Accounting considérations for UK corporate joint venturers 81 81 Subsidiary undertakings 82 Accounting for joint ventures which do not hâve to be Consolidated 85 Associates 85 FRS9 joint ventures 86 FRS9 Joint ventures contrasted with subsidiary undertakings, associated undertakings and simple investments 87 Joint arrangements which are not entities ('JANES') 87 Accounting treatments compared 88 Consolidation 88 Equity accounting 88 Equity accounting gross equity method 89 Consolidation and equity accounting compared 89 Accounting for the interest as an investment 89 International accounting standards? 90 9 Application of EC compétition law to joint ventures 93 93 The circumstances in which EC compétition law is relevant 93 Joint ventures within the EC merger régulation 94 Is the venture concentrative? 94 Joint or sole control 95 Is the venture a full function one? 95 When are the relevant thresholds exceeded? 96 Undertakings concerned 97 XI
Calculation of turnover 98 Notification, implementation and penalties 99 Considération by the Commission 99 Ancillary restraints 1 Non-compete covenants 102 Licensing of intellectual property rights 102 Supply and purchase agreements 102 Application of national merger and compétition laws 103 Joint ventures within Article 81 103 When does Article 81 apply? 103 Agreements of minor importance 105 Draft Notice on horizontal co-operation 106 Possibility of exemption 107 Additional restrictions 112 Notification 112 Article 82 113 Reform and modernisation 113 10 UK compétition law applying to joint ventures 117 117 Relationship between UK and EC Law 117 Merger control 118 When is a joint venture a qualifying merger? 118 When do enterprises cease to be distinct? 118 How are market shares to be calculated? 119 What is the value of the assets taken over? 119 Notification procédure 120 Références to the Compétition Commission 121 Spécial sectors 121 Future developments 121 Examination of agreements under the 1998 Act 122 Exclusion of mergers 122 What restrictions are ancillary? 123 Other exclusions and exemptions 123 Notification 124 Régulation sectors 125 Appeals 125 Abuse of a dominant position 125 Other provisions 126 Typical restraint clauses 126 11 Other regulatory matters in the UK 129 Regulated business 129 General 134 Requirements for UK listed companies 134 Takeover code implications 136 Investment advertisements, etc 136 Limited partnerships - collective investment schemes 137 XII
PART B Key issues in structuring and drafting UK corporate joint venture documentation and shareholder agreements 12 Deadlock companies Structuring a deadlock company Avoiding and resolving deadlocks Avoiding deadlock Resolving deadlock Termination on unresolved deadlock 13 Minority protection Why minority protection is needed Control by majority Minority protection given by law Kinds of express minority protection Positive rights Négative rights Should the minority protection rights be conferred by a shareholders' agreement or the articles of association? The enforcement of shareholders' agreements The enforcement of the articles of association Dealing with enforcement by and against transférées and new shareholders Possible disadvantages of class rights Suggested solutions Self-help remédies 14 Typical minority vetoes Individual or majority vetoes? Over-regulation? Deemed consent Extension of vetoes to subsidiaries Vetoes applicable to a minimum shareholding Fundamental vetoes Change in the nature of the business Changes in share capital Liquidation Sale of the business or material assets Acquisitions Making of loans and the giving of guarantees Transactions with connected parties, etc Management contracts Transfer of shares Operational vetoes Borrowings Capital expenditure Dividends Exclusive agency and distribution agreements Licenses of intellectual property Service agreements, etc 141 141 143 143 143 145 147 147 147 148 150 150 153 153 154 157 159 160 160 161 163 163 163 163 164 164 165 165 165 165 166 166 166 168 168 168 168 169 XIII
. Consultancy, management and like agreements l 69 Leasing transactions Auditors and accounts Litigation Business plan General conclusion 15 Directors l71 The structuring of board représentation Methods of structuring board représentation 171 Alternate directors and quorums 179 The position of an appointed director x 179 ' z The duties of a director to his company 173 Directors voting on transactions in which they are interested 174 No compulsion on director to vote in a particular way 174 Duties of confidentiality l'4 Dual directorships 1 ' Resolving conflicts in practice 1' 4 Shadow directors * '' 16 Termination and its conséquences ' ' ' Typical termination events and resulting provisions 180 Expiry 18 Notice to terminate 180 Deadlock l 81 Persistent use of vetoes 181 Breach 182 Change of control 183 Liquidation, bankruptcy or insolvency of a party 184 Liquidation of the company 184 Continuance of minority protection after termination 185 Réalisation mechanisms on termination 185 Termination put and call options 185 'Russian roulette' 186 'Texas shoot out' or 'Dutch auction' 186 'Multi-choice réalisation procédure' 188 Completion of the sale 190 Other termination conséquences 190 Repayment of loans 191 Release of guarantees 191 Ancillary agreements 191 Names 193 VAT 193 Regulatory matters 193 Conclusion 193 Provisions surviving termination 194 17 Pre-termination put and call options 195 195 Structuring an option 196 Avoiding conflict with other provisions 196 171 XIV
Time of exercise 196 The shares the subject df the option 197 Adjustment of the considération for the option of shares 197 Perpetuities 197 Multi-party options 198 Restrictions on disposai 198 Voting rights and dividends 198 Completion 198 Warranties 199 Considération for grant 199 Dangers of put options 201 18 Pre-emption rights on transfers 203 203 Key points in drafting pre-exemption rights 204 Bénéficiai interests in shares and changes in control 204 Price détermination 204 Allocation of the shares 205 Completion 205 Ability to transfer to an outsider 206 Waiver of pre-emption article 206 Permitted transfers 206 Compulsory transfers 207 Last right of refusai 207 19 Purchase and rédemption of shares by a company 209 Purchase of shares 209 General 209 Procédure 210 Tax conséquences 210 Rédemption of shares 212 212 The law regarding redeemable shares 213 General points 213 20 Sale of flotation of the company 215 Sale of the entire issued share capital of the company to a third party 215 215 Sale following termination 215 Offer from third party - 'tag along and drag along' 217 General 217 Provisions in shareholders' agreements 218 Provisions in articles 218 Legality of drag along provisions in articles 220 Legality of expropriation provisions 220 Conclusion and practical solutions 220 Why not rely on Companies Act 1985, s 429 instead of'drag along' provisions? 221 Sale or flotation 221 Impossibility of légal commitment 221 Flotation 221 Institutional protection 223 XV
21 Share valuation provisions 227 Valuing shares 228 Earnmgs Cashflow 23 Dividend yield Net assets 231 Start-up cost Turnover 231 231 Fair value Market value on pro rata basis The drafting of valuation clauses 22 Dispute resolution Choice of law Methods of dispute resolution The courts Arbitration Expert détermination Alternative dispute resolution 235 235 236 23 ' 93R z PARTC Joint ventures and shareholders' agreements in practice 245 23 Establishing and documenting a UK corporate joint venture 247 The implementation process 247 Heads of terms (or framework agreement) 249 Shareholders' agreement 249 Articles of association 253 Should the articles refer to the shareholders' agreement? 254 24 Drafting share rights in articles of association 257 257 Drafting principles 257 Types of share 258 Préférence shares 258 Redeemable shares 259 Convertible shares 259 Adjustment of conversion ratios 262 25 Due dilligence, warranties and indemnities 271 271 Due diligence 271 Warranties 272 Indemnities 273 Remédies other than damages or indemnity payments 274 XVI
26 Considérations relating to joint ventures and shareholders' agreements including individuals Tax considérations The taxation dividends and other distributions and income received by individuals Spécial provisions relating to close companies Relief on interest paid on loans incurred by individual joint venturers Company or partnership? Schedule E income tax charges on the acquisition of shares Enterprise investment scheme ( EIS) Venture capital trusts (VCTs) Corporate venturing Dividends or rémunération? Pension contributions, options, etc Tax considérations on réalisation of shareholdings Inheritance tax Transfers to family members and trusts Dealing with résignation, retirement and death Retirement or résignation of working shareholders Death 27 Spécial considérations for venture capitalists and other equity providers General structure and exit routes Types of transaction Minority protection and exit machinery Choice of exit Maximising the retum before exit Préservation of capital Retaining and motivating management Service agreements Conclusion 28 International joint ventures Overseas joint ventures The choice of the business location Choice of vehicle Choice of law Other tax planning issues affecting structure or opération The UK's rules for taxing overseas profits Transfer pricing UK corporate joint ventures and non-resident participants Double tax treaties Taxation of dividends and other distributions Loan interest Thin capitalisation and excessive loan interest Interest rate fluctuating with the profits Royalties Payments for goods and services supplied Consortium relief 275 275 275 276 278 279 282 284 285 286 287 288 288 291 291 291 291 292 295 295 295 295 297 297 297 298 298 298 299 301 303 303 303 303 304 306 307 308 308 309 309 309 310 310 311 311 312 312 XVII
29 Joint ventures in the upstream oil and gas industry 335 Background 335 Typical structure for an unincorporated joint venture in the UK 336 Bidding agreements 336 Joint operating agreements (JOAs) 337 Main terms of JOA 338 Légal status of a JOA 340 Other agreements 340 PARTD Précédents and other material 343 Case study 1 - Caspian Pipeline Consortium ( l CPC) 345 Case study 2 - UK property joint venture 348 Précèdent 1 - Checklist of issues for considération when establishing a UK joint venture company 351 Précèdent 2 - Heads of agreement 358 Précèdent 3 - Shareholders' agreement 363 Précèdent 4 - Articles of association 380 Précèdent 5 - Support agreement 391 Index 397 XVIII-