InfoPAKSM Joint Ventures International Transaction Guide: … · tel +1 202.293.4103 fax +1 202.293.4107 This InfoPAKSM provides a checklist for international joint ventures. The

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

InfoPAKSM

Joint Ventures International Transaction Guide: Checklists

Sponsored by:


Copyright © 2015 Practical Law Company (PLC) & Association of Corporate Counsel

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August 2015

Provided by the Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036 tel +1 202.293.4103 fax +1 202.293.4107 www.acc.com

This InfoPAKSM provides a checklist for international joint ventures. The information in this InfoPAKSM should not be construed as legal advice or legal opinion on specific facts, and should not be considered representative of the views of PLC or of ACC or any of its lawyers, unless so stated. This InfoPAKSM is not intended as a definitive statement on the subject but rather to serve as a resource providing practical information for the reader.

This material was developed by PLC. For more information about PLC, visit their website at http://www.practicallaw.com/.

Contents

I. Preliminary Matters ......................................................................................................................... 4

II. Identity of the Parties ...................................................................................................................... 4

III. Business of the Joint Venture .......................................................................................................... 4

IV. Structure ........................................................................................................................................... 5

V. Foreign Ownership and Exchange Controls .................................................................................. 5

VI. Contributions to the Joint Venture ................................................................................................ 6

VII. Financing of the Joint Venture ........................................................................................................ 6

VIII. Tax .................................................................................................................................................... 7

IX. Administration .................................................................................................................................. 7

X. Documents (General) ...................................................................................................................... 8

XI. Control and Minority Protection .................................................................................................... 8

XII. Transfer of Shares ............................................................................................................................ 9

XIII. Deadlock .......................................................................................................................................... 10

XIV. Termination .................................................................................................................................... 11

XV. Competition and Restrictions on the Parties .............................................................................. 11

XVI. Intellectual Property ...................................................................................................................... 12

XVII. Employees ....................................................................................................................................... 12

XVIII. Insurance ......................................................................................................................................... 13

XIX. Continuing Business Involvement of the Parties ........................................................................ 13



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Note. Unless otherwise stated the checklist assumes that a corporate structure will be used for the joint venture.

I. Preliminary Matters ■ Do the parties wish to have a period of exclusive negotiation?

■ Is a confidentiality undertaking required?

■ Is there to be a feasibility study and/or valuation?

■ Consider a memorandum of understanding (also called a "heads of terms").

II. Identity of the Parties ■ What particular considerations may be relevant because any of the parties to the

joint venture are:

• individuals; or

• partnerships; or

• companies; or

• other bodies, organisations or associations?

■ Are any of the parties subsidiary or holding companies?

■ Will any of the principal parties wish to hold their interest in the joint venture through a specifically created vehicle, incorporated or not?

III. Business of the Joint Venture ■ What will be the nature of the activities carried on by the joint venture?

■ Is the purpose of the joint venture to carry out a specific project or a continuing business?

■ What is the likely turnover and market share?

■ Where will the business be based?

■ Will there be geographical limitations placed on the joint venture's operations?

■ What are the parties’ objectives?

■ What regulatory consents, approvals and licences will be required for the formation and business(es) of the joint venture?

■ Is it envisaged that its shares are to be traded on a stock exchange?

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IV. Structure ■ Is the joint venture to be carried out through a separate vehicle, or does its nature

make a direct contractual arrangement between the parties more suitable (for example, some form of collaboration agreement, joint R&D, supply or distribution)?

■ What form will the vehicle take? For example:

• a limited company; or

• a partnership, limited partnership or limited liability partnership.

■ In what jurisdiction(s) will the joint venture be established?

■ How do the laws governing the contractual arrangements between the parties and those governing incorporation of a joint venture vehicle interact?

■ What formalities are required for establishing the relevant structure including relevant registration requirements and approvals? How long is it likely to take?

■ If a corporate vehicle is used:

• will a new company be incorporated or an existing subsidiary of one of the parties be used;

• are there minimum/maximum capital requirements;

• can shares be issued in consideration for the transfer of assets or services;

• what is the relevant management structure; and

• how flexible is the relevant corporate vehicle particularly in relation to minority shareholder protection (see Control and minority protection below)?

V. Foreign Ownership and Exchange Controls ■ Are there any restrictions on foreign ownership or investment?

■ Will any exchange controls restrict the conversion of local currencies?



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VI. Contributions to the Joint Venture ■ Will either party contribute any specific tangible or intangible property to the

joint venture?

■ How are contributed assets to be valued, and how will any adjustments be made for any shortfall or excess in relation to any contributor's proportionate funding obligation?

■ Do assets need to be valued under local law (if, for example, they are transferred in consideration for the issue of shares in a joint venture company)? What are the timing implications and how will this valuation relate to any other independent valuation?

■ Will contributions be by way of outright transfer, or a lease or licence to the joint venture for a fixed or indefinite term?

■ Will transfer duties or other tax considerations affect the method of contribution of assets? Who will bear the tax costs of contributions?

■ Can all contributions of assets be made contemporaneously, bearing in mind any regulatory approvals or consents from third parties (including lessors, licensors and lenders) required for any transfer? If not, should the availability of all or any particular assets be a condition to the establishment of the joint venture?

■ What "due diligence" investigations will be made into assets being contributed and what warranties and indemnities will be given and to whom?

VII. Financing of the Joint Venture ■ In what proportions (if at all) will the parties provide initial finance to the joint

venture and how much will be provided from external sources?

■ How will finance be structured (for example, debt or equity)? Consider advantages and disadvantages under relevant tax and corporate law.

■ If third party funding is required, what security and/or recourse to the parties themselves will the lender(s) require?

■ What arrangements will there be for funding, on a continuing basis:

• working capital requirements;

• losses incurred by the joint venture; and/or

• development and expansion costs.

■ Will the parties be required to provide further finance? If so, on what terms and what will happen if one of the parties defaults?


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VIII. Tax ■ What is the optimal structure from a tax perspective?

■ Are there any restrictions on the capital structure of the joint venture vehicle (for example, thin capitalisation rules restricting the amount of debt finance)?

■ How will contributions to the joint venture be taxed and are any reliefs available (for example, transfer duties, tax on gains, value added tax)?

■ Is any tax payable on the issue of shares by the joint venture company?

■ What will be the applicable rate of tax on the joint venture vehicle and how will it be assessed?

■ Is relief available for losses (for example, through surrender to other group companies or carry forward)?

■ How will payments to the parties be taxed (dividends, interest, intellectual property royalties and so on)? Can a structure be used to enable profits to be distributed more efficiently?

■ Is relief available under double tax treaties?

■ Will any tax clearances be required in connection with the formation and/or continuing operation of the joint venture?

IX. Administration ■ What will be the name of the joint venture?

■ Who will be the:

• joint venture's (first) directors;

• secretary (if a secretary is required);

• joint venture's bankers; and

• auditors?

■ What accounting policies will be adopted by the joint venture and what will be the accounting treatment of the parties' interests in it?

■ What other professional advisers will be appointed, and by whom?

■ Where will the joint venture's registered office and headquarters be located?

■ What will be the joint venture's financial year end?



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■ What will be the dividend policy? How much will be distributed to the parties, when and who will make decisions on this?

X. Documents (General) ■ How will the venture be documented? Who will be responsible for drafting

relevant agreements and what language will be used?

■ What conditions are necessary to the setting up and operation of the joint venture? Is there a cut-off date by which these must be met?

■ What will be the governing law of the joint venture documents? Will it be the same as the governing law of the joint venture vehicle? What, if any, mandatory provisions of law will apply irrespective of the choice of governing law?

■ What forum and method of dispute resolution will be used in relation to disputes arising under the documents?

XI. Control and Minority Protection ■ How will ownership of the joint venture be divided and what voting rights will

the parties have as shareholders?

■ Will there be separate classes of shares?

■ Will shares of the same class be capable of being held by more than one person?

■ Will any special voting rights attach to any or all shares?

■ What quorum and notice requirements will apply to shareholder meetings?

■ Should there be any limitation on possible locations for shareholders' meetings?

■ What rights will each participant have to appoint directors (and will the board or company in general meeting have rights to appoint any additional directors)?

■ What access will shareholders have to financial and other information relating to the joint venture?

■ What quorum and notice requirements will apply to directors' meetings?

■ Will particular matters be reserved for decision by the board itself (and be incapable of delegation) or to shareholders?

■ Will particular voting arrangements apply to matters specifically reserved to the board and/or to any other matters?


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■ Will there be specific requirements concerning the frequency and/or location of board meetings?

■ How is the appointment of the chairman to be determined and will the chairman have a casting vote or other special powers or rights?

■ Who will determine the appointment of any managing or other executive directors?

■ Will individual participants be protected against majority decision at shareholder and/or director level by any:

• requirements for unanimity; or

• requirements for special majorities (that is, majorities of more than 50.1% or comprising particular (classes of) shareholders or directors); or

• rights of veto (by weighted voting rights or otherwise); or

• class rights attaching to shares?

■ Will any such protections extend to all matters for decision or just to some?

■ How should protections be documented and what remedies will be available?

XII. Transfer of Shares ■ To what extent is it necessary or desirable that participation in the joint venture

should be transferable or should the joint venture be wound-up if any one party wants to sell out?

■ If transfers are permitted, should other parties have pre-emption rights (rights of first refusal) before any sale to a third party takes place?

■ To what extent will the identity of any third party buyer be relevant to arrangements for permitting transfers or the terms of any pre-emption rights?

■ Should any transfers (for example, intra-group transfers) be permitted free of pre-emption rights?

■ Are any special terms appropriate, for example:

• "shotgun" or "Russian roulette" provisions, by which other parties can elect either to purchase from, or to put their own shares on, an intending transferor; or

• "drag-along" or "piggy back" ("tag-along") provisions, by which the intending transferor must endeavour to require a potential third party buyer to acquire the other party’s shares in addition to its own?

■ How will shares be valued for the purposes of the transfer provisions?



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■ Will any new shareholder be required to become a party to the joint venture agreement?

■ Will the joint venture's name have to be changed if shareholdings are transferred?

■ What will happen to any arrangements between a leaving shareholder and the joint venture company (such as intra-group loans, intellectual property licences, supply agreements, management services and so on)?

■ Does particular provision need to be made in relation to the continuing use by the joint venture of assets contributed or licensed by an outgoing participant, or any monies owed by the joint venture to that participant (or vice versa)?

■ What (if any) arrangements will apply for requiring or enabling the transfer of shares held by a party which suffers a change of control or becomes insolvent or is in breach of the joint venture agreement, and how far will other provisions on transfer (including those on pricing) be applicable in these circumstances?

XIII. Deadlock ■ Will a deadlock be capable of arising on:

• all issues; or

• issues determined as deadlock issues by the parties on the establishment of the joint venture; or

• issues designated as deadlock issues by any one or more parties at the time they arise or when disagreement becomes apparent?

■ Will deadlock issues be resolved by:

• the chairman of the board's casting vote; or

• reference to independent non-executive directors; or

• reference to an external expert or arbitrator; or

• reference to chairmen or chief executives of the parties to the joint venture?

■ Will any "cooling off" period apply?

■ What rights will any party have on a deadlock to require:

• the termination (or winding-up) of the joint venture; or

• other parties to purchase its shares (perhaps under "shotgun" provisions, by which any party requesting the others to purchase its shares may buy the others out if they refuse)?


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XIV. Termination ■ Is the joint venture for a fixed term or indefinite in duration?

■ Are there any circumstances in which the joint venture will automatically terminate, for example:

• the loss of any regulatory approval; or

• the loss or destruction of a particular asset; or

• the insolvency of any party; or

• the transfer of any party's shares?

■ Are there any circumstances in which any party will be entitled to terminate the joint venture, for example:

• a change of control of any other party; or

• a material breach of the joint venture agreement by another party; or

• by notice of termination given after the expiry of a minimum fixed term?

■ What arrangements will apply on termination for:

• the distribution of assets, including intellectual property and know-how of the joint venture;

• the discharge of outstanding contracts of the joint venture; and

• the assumption or discharge of any other liabilities of the joint venture?

XV. Competition and Restrictions on the Parties ■ What competition approvals are likely to be required for the formation and

operation of the joint venture?

■ Will the parties be prohibited from competing with the joint venture? If so, what territorial or other limitations should apply and how will the business of the joint venture be defined?

■ Will the parties be prevented from soliciting customers and employees from the joint venture?

■ Will the parties have obligations to refer business to the joint venture?



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XVI. Intellectual Property ■ What intellectual property rights are to be contributed to the joint venture?

Should they be licensed or transferred?

■ Are any intellectual property rights to be conferred on the other joint venture party?

■ Who will own new intellectual property rights developed by the joint venture and (if any) by the joint venture parties?

■ Who will undertake exploitation of the intellectual property? Will there be any compensation for this?

■ To what extent will the parties have access to, or rights over, confidential information, know-how and other intellectual property rights concerning or accruing or belonging to the joint venture itself?

■ What will happen to the intellectual property rights on termination of the joint venture?

■ Will any of the parties require a licence of any intellectual property from the other following termination?

■ Will there be different methods of dealing with intellectual property rights depending on the exit route used?

XVII. Employees ■ Will the joint venture have its own employees and, if so, how will it get them?

■ Will the employees be seconded from any of the joint venture parties and, if so, what impact will this have on the terms in their contracts of employment?

■ Are service contracts required and are there particular individuals with key roles in the joint venture calling for special treatment?

■ Is any particular form of management structure envisaged?

■ If either party transfers an existing business to the joint venture, do employees engaged in the business have any statutory rights (for example, consultation, protection against dismissal and novation of employment contracts)?

■ Will there be any redundancies on the formation of the joint venture and, if so, how will the cost be borne by the parties?

■ Will it be necessary to harmonise employment terms of employees transferred by the parties to the joint venture?

■ What (if any) share option or incentive schemes are proposed?


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■ What pension arrangements will apply?

■ Are there any restrictions on the use of foreign managers? Do foreign managers require work permits?

XVIII. Insurance ■ What insurance policies is the joint venture required to maintain by law?

■ What other commercial insurance policies will the joint venture need?

■ Does the joint venture need to maintain its own policies or do the parties' existing policies already extend, or can they be extended, to the joint venture?

■ If the parties offer their own policies to cover the joint venture's risks or liabilities, do they expressly cover the activities of the joint venture? Are there any obvious gaps between policies?

XIX. Continuing Business Involvement of the Parties ■ Will any of the parties second staff to the joint venture and, if so, on what terms?

■ Will any of the parties be responsible for providing the joint venture with office or other accommodation, support services or facilities, or training for staff?

■ Will there be continuing trading arrangements between any of the parties and the joint venture (for example, distributorship agreements or agreements for the supply of goods, materials or services)? If so, will these be independently audited?

■ How do continuing arrangements between the joint venture and any of the parties impact on:

• the entitlement of each of the parties to the profits of the joint venture, or responsibility for its losses?

• the business risks and legal liabilities assumed by each of the parties in relation to the joint venture?

• the rights of the joint venture and/or the parties to assets or revenues over which any one party maintains direct control or ownership?

■ What will be the procedure for the flow of information and for reporting from the joint venture to the parties?