Publications - Corporate



			Publications - Corporate Joint Venture Considerations Introduction The aim of this note is to highlight to the reader various issues which should be considered at an early stage of discussions regarding a proposed business joint venture. The information in this note is general and not exhaustive. Preliminary actions Preparing a feasibility study or business plan. Recording agreed points of principle in a letter of intent or heads of terms. Protecting confidential information with a confidentiality agreement. Restricting the freedom of the parties to negotiate with others with an exclusivity agreement. Identifying any relevant public announcement obligations, stock exchange requirements, material authorisations, consent, licences or other conditions to the venture proceeding. Parties Are they to be individuals and/or companies? If a company is to be a party is it a parent company or a subsidiary? If a subsidiary is a party will its parent company guarantee its obligations? Structure Is a joint venture the best type of relationship within which to effect the project? Can the commercial aims of the parties can be better achieved via another arrangement such as a research and development or co-operation contract, a licence or franchise arrangement, a distribution or agency arrangement, a supply contract, or a straightforward acquisition? Should the venture be conducted through a limited company? If a partnership is to be used should it be a standard or limited liability partnership? Where should the joint venture "vehicle" (whether it is a company or otherwise) be located? What law should govern the venture? What will be the effect of local laws of the country in which the venture is to be established (if overseas)? Have the tax implications of the preferred structure been considered? Business Has the scope of the joint venture vehicle's activities been agreed ie. its business objectives and any restrictions (geographical or otherwise) which will apply? Are there any matters which are so fundamental to the venture going ahead that they should be pre-conditions of the joint venture? These could include the grant of a licence or approval, the purchase of a property, the issue of a tax clearance or the satisfactory completion of investigations into the parties and/or venture (otherwise known as "due diligence"). Tax and accounting Advice will need to be taken in respect of tax and accounting, this should include:- Capital Gains Tax on the establishment of the joint venture. Capital allowances/balancing charges on transfer of assets. Transfer of any available tax losses. Compliance with transfer pricing legislation. Stamp duty and stanp duty land tax cost and saving schemes. Consortium/group relief. Availability of tax clearances. How the joint venture will be treated in the parties' accounts? Regulatory Issues Are any general or business-specific regulatory approvals required (in any relevant jurisdiction)? How will competition law impact on the proposed venture (advice will need to be taken as to whether the venture will have or create a significant market share, whether it will be a "full-function" joint venture, whether EC Merger Regulation turnover thresholds apply, whether notification to the EC Commission is necessary or advisable, whether the joint venture is a "qualifying merger" and whether the joint venture falls under the prohibitions of the Competition Act 1998)? Is one of the joint venture parties (or the proposed joint venture business) located in a country subject to any trading sanctions? (For example, US companies and their affiliates are prohibited from having any business relations with various countries around the world including Iran, Iraq, and North Korea). Will the parties agree to co-operate should any regulatory action be taken after completion? Could the joint venture be a "collective investment scheme"? Capital and Finance What will be the amount of initial investment (shares and/or loan) from each party? Will this be made in cash or otherwise (eg. contribution of a non-cash asset)? When will the initial investment be paid? In what proportions will shares be held by the parties? Are any shares to have special rights? Will any loans be secured, or subordinated? Should new shares issued in the future be offered to existing shareholders in proportion to their existing shareholdings? Are any obligations to be imposed on shareholders re future or further finance? Will the parties accept any obligations to support borrowings eg. by guarantee in agreed proportions? Are any grants or other subsidies available? Contribution of non-cash assets by parties Where non-cash assets are being transferred into the joint venture vehicle:- What level of investigation should be carried out into such assets for the protection of those parties other than the contributor? How will they be valued? Will any tax or duty considerations affect the transfer? Will a balancing payment need to be made between the parties? Are any minimum net worth obligations/warranties to be given in relation to such assets? Are any consents required for the transfer of such assets? Intellectual Property/Technology Is any significant IP or technology being contributed by any party? If so is it or should it be protected by registration? Should ownership of the IP or technology pass to the joint venture vehicle or would a contractual licence in favour of the vehicle be sufficient? Will any of the parties need rights as regards any IP or technology generated by the joint venture vehicle? Transfer of business and employees Is there to be a transfer of a business into the joint venture vehicle? If so will the employees of that business be automatically transferred to the joint venture vehicle with full continuity by virtue of employment regulations ("TUPE")? Will employees be seconded to the venture or directly employed? Should new service contracts be negotiated with key employees or introduced to standardise terms? Is there a need for a new pension scheme? Do the employees have share options or benefit from other incentive arrangements? What is to happen to these? Directors and boardmeetings Who will be the first directors? Should the number of directors be limited? Should any party have the right to appoint a director or directors? When and where should the directors meet? What type of notice and how much notice should directors be given of a board meeting? Must all or some of the directors be present for a meeting to conduct business? Should directors be entitle to appoint "alternate directors" to attend meetings and vote on their behalf? Who should have the right to appoint the Chairman of the board? Should decisions be made by directors on the basis of "one man, one vote"? What should happen if the board is deadlocked? If appointed should the Chairman of the board have a second or casting vote? Should directors be restricted from voting on contracts or matters in which they are "interested"? Shareholders' meetings Where should they be held? Should there be any special requirements for notice of shareholders' meetings? Must all or some of the shareholders be represented for a meeting to conduct business? Should any special requirements apply as regards shareholders voting by proxy? Who should have the right to appoint the Chairman at shareholders' meetings? Should any of the parties have enhanced voting rights on any particular issues? If appointed should the Chairman have a casting vote? If there are different classes of shares with different rights, should specific matters be referred to a separate meeting of shareholders in a particular class for approval? Matters requiring special consent Certain matters might merit the approval of all board members and/or all shareholders (or a special majority or consent) before they can proceed. These might include:- Any changes to name, constitution or share capital. Any change to the business plan or business expansion (including formation of a subsidiary). Any borrowing over an agreed limit. The grant of any security or guarantee. Any change to and the setting of budgets. Any significant capital expenditure commitment. Any declaration of dividend. Any change of or change in the terms of any chief executive or other key manager. The sale or purchase of any key asset. The entry into or termination of any key contract. The starting or settling of any material dispute. Any significant agreement re. intellectual property rights. Any dealings between the joint venture vehicle and any shareholder or connected person. Any change of accounting policies, practices and/or accounting reference period. Any change of auditor or key advisers. Liquidation or dissolution of the joint venture vehicle. Restrictions on parties Should all parties be barred from competing with the joint venture vehicle and/or soliciting its employees? Can the restrictions be limited by reference to a specific geographical area? How long should the restrictions last? Do any specific exceptions need to be mentioned? Should the parties be bound to refer business to the joint venture vehicle? Change of control of parties What should happen if a party to the joint venture is the subject of a change of control? How should "change of control" be defined? Should the change require the party affected to offer its shares or other interests for sale and if so at what value? If a party exits in this way will there be any need to change the name of the joint venture vehicle? Transfer of Shares What should happen if a party who is a shareholder wants to transfer its shares in the joint venture vehicle? Should there be an initial period during such transfers are barred? Should all or any of the other parties have rights to buy those shares ("pre-emption rights") and if so at what value? What should happen if pre-emption rights are not exercised, should the party wishing to sell be free to sell its shares to an external party and/or be entitled to call for the venture vehicle's liquidation? Should a shareholder who wants to sell to an external party have to procure the same offer from that external party for all shareholders? Should a shareholder who wants to sell to an external party be able to force fellow shareholders to sell to the external party if the same offer is procured? Where shares are held by a company should that company be able to transfer its shares to another company in the same group? Should any specific buy or sell options to be included at the outset? Must a new shareholder be obliged to sign up to the joint venture agreement? Should a person who acquires shares by transfer from another party assume existing loans or guarantees made by the seller? If a party exits in this way will there be any need to change the name of the joint venture vehicle? Termination Is the venture to last indefinitely or is it to have a limited duration? Should any party be able to give notice of termination (leading to a liquidation unless otherwise agreed) after minimum period, or is exit from the venture to be only by a transfer of shares/loans? Are there any circumstances in which termination should be automatic? If a party materially breaches the joint venture agreement should the other parties be entitled to buy out its shares/loans? If a party becomes insolvent or bankrupt should the other parties be entitled to buy out its shares/loans? If a party exits in these ways will there be any need to change the name of the joint venture vehicle? What rights and obligations should survive termination? In a liquidation how should the assets and liabilities of the joint venture be allocated? Written July 2001. Reviewed January 2004. For further information please contact : corporate@mcgrigors.com «Back to Corporate Publications				«Publications McGrigors' lawyers produce a variety of publications to help keep clients up to speed with legal developments in their industries. You can select the areas most relevant to you on the left and you can register for email updates to make sure you don't miss out.