Joint Ventures PDF

Corporate & Commercial Practice Mergers & Acquisitions Joint Ventures Wong Yi Jia Partner Allen & Gledhill LLP  Introduction Copyright © 2024, Singapo...

Corporate & Commercial Practice Mergers & Acquisitions Joint Ventures Wong Yi Jia Partner Allen & Gledhill LLP  Introduction Copyright © 2024, Singapore Institute of Legal Education What are joint ventures? Not legally defined in Singapore Collaborative business arrangement Significant integration between parties Copyright © 2024, Singapore Institute of Legal Education What are joint ventures? United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 “The term “joint venture” is not a technical one with a settled meaning. As a matter of ordinary language, it connotes an association of persons for the purpose of a particular trading, commercial, mining or other financial undertaking with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.” Copyright © 2024, Singapore Institute of Legal Education Why do parties enter into joint ventures? Cost savings Risk savings Access to technology Expansion of customer base Entry into developing economies Entry into new markets Subsequent exit Copyright © 2024, Singapore Institute of Legal Education The role of lawyers in joint ventures Alert client to important business issues Structure the joint venture Carry out due diligence Identify and obtain clearances and consents Ensure proper documentation Establish joint venture vehicle Copyright © 2024, Singapore Institute of Legal Education Forms of joint ventures 1. Corporate joint ventures Jointly owned corporate vehicle Holds business assets of joint venture Appropriate legal form for most equity joint ventures for continuing business Available in most jurisdictions 2. Contractual alliances Unincorporated alliance based on simple contract Does not involve creation of a separate legal entity Copyright © 2024, Singapore Institute of Legal Education Legal Documentation Copyright © 2024, Singapore Institute of Legal Education Legal documentation For joint venture company: 1. Constitution 2. Joint venture or shareholders’ agreement Principal commercial agreement between parties Supplements constitution Copyright © 2024, Singapore Institute of Legal Education Relationship between shareholders’ agreement and constitution Constitution are regulated by Companies Act and bind all shareholders, including future shareholders Constitutions can be amended by shareholders with at least 75% voting rights Shareholders’ agreements are governed solely by contract law and only bind parties to them Copyright © 2024, Singapore Institute of Legal Education Key issues in shareholders’ agreement Parties Financial matters Purpose and scope Reporting and information Conditions precedent to Inter-party relationship issues formation Transfers of shares Share capital & equity interests Insolvency, default and change Governance/Board & of control Management structure Governing law Additional financing Dispute resolution Copyright © 2024, Singapore Institute of Legal Education  Parties Copyright © 2024, Singapore Institute of Legal Education Parties to a shareholders’ agreement Key parties: shareholders of the joint venture company Optional parties: Parent companies of the shareholders Joint venture company Copyright © 2024, Singapore Institute of Legal Education Should joint venture company be party to the shareholders’ agreement? Advantages Disadvantages 1. Undertaking of obligations is 1. In event of dispute between direct parties, JV company’s 2. Easier to enforce obligations, consent may be required particularly if: 2. Terms that fetter JV Directors have little regard for company’s statutory powers wishes of shareholders might be unenforceable There are multiple parties to JV Copyright © 2024, Singapore Institute of Legal Education Minority Protection Copyright © 2024, Singapore Institute of Legal Education Minority protection Underlying statutory and corporate rights limited Stronger rights have to be negotiated for Copyright © 2024, Singapore Institute of Legal Education Negotiating minority rights Rights vary depending on: Proportion of minority shares Role of minority shareholder Whether JV is a multi-party JV Copyright © 2024, Singapore Institute of Legal Education Minority protection under Companies Act Minority >25% shares can block certain decisions requiring 75% shareholder approval Statutory rights to call for meetings, information or investigations Statutory derivative actions for breach of directors’ duties Remedy for unfair prejudicial conduct by the majority Right to seek winding up on just and equitable grounds Copyright © 2024, Singapore Institute of Legal Education What to negotiate for Board representation Information rights Major business decisions (reserved matters) – veto right Protection against dilution by subsequent share issues Safeguards against breaches by majority shareholder Exit Copyright © 2024, Singapore Institute of Legal Education Governance / Management Copyright © 2024, Singapore Institute of Legal Education Governance / Management Board composition Appointment and removal of directors Adjustments on change in shareholding proportions Key management Appointment rights Board and shareholder proceedings Quorum and notice requirements Approval thresholds Copyright © 2024, Singapore Institute of Legal Education  Financing Copyright © 2024, Singapore Institute of Legal Education Key financing issues Funding obligations Loan finance-shareholder/outside loans Provision of security Default Copyright © 2024, Singapore Institute of Legal Education Transfers of Shares Copyright © 2024, Singapore Institute of Legal Education Range of potential transfer restrictions Completely free transferability Free transferability with a few constraints (e.g. transfer can be refused in a few limited situations) Pre-emption (giving other member(s) a right of first refusal) Prohibition on transfer except in very limited circumstances, usually with the other shareholder’s consent Absolute prohibition on transfer Copyright © 2024, Singapore Institute of Legal Education Pre-emption procedure Proposed transfer price by selling party Other party is given time to exercise pre-emption right on terms started in transfer notice If pre-emption rights not exercised, selling party is free to sell to 3rd party at price not less than that offered to JV party Copyright © 2024, Singapore Institute of Legal Education Pre-emption rights Right of first offer Selling party wishes to sell but not obliged to first identify 3rd party purchaser Non-selling party has 1st opportunity If not accepted, selling party usually free to sell to 3rd party at price not less than previously offered price Right of first refusal Selling party obliged to identify bona fide 3rd party purchaser before pre- emption right arises Non-selling party has 1st opportunity If not exercised, selling party can only sell to specified 3rd party at price specified in transfer notice Copyright © 2024, Singapore Institute of Legal Education Transfer Price Price set by selling party Price offered by third party purchaser’ Price determined by independent valuation Market value Fair value Net asset value Earnings basis (e.g. P/E ratio) Discounted cash flow Start-up cost Dividend yield Copyright © 2024, Singapore Institute of Legal Education Tag-along right “Tag-along” or “piggy-back” right preserves exit for other party when one party wishes to sell to 3rd party Selling party is obliged to ensure that 3rd party extends offer to include other parties on same terms Sensible precaution for minority to ensure that upon sale by majority, it can get the same price and does not get locked in as minority with newcomer Copyright © 2024, Singapore Institute of Legal Education Drag-along right “Drag-along” right gives selling party the right to oblige other parties to sell to 3rd party at the same price as negotiated by selling party Enables majority party to deliver entire interest to 3rd party purchaser Copyright © 2024, Singapore Institute of Legal Education  Exit Copyright © 2024, Singapore Institute of Legal Education Key issues in exit provisions Fixed term/joint renewal Termination for convenience Termination for cause (default) Agreed put or call options Sale or public offering of joint venture company Deadlock Copyright © 2024, Singapore Institute of Legal Education  Deadlock Copyright © 2024, Singapore Institute of Legal Education What is a deadlock? Inability of the parties to agree on strategy or other important decisions due to: Genuine disagreement or Fundamental breakdown in relationship Copyright © 2024, Singapore Institute of Legal Education How deadlocks arise Board level Shareholder level Boycott of meetings Copyright © 2024, Singapore Institute of Legal Education Dealing with deadlocks 3 basic ways: 1. Design management structure to avoid deadlock arising 2. Mechanisms enabling joint venture to continue 3. “Divorce” mechanisms Copyright © 2024, Singapore Institute of Legal Education Designs to avoid deadlocks Design management structure to avoid deadlock arising in the first place, including: 1. One party to have clear voting and management control 2. A particular party will have control or leadership over a particular area 3. Most decisions are made at executive level instead of board 4. Matters that require board or shareholder approval are restricted Copyright © 2024, Singapore Institute of Legal Education Mechanisms enabling continuity Possible mechanisms include: Additional vote Independent director’s swing vote Internal escalation Dispute review panel Reference to mediation or expert determination Copyright © 2024, Singapore Institute of Legal Education “Divorce” mechanisms Examples: Winding up Sale of joint venture company Put/call options “Shoot-out” procedures “Multi-choice” procedures Copyright © 2024, Singapore Institute of Legal Education Default Default Events Insolvency Breach Cross-default Change in control Default mechanisms Put/call options Pricing Unwinding arrangements Copyright © 2024, Singapore Institute of Legal Education Notice Copyright © 2024, Singapore Institute of Legal Education. All rights reserved. The Course materials are developed by the Singapore Institute of Legal Education, based on the content, syllabus, and guidance provided by the Chief and Principal Examiners and their teams. No direct or indirect reproduction, publication, communication to the public, adaptation or any other use (that is prohibited and/or proscribed by copyright laws) of the Course materials in whole or in part in any form or medium is allowed without the written permission of the Singapore Institute of Legal Education. Part B Candidates should refer to the Code of Conduct for more information, particularly, the sections on conduct and behaviour, and the use of SILE resources. Copyright © 2024, Singapore Institute of Legal Education