Joint Ventures in Singapore PDF

Andrew Yip (00:01.57) Hi, my name is Wong Yi Jia and today I\'ll be giving you a brief overview on joint ventures in Singapore. We\'ll start by considering what are joint ventures. Joint venture is not a legal term of art. It represents a wide range of collaborative business arrangements and a fund...

Andrew Yip (00:01.57) Hi, my name is Wong Yi Jia and today I\'ll be giving you a brief overview on joint ventures in Singapore. We\'ll start by considering what are joint ventures. Joint venture is not a legal term of art. It represents a wide range of collaborative business arrangements and a fundamental feature of a joint venture is collaboration between the participants involving a significant degree of integration between them. A popular case explains that 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. A common rationale for parties to enter into joint ventures is the objective of saving costs through sharing of employment or other fixed costs or the cost of research and development or capital intensive programs. A similar rationale behind many joint ventures is the wish to share with another party significant financial risk, which may be involved in undertaking a speculative or capital intensive project. Projects of considerable size, such as natural resource or infrastructure projects, are frequently undertaken as joint venture projects. Joint ventures may also provide a route for a party to gain access to and to learn from a co -venturer\'s technology and skills, accelerating its entry into a particular technology or market. The merger of similar businesses between two or more participants may be desirable in order to establish economies of scale, global customer reach, purchasing power, or capital investment resources necessary to meet the strength of international competition. Joining forces with a financial partner can also be method of financing an acquisition or a venture which would not otherwise be affordable. Andrew Yip (01:55.926) A joint venture may also be a first step in an eventual full disposal or acquisition of a business or a future exit such as an IPO or trade sale. Andrew Yip (02:09.558) Lawyers play a very important part at the planning stage of many joint ventures. As a lawyer, you\'ll be expected to alert the business negotiators to important legal or business issues to be addressed in establishing the venture and the options available to deal with these issues. You will also help structure the joint venture in the light of the business objectives and interests of the client or carry out any necessary due diligence in other legal investigations. For example, if assets are being contributed into a joint venture vehicle, or if your client is investing into an existing business. Lawyers also help to identify and obtain clearances and consent from third parties or ensure that the joint venture arrangements are properly and clearly documented and the interests and the intentions of the clients are properly safeguarded. It is important to manage the legal and other formal steps necessary to establish the joint venture and generally advise constructively in helping to establish a joint venture according to the client\'s wishes and interests. The two most common forms of joint ventures in Singapore are corporate joint ventures and contractual alliances. Under a corporate joint venture, two or more parties jointly own a corporate vehicle which will hold its own assets and undertakings as a separate legal personality. This is the most common form of joint ventures in Singapore. The second is a contractual alliance, basically an unincorporated joint venture where no separate vehicle or entity is established. The arrangement is just based on a simple contract and does not involve the creation of a separate legal entity. For the purposes of this lecture, I will just be focusing on corporate or equity joint ventures. Andrew Yip (03:55.33) The key legal documentation for joint venture companies in Singapore comprise the constitution of the company as well as the joint venture agreement or shareholders agreement. These two terms are used interchangeably. The Constitution is regulated by the Companies Act and comprises the regulations of the company. It binds all shareholders, including future shareholders, and can be amended by shareholders with at least 75 % of the voting rights, i.e. by way of passing a special resolution. Shareholder agreements are governed solely by contract law and only bind the parties to the agreement. Typically, we would Draft the two hand -in -hand where the Constitution replicates certain regulatory or governance provisions that are contained in the Shareholders Agreement to ensure that the documentation binding shareholders are fully aligned. I\'ve set out in this slide some of the key issues to consider when negotiating and drafting a shareholder\'s agreement. I won\'t have time in this lecture to go through all of these issues, but will consider some of them in the later slides. It should be clear from this list that shareholder\'s agreements can and often are a complex agreement to negotiate and draft. They are bespoke agreements that will depend on the structure and terms of the transaction, for example. or the relative bargaining power and shareholding proportions of each of the parties, plus your client\'s specific interests and intent for that specific transaction. Andrew Yip (05:21.708) The first key issue I\'ll touch on would be the parties to the shareholders agreement. The key parties or the main parties would, of course, be the shareholders of the joint venture company themselves, following which parties often consider whether the parent companies of the shareholders or the joint venture company itself should be a party to the agreement. In relation to parent companies, this is sometimes they are sometimes included as parties where, for example, your shareholders are shell companies or are not entities of substance and you want a more substantive entity to stand behind the obligations and guarantee the performance by the shareholders of their specific obligations under the joint venture agreement. The joint venture company itself may or may not be a party to the shareholders agreement and the practice varies. There are various advantages and disadvantages of including the joint venture company as a party. One advantage is that if the JV company is a party, it can directly undertake obligations to observe certain restrictions or procedures, such as non -compete or confidentiality undertakings, which could make enforcement easier. A direct contractual right of enforcement against the joint venture company will also help if there is a risk that the directors of the joint venture company may not observe constraints or undertakings contractually agreed between the shareholders. Even if the directors are likely to have regard to the wishes of the shareholders in fulfilling their duties as directors, they will not be contractually limited or bound by commitments in the shareholders agreement unless the company is a party. Another situation in which it is advantageous to have the joint venture company as a party to the agreement is where there are multiple parties to the joint venture, where the cooperation of several shareholders is likely to be required in order to give effect to an undertaking relating to the conduct of the joint venture company. In such a case, Andrew Yip (07:13.922) Having the company as a party to the agreement will ensure compliance and assist with an enforcement of the agreed term. On the disadvantages of having the joint venture company as a party, one disadvantage is where the joint venture parties prefer that the terms of their contract should not involve the company so that in the event of disputes or variations, they can take any wider relationship issues into account without the consent or knowledge of the joint venture company and its management. Another potential disadvantage is that if the shareholders agreement contains terms which fetter the joint ventures company\'s exercise of its statutory powers, for example, a term which restricts the joint venture company from passing a resolution pursuant to a specific right given to the shareholders by statute, those terms may be unenforceable. However, it is possible to contract around this by phrasing this as a restriction on the shareholders. where they will exercise their voting rights to ensure that certain resolutions are not passed unless certain contractual approvals have been obtained. Andrew Yip (08:22.668) Another key issue is the rights and protections that should be considered or negotiated for when acting for minority shareholders in a joint venture company. The underlying statutory and corporate rights for minority shareholders are generally quite limited and provide no realistic safeguards or influence in relation to joint venture companies. When acting for a minority shareholder, your client will usually expect stronger rights and you should do your best to negotiate such rights for them. The minority protection rights to be negotiated will vary from case to case. For example, there should be differences between the rights to be negotiated by a minority party in a 60 -40 joint venture, where the minority party is providing substantial management and technical expertise, and in an 80 -20 joint venture in which the minority is a strategic partner, but the majority shareholder has day -to -day operational control and management rights. Similarly, should expect differences between a joint venture in which a venture capital institution has a majority minority stake, but may be the principal provider of finance, and a multi -party joint venture in which a number of parties have comparatively small and passive shareholding interests, which you\'ll see in a lot of startup joint venture or shareholder agreements. A range of protective measures should be considered and the appropriate protection should be selected to prevent undue preference or misuse of control. by a majority party or parties. Before we consider the typical minority protections in a shareholder\'s agreement, let\'s have a recap of what the statutory remedies for minority shareholders are. By and large, these tend to apply only in limited and relatively extreme circumstances. The principal rights are essentially confined to the following. If the minority holds more than 25 % of the voting rights, it would have the ability to block certain decisions which require special resolution. or 75 % shareholders approval. Statutory rights to call for meetings, information, or formal regulatory investigations in certain limited circumstances. A right to initiate an action on behalf of the company, commonly known as statutory derivative actions, against directors for breach of duties under the Companies Act. A right to seek a remedy under the Companies Act in the event of unfairly prejudicial conduct by the majority party. Andrew Yip (10:44.844) and a right in certain circumstances to seek a winding up of the joint venture company on the grounds that it is just and equitable to do so. A minority shareholder will therefore look for express contractual rights and protections beyond those afforded by statute and corporate law. minority participant will generally aim to protect its interests in the following principal areas. Typically, minority shareholders will want to ensure its participation in management through representation on the board of directors, on the joint venture company. In addition, they would typically negotiate for specific information rights, for example, for budgets or periodic financial statements to be provided to them on a regular basis. Minority shareholders would also want that it would be involved in major business decisions, including that its consent would be required on key matters. Typically, we call these reserve matters in a shareholders agreement. Minority shareholders would also want to protect against its equity stake in the joint venture being improperly diluted by subsequent share issues. It would want to ensure that it receives a proper distribution of profits from the joint venture company and also establish safeguards to enable the joint venture company to assert claims when necessary against the majority shareholder if the majority shareholder is in breach of its obligations to the joint venture. Lastly, it would want to ensure that it has an ability to exit the joint venture. in worst case scenario without it remaining trapped in a situation where the relationship between the shareholders have broken down. Andrew Yip (12:24.162) Moving on to another key issue in drafting shareholders agreements would be governance and management rights, which we briefly touched upon when discussing minority protection measures. These arrangements cover things like board composition, key management appointments, as well as the proceedings for board and shareholder meetings or resolutions. On board composition, mean, this typically refers to the number of directors that each party can appoint, as well as the manner in which the parties can appoint and remove their board nominees. Usually we also include provisions to adjust for the number of directors that can be appointed by the parties if there is a change in shareholding proportions. So for example, if you start the joint venture on a 60 -40 basis, maybe you\'ll provide that party A, who holds 60%, can appoint three directors and party B, who holds 40%, can appoint two directors. Then you would include provisions to say that if there is a change in the shareholding proportion, then the number of directors that each party can appoint would be adjusted. Maybe, for example, every 10 % shareholding you hold would be equivalent to one board seat. The next one is on key management positions. For example, CEO, CFO. In some cases, the parties would like to prescribe upfront which party gets to appoint or nominate the persons to these positions. The last one on board and shareholder proceedings would cover things like Quorum and Notice Requirements, especially if you\'re acting for a minority shareholder or an investor which is taking a more passive role, typically they would want one of their directors to be present at a board meeting or their shareholder representative to be present at a shareholders meeting in order for the Quorum requirements to be met. Notice Requirements will follow the\... prescribed notice arrangements under the Companies Act for shareholders\' meetings, unless contractually agreed otherwise. We would also typically provide for certain different approval thresholds depending on the matters that are being decided by the board or the shareholders. Typically, day -to -day matters would just be based on simple majority vote. And then certain prescribed matters, reserved matters as I referred to in my earlier slide, are matters which would require the prior written consent of Andrew Yip (14:45.1) either the minority shareholder or both shareholders depending on the balance between the two. Andrew Yip (14:52.15) Another key issue would be the financing arrangements for the joint venture company. So for example, are there any specific funding obligations on the part of the shareholders? Typically, if the joint venture is being established for a specific project, for example, like a property tender or infrastructure project, there may be specific funding obligations or a funding schedule that would be attached to the shareholders agreement where shareholders are committed to fund. specific or minimum amounts upon the achievement of certain milestones. The other thing would be how funding should be obtained for the joint venture company. Sometimes there is a priority of methods of funding. For example, first you have to go to banks to seek external funding. Secondly, shareholders loans. Third, through pumping in of shareholders equity where shareholders subscribe for additional shares to fund the companies. Also important would be when the company can trigger these funding arrangements if the shareholders are meant to be contractually obligated to fund the company in these scenarios. If external financing is obtained, sometimes the banks might require provision of security by the shareholders of the joint venture company. And so the shareholders agreement would also contain provisions to discuss how the liability under any security granted by the shareholders should be apportioned. Lastly, what happens if there are specific funding obligations imposed on the shareholders and one of the shareholders fails to fund? Can the other shareholder fund on behalf of the non -funding shareholder? And if so, in some cases there are penalties imposed such as default interest or the funding will take place by issuance of shares at a dilutive issue price. Andrew Yip (16:45.484) Next, I\'ll discuss when and how a share in a joint venture can usually be transferred and the circumstances under which joint venture parties may exit a joint venture. Almost all joint ventures contain restrictions on transfer. This is because the ability to freely transfer shares to any third party without constraint is contrary to the basic personal nature of a joint venture. The range of potential restrictions on transfer include completely free transferability at one end of the spectrum, to an absolute prohibition on transfer at the other end. A crucial question is therefore, where within this range should transfer restrictions in the particular joint venture be pitched? In certain joint ventures, particularly multi -party ventures, where a number of parties may have a largely passive investment, for example, with like startups, a regime of relative freedom of transfer may be appropriate in order to enable a party to transfer its interest to a third party. In contrast, in many core\... corporate joint ventures, particularly cooperative ventures, where the personal relationship between the parties is crucial to the continuance of the venture, the simplest route may be to prohibit any transfers without the consent of the other parties or parties, certainly at least for an initial lock -up period. So for example, if it\'s a very operational joint venture where parties are leveraging on specific assets or specific know -how of the other parties, it\'s very personal to the identity of the relevant parties involved, then there would be additional transfer restrictions imposed. In most joint ventures, parties will choose to adopt a solution where transfers are permitted but subject to a preemption procedure. This will usually entail a procedure along the following lines. A transfer price is given to the other party, setting out the selling party\'s wish to transfer shares in the joint venture company and the proposed price. The other joint venture party is given a period in which to decide whether to exercise a preemption right on the terms stated in the transfer notice. In the case of a multi -party venture, Andrew Yip (18:48.728) where there more than two shareholders. Each party is offered the selling party shares pro rata based on their existing shareholding percentage in the joint venture company, together with an opportunity to take up any excess shares not acquired by the other non -selling shareholders. If and to the extent that the preemption rights are not exercised, the selling party is free to sell its shares to a third party within a defined period. and at a price that is not less than the price offered to the existing joint venture parties under the preemption procedure. Andrew Yip (19:23.896) There are different types of preemption rights on a transfer of shares, but most usually fall within one of the following two descriptions, either a right of first offer or a right of first refusal. These preemption rights are also known as soft and hard preemption rights respectively. A right of first offer occurs where the selling party wishes to sell its shares, but is not obliged to first identify a third party purchaser. The non -selling shareholder has the first opportunity to take up that offer or to negotiate. The right arises at the front end of the sale process. If the offer is not accepted, then the selling party is free to sell its shares to a third -party purchaser at a price not less than the previously offered price. An advantage for the selling party under the right of first offer is that it avoids the initial cost and effort of marketing or negotiating with third parties. A disadvantage for the non -selling party is that it may be forced to participate or make a decision on whether to buy out the selling party in circumstances where the sale to a third party may not be a real possibility. So it might be forced to buy because it just doesn\'t want a third party that it\'s not familiar with or that it does not know to come in when actually perhaps the selling party would not have been able to find a buyer in the first place. A common variant rests on the premise that if a joint venture party wishes to exit by transferring its shares, it is appropriate for the other existing party to have a right to acquire those shares at a fair price. Andrew Yip (20:56.322) A right of first refusal, on the other hand, occurs where the selling party is required to identify a bona fide third party purchaser before the preemption right is exercisable by the non -selling party. So this right arises at the back end of the sale process, instead of the front end, like you have under the right of first offer. In this situation, if the preemption right is not exercised, the only permitted sale will be to the specific third party purchaser. and at the price specified in the transfer notice. A hard right of this kind can make it very difficult in practice for a selling party in a joint venture company to find a purchaser. It will not often be feasible for a seller to obtain a firm offer from a third party in advance of the preemption process taking place, since a third party would usually prefer to wait and not waste time on potentially abortive negotiations until it has clarified whether any preemption rights will be taken up or exercised. Andrew Yip (21:55.16) Price is invariably a key issue when negotiating preemption rights. The price at which the non -selling party can buy the selling party\'s shares under preemption provisions could be based on the price set by the selling party, the price offered by a third party purchaser, or a price determined by an independent valuation. The last option gives rise to some interesting issues. Setting the valuation formula and procedures will be a matter that requires the assistance of the parties, accountants or other financial advisors. These are usually very technical financial determinations and will require detailed mechanics and timelines to be set out for parties to determine how the valuation will be determined, the assumptions that should be used by the valuer, timelines for preparation of the valuation report and what are the procedures that should be in place if the parties disagree with the valuer or with each other\'s valuation. Different basis for valuation of a party\'s shareholding in a joint venture company include market valuation on fair value and more formulaic basis for valuation such as net asset value, earnings basis, discounted cash flows, startup costs and dividend yield. The most appropriate basis or manner in which the valuation should be done will depend on the transaction at hand as well as the party\'s commercial preference. Andrew Yip (23:23.694) Two additional issues that are relevant to a party\'s right to transfer its shares in the joint venture are whether a tag -along right and or a drag -along right are appropriate. If a party wishes to sell its shares in a joint venture company to a third party, the other joint venture parties may also want to have the opportunity to exit. This exit right can be preserved by giving the other parties a tag -along or piggyback right where the selling party is obliged to ensure that any third party purchaser of its shares must extend its offer to include, on the same terms, each other party\'s shares in the joint venture company. This is usually a sensible precaution for a minority shareholder in order to ensure that upon a sale by a majority party, the minority is not deprived of the opportunity to obtain equivalent sale proceeds and that it doesn\'t get locked in as a minority in a joint venture with a new, unknown majority partner. Andrew Yip (24:23.67) A drag -along right, on the other hand, may be particularly appropriate for a majority party. In this case, the selling party is given a right, if it is selling to a third -party purchaser, to oblige each other shareholder to also sell its shares in the joint venture company to the third party, at the same price per share as negotiated by the selling party. This enables the majority party to avoid any blocking of the sale by the minority and enables it to deliver the entire interest in the joint venture company to the third party purchaser. Typically drag -along rights are structured so that they can only be exercised if the sale involves either all of the shares in the company or a majority of the shares in the company. Usually, if the drag -along provisions will also provide that the dragged shareholders, i.e. the other shareholders who are compelled to sell their shares, will only be required to give limited reps and warranties, for example, in relation to title to shares, authority and capacity to enter into the sale agreement. and will not be giving detailed business or operational reps and warranties in relation to the joint venture company. This is especially where the minority shareholders are silent investors that do not have control or involvement in the management or day -to -day operations of the joint venture. Andrew Yip (25:47.286) I turn now to exit provisions, where I\'ll discuss the typical considerations when negotiating when and how a party should be able to exit from a joint venture. In designing appropriate exit provisions for a particular venture, a number of basic questions should be addressed. I will touch on these questions briefly. Is a joint venture to be established for a fixed term with automatic termination unless each of the parties agree to renew? This approach is more common for non -equity joint ventures and is often the simplest approach. but rarely seen in the context of equity joint ventures. Should a party have the right simply by notice to terminate its interest in the venture, irrespective of any cause attributable to the other party? If so, what should be the exit mechanism following any such notice, for example, winding up or buyout mechanism? Should a party have the right to terminate the venture in the event of specified circumstances or for cause, i.e. in a default scenario? If so, what should be the trigger events which entitle a party to exercise these rights? Will the party have a direct right or option to put its shares in the joint venture company to the other party, i.e. to require the other party to buy its shares, or to call for the other party\'s shares, i.e. to require the other party to sell its shares at specified times as part of a pre -agreed commercial deal? Should a party have the right to initiate a sale of the joint venture company as a whole, either through an initial public offering or through a trade or other secondary sale? Such a route may be specifically contemplated as an objective or possibility when the joint venture company is established. Should there be a right to trigger a specific deadlock resolution mechanism which will terminate the joint venture if there is a deadlock or breakdown in the joint venture relationship? Any contractual provisions for exit or termination will be centred on these core issues. Within each of these scenarios, there are detailed questions and many different approaches. I will explore two of the more common exit scenarios or provisions, i.e. default and didlock, in more detail in the following slides. Andrew Yip (27:57.72) For the purposes of this lecture, deadlock means the inability of the parties to agree on strategy or other important decisions affecting the venture. This ability may be due to genuine disagreement between the parties on a business dispute or a fundamental breakdown in their relationship. In particular, the existence of strong minority rights can lead to a greater risk of potential deadlock. Deadlock in the joint venture company can present itself in different situations. A management deadlock can arise at board level, where the directors appointed by two or more shareholders take opposing views and the votes cast are equal. Or if there is a minority shareholder where their board appointee exercises a veto right. A similar deadlock can arise at shareholder level. Sometimes a deadlock arises because one of the parties refuses to attend meetings and it becomes impossible to pass decisions or to conduct the affairs of the joint venture company. For example, as we touched on in the in the governance provisions if the quorum requirements require at least one representative or appointee of a specific shareholder to be present at board of shareholders\' and that shareholder just simply fails to turn up at those meetings. Andrew Yip (29:15.49) In these scenarios, the question comes up as to whether parties should include provisions in the joint venture company\'s governance structure to deal with deadlocks at all. Do they really help? There are two primary and opposing schools of thought on the value of making special provision for deadlock resolution in joint venture agreements. There are those who actively try to establish governance rules which avoid a potential deadlock or which establish a clear resolution procedure if a deadlock or breakdown arises. Then there are those who would prefer to try and negotiate an appropriate resolution at the time of any deadlock, rather than anticipate in advance what this might be and do not therefore provide for deadlock resolution procedures in the agreement. The truth is that detailed deadlock breaker provisions are rarely used in practice. Commercial pressures and negotiations will usually lead to agreement on the way forward without going through a formal preset deadlock procedure. Many practitioners have considerable doubts as to their usefulness, unless the parties have a strong commercial desire to ensure at the outset a definite exit route exists in the event of breakdown. If deadlock breaker provisions are included but not operated in full, they can nevertheless establish an important background against which each party will then develop its tactical strategy in any dispute or deadlock situation and provides a fallback scenario in case parties are unable to reach an agreement at that point in time. In any event, I will now spend some time discussing the three basic ways of dealing with deadlocks. The first is to design management structures to avoid deadlocks arising in the first place. The second is to provide for mechanisms enabling the venture to continue. And the third is what is commonly referred to as divorce measures. One way of dealing with deadlock is to design the management structure in a way which endeavors to avoid deadlock in the first place. Structural measures, in addition to the typical issue resolution procedures, can include agreeing at the outset that one party is to have clear voting and management control. Andrew Yip (31:25.644) Alternatively, it may be agreed at the outset that a particular party will have control or leadership over a particular area of management responsibility or decision making. This can work well in practice in situations where each party is contributing a different and distinct skill or resource to the venture. A different approach is to establish a management structure whereby as many decisions as possible are taken at individual executive level without the matter requiring referral to the full board of directors. Similarly, the parties can choose to restrict the list of matters which must be referred or reserved to the decision of the shareholders themselves. These measures will all go to the management structure within the particular venture. Much will therefore depend on the wishes of the parties when establishing that structure. In many cases though, each party will be reluctant to give up its right to agree to major decisions, which then leads back to the potential for inter -party deadlocks. which will have to be broken by one means or another. Andrew Yip (32:29.07) Possible mechanisms for resolving deadlock within the context of a joint venture, which the parties wish to continue, include giving a party a second or additional vote in the event of a tie. An alternative is to give an independent director appointed from outside, without prior allegiance to any joint venture party, an additional vote, which will decide what would otherwise be a deadlock between the parties. Other possible mechanisms of this kind are essentially features of a general dispute resolution procedure for the joint venture. The deadlock may be referred, perhaps in stages of escalation, up to the chairman or chief executives of the joint venture parties themselves for resolution at the highest level within each party\'s organisation. In a potentially long -running or complex venture, a standing dispute review panel may be established. which will be available throughout the venture to assist with the resolution of disputes. Lastly, a dispute may also be referred to an independent expert or to mediation or other alternative dispute resolution. In this scenario, arbitration or court proceedings would not be appropriate because a deadlock relates to a business disagreement rather than any breach or contractual interpretation. Andrew Yip (33:45.41) The last way to deal with deadlocks, divorce measures, are useful when dealing with major breakdown in relations between the parties. In such circumstances, the first question is to assess whether the express exit or termination provisions in the joint venture agreement are sufficient to deal with the situation. In many ventures, there may be express rights which provide an effective route to divorce. For example, an express right for a party to terminate by notice, by calling for a winding up of the joint venture company, exercise a put option, or otherwise exit from the joint venture. It is only if the termination provisions do not provide an adequate solution that the parties need to consider whether special divorce measures should be introduced to provide for a situation of management didlock or breakdown. Here I should mention that divorce measures are often considered but may or may not be included in equity joint venture agreements. The strongest reason for their inclusion is that they will generally act as a nuclear deterrent. The threat of their implementation puts pressure on the parties to agree on a commercial solution. If such a measure is adopted, it is highly desirable to allow sufficient timing breaks within the formal DLock procedure before the strict provisions of the Joint Venture Agreement are finally implemented. This allows parties the opportunity to agree on a commercial solution, even if they do so reluctantly. In addition, we sometimes limit these divorce mechanisms to a key deadlock, where the deadlock must relate to something that is inherently critical to the continued operation of the joint venture. For example, if no resolution is reached, either the company might have to cease operations or it would be found to be in breach of laws or in breach of its financing covenants, etc. So it\'s not a minor disagreement that could result in the divorce mechanisms being triggered. Andrew Yip (35:41.708) I will share with you now some examples of measures which are sometimes used or considered. They recognize that an insoluble deadlock will inevitably lead to the breakup of the joint venture and that this cannot realistically be solved by the sale of one party\'s interest to a third party. The measures therefore result in a buyout of one party\'s interest or in certain cases winding up of the joint venture company. In this scenario, upon the defined deadlock trigger event, A party has a contractual right to initiate the relevant divorce measure. Possible measures include taking proceedings for the winding up of the joint venture company, initiating the sale of the joint venture company as a whole, exercising a put or call option, commencement of various buy or sell shootout procedures between the parties, and the commencement of discussions between deadlocked parties on a variety of options, usually in the order of preference. None of these measures is an ideal solution. In fact, very few divorce resolution procedures are implemented and completed in accordance with their contractual terms. The inbuilt potential deadlock of joint venture companies in itself provides the strongest structure for encouraging the parties to reach a commercially agreeable solution. The severe commercial consequences to the business of the joint venture of an insoluble deadlock generally ensure that a sensible compromise will eventually be agreed between the parties. If there is a prolonged and insoluble deadlock and no satisfactory termination procedure which can be triggered, the residual legal remedy is usually for a party to seek a winding up of the joint venture company. Any such process is, likely to be slow, costly and time -consuming. In any event, winding up will invariably be the last resort and a drastic remedy. A joint venture inevitably carries a commercial requirement for the parties to agree on certain matters. The parties will need to agree when settling up the venture and will invariably need to agree when terminating it. Andrew Yip (37:47.926) I come now to the last key issue and exit scenario, whereby parties may wish to negotiate for the right to terminate the joint venture on the occurrence of certain specified circumstances or for cause. If so, we will need to consider the appropriate trigger events which will entitle a party to exercise this right. Such events usually include insolvency. So if one of the joint venture partners goes insolvent, the parties might want to be able to trigger a default. mechanism and buy out the insolvent party shares rather than wait for the party to go through the whole insolvency process where the assets of the insolvent party, which would include the shares it holds in the joint venture, may be distributed to third parties who the existing or remaining joint venture parties are not familiar with. Another common default event would be a material breach of the shareholders agreement. This is typically requested by minority shareholders on the basis that most of the obligations and responsibilities under the shareholders agreement would require the majority shareholder to ensure compliance. In some scenarios, we try to limit a default event triggered by breach to breach of certain specified provisions rather than any breach of the shareholders agreement, which could include more minor provisions like confidentiality, et cetera, which in themselves should not be serious enough to warrant a termination. of the joint venture and dissolution of the relationship. Another common default event would be cross default. So in a scenario where the joint venture company has entered into various ancillary agreements or side agreements with certain or all of its shareholders, for example, maybe licensing agreements or management services agreements, a default or termination under those ancillary agreements could also trigger a cross default. scenario under the shareholders agreement. Lastly, another common default event is change in control, where parties are engaging with each other on the basis that they belong to a certain wider group of companies. In the event that the shareholder entity ceases to remain in that group of companies, then this could trigger a change in control event and Andrew Yip (40:14.688) allow parties to go to the default mechanism. So for default mechanisms, the most common arrangement is to have a put and call option where the non -defaulting shareholder or shareholders would be entitled to either put their shares to the defaulting shareholder, i.e. to require the defaulting shareholder to acquire their shares, or to have a call option over the defaulting shareholder shares, where they would be entitled to acquire the shares held by the defaulting shareholder. In some scenarios where there is a very uneven shareholding proportion between the parties, for example, there is a very clear majority shareholder that is responsible for running the group or the joint venture is part of that majority shareholders brand or group operations. In that scenario, the majority shareholder may want to ensure that regardless of whether it is the defaulting or non -defaulting shareholder, it would always be the party buying out the minority shareholders to ensure that the joint venture company remains within its group and remains under its control. The next issue in terms of the put and call options would be the pricing. This usually goes to evaluation mechanism, which I touched on in the context of the pricing arrangements for preemption rights on transfer. Typically in a default scenario, the pricing would be based on fair value with the basis of valuation to be set out in the shareholders agreement. In addition, there would be a discount or premium applied to the to the purchase price of the shares depending on whether the put or call option is exercised. So for example, if the defaulting shareholder is buying the non -defaulting shareholder shares, it would have to buy the shares at a premium to fair value. Conversely, if the non -defaulting shareholder is buying the defaulting shareholder shares, then it would be entitled to buy those shares at a discount. Andrew Yip (42:14.498) So the percentage of discount or premium to be applied would be something that would be negotiated between the parties. There may also need to be other unwinded arrangements which would similarly apply to any termination or exit under the joint venture agreement. So again, if there is a joint venture with a lot of ancillary agreements between the joint venture company and specific shareholders, then those ancillary agreements may need to be terminated or alternative arrangements may need to be put in place if the if the shareholder that is party to the ancillary agreements would be exiting. Similarly, if any one party or both or all parties have contributed specific assets to the joint venture, there may need to be arrangements for the assets to be returned to the exiting shareholder. So these all depend on the specific structure and terms of the joint venture as well as the relative bargaining powers or shareholding proportions of the parties involved. On this note, I will end this last slide on joint ventures. I hope I\'ve given you basic understanding of the issues that frequently come up in joint venture transactions, and I thank you for your attention. Good luck with your studies, and I hope to meet you in person one day. Mergers and Acquisition - Joint Ventures - **[Key]** issues to be addressed