Joint Ventures and Shareholders’ Agreements

Description

Baffled by joint venture and shareholder agreements? Guidance on the new PSC Register is just one of the things that small businesses need to understand. Helping you to identify the central issues involved in joint venture transactions, take effective instructions and draft good documentation using precedents, case studies and checklists. Preface to the fifth edition Preface to the fourth edition Preface to the third edition Preface to the second edition Preface to the first edition About the author Contents Table of statutes Table of statutory instruments Table of cases Table of European material List of abbreviations Part A Preliminary considerations 1 Introduction What is a joint venture? Reasons and motivations for establishing a joint venture Alternative forms of joint venture Introduction Agency agreement Distribution agreement Intellectual property licence Franchise Collaboration agreement Consortium agreement Strategic alliance Partnership Limited partnership Limited liability partnerships Limited company European Economic Interest Groupings, Community Interest Companies and companies limited by guarantee Unincorporated associations and sole traders Overseas entities ‘Dual headed’ structure The importance of adequate documentation Clarity of obligations Aspirations and objectives Minority protection Deadlock Termination and exit routes Ensuring the structure works 2 Matching the aims and expectations of the parties Introduction Long-term and short-term investors Achieving early exits Different classes of shares Dealing with other expectations and requirements Case studies showing the matching of aims and expectations 3 The contributions of the parties to the joint venture General Physical assets and undertakings Intellectual property Supply of goods and management and other services Termination and exit provisions 4 Employment and pensions issues in UK based joint ventures Transfer of employees Transfer without a undertaking Transfer with an undertaking Restrictive covenants Transfer of subsidiary companies Secondment of employees Pension issues Type of schemes Registered pension schemes Potential liability for underfunded defined benefits Contribution notice where avoidance of section 75 debt Financial support direction Applying for clearance Notification Transfers of pensionable employees Joint venture vehicle participating in existing scheme Consultations Varying pension benefits Transfer of past service benefits Taking over an existing pension scheme Establishing a new scheme without transfers of existing employees Employer-financed retirement benefit schemes Specialist advice 5 Share incentive schemes in UK joint venture companies Introduction Owner-employees Share incentive schemes General tax position Types of scheme Approved company share option schemes Approved savings related share option schemes Share incentive plans Enterprise Management Incentive Schemes Unapproved share option schemes Long-term incentive plans (LTIPs) Phantom share options and awards Corporation tax relief for employee share acquisitions Establishing an new scheme for a joint venture vehicle Realisation mechanisms Valuations Consents and regulatory issues Joint venture employees participating in a scheme established by one of the joint venture participants under which the joint venture participant’s shares are issued Joint venture employees participating in a new scheme using shares in one or more of the joint venture participants The effect on employees transferring to the joint venture who are members of existing schemes 6 Financing a corporate joint venture in the UK Introduction Loan finance or share capital? Loan finance from the parties Structuring Other general considerations Tax considerations Outside finance Equity finance Security and guarantees Contribution and subrogation 7 Tax considerations for UK joint ventures Introduction UK corporate joint ventures Transfer of assets into the venture Assets subject to corporation tax on chargeable gains Transfer of stock in trade Assets upon which capital allowances have been claimed Trading losses Value added tax Stamp duty and stamp duty land tax and ATED Operational tax issues Corporate partnerships Contributions of assets Profits Capital gains and losses Termination Contractual joint ventures Tax issues dealt with elsewhere 8 Accounting considerations for UK corporate joint venturers Introduction Subsidiary undertakings Accounting for joint ventures which do not have to be consolidated Associates FRS 120 (s 15/15) joint ventures Accounting treatments compared Consolidation Equity accounting Equity accounting – gross equity method Consolidation and equity accounting compared Accounting for the interest as an investment International Financial Reporting Standards Introduction IFRS 11 Joint Arrangements 2016 Changes Consolidation of subsidiaries Associates Accounting for associates Jointly controlled entities Changes to joint venture accounting Accounting for jointly controlled entities Jointly controlled operations and jointly controlled assets 9 Application of EC competition law to joint ventures Introduction The circumstances in which EC competition law is relevant Joint ventures within the EC Merger Regulation Is the venture concentrative? Joint control Full-function Are the relevant thresholds exceeded? Undertakings concerned Calculation of turnover Notification, implementation and penalties Consideration by the Commission Ancillary restraints Non-compete covenants Licensing of intellectual property rights Supply and purchase agreements Application of national merger and competition laws Joint ventures within EC Treaty, art 101 When does art 101 apply? Notice on the application of art 101(3) Notice on agreements of minor importance Guidelines on horizontal co-operation agreements Research and development agreements Production/specialisation agreements Joint purchasing Commercialisation agreements Standardisation agreements Environmental agreements Other potentially relevant guidelines and block exemptions Additional restrictions Article 102 10 UK competition law applying to joint ventures Introduction Relationship between UK and EC law Merger control When is a joint venture a relevant merger situation? When do enterprises cease to be distinct? How are market shares to be calculated? What is the UK turnover of the enterprise taken over? Notification procedure Merger fees Phase 2 – Competition and Markets Authority Public interest intervention process Special sectors Examination of joint ventures under CA 1998 Exclusion of mergers Other exclusions and exemptions Regulated sectors Appeals Other provisions Typical restraint covenants 11 Other regulatory matters in the UK Regulated businesses Financial services (including investments, banking, mortgage business and insurance) Telecommunications and broadcasting Railways Water Electricity and gas Newspapers Consumer credit and consumer hire Prior clearance of mergers where there is a consumer credit licence – s 178 Notices Non-UK ventures Requirements for UK listed companies Takeover code implications Financial promotions Collective investment schemes 12 UK limited liability partnerships Introduction Advantages and disadvantages of LLPs compared with limited companies Fiscal transparency Greater flexibility of operation Reduced capital maintenance requirements Members of an LLP are not employees Advantages of LLPs over partnerships Collective investment schemes Statutory regime governing LLPs Conclusion Part B Key issues in structuring and drafting UK corporate joint venture documentation and shareholders’ agreements 13 Deadlock companies in English company law Structuring a deadlock company Avoiding and resolving deadlocks Avoiding deadlock Resolving deadlock Termination on unresolved deadlock 14 Minority protection under English company law Why minority protection is needed Control by majority Minority protection given by law Types of express minority protection Positive rights Negative 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 transferees and new shareholders Possible disadvantages of class rights Suggested solutions Self-help remedies 15 Typical minority vetoes Introduction 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 Licences of intellectual property Service agreements etc Consultancy, management and like agreements Leasing transactions Auditors and accounts Litigation Business plan General conclusions 16 Directors of UK companies The structuring of board representation Methods of securing board representation Alternate directors and quorums The position of an appointed director The duties of a director to his company Directors voting on transactions in which they are interested Compulsion on director to vote in a particular way Duties of confidentiality Dual directorships Resolving conflicts in practice Shadow directors Small Business, Enterprise and Employment Act 2015 (‘SBEE’) and Shadow Directors and People of Significant Control Rules 17 Termination and its consequences Introduction Typical termination events and resulting exit provisions Expiry Notice to terminate Deadlock Persistent use of vetoes Breach Change of control Liquidation, bankruptcy or insolvency of a party Liquidation of the company Continuance of minority protection after termination Realisation mechanisms on termination Termination put and call options ‘Russian roulette’ ‘Texas shoot out’ – or ‘Dutch auction’ ‘Multi-choice realisation procedure’ Completion of the sale Other termination consequences Repayment of loans Release of guarantees Ancillary agreements Names VAT Regulatory matters Conclusion Provisions surviving termination 18 Pre-termination put and call options Introduction Structuring an option Avoiding conflict with other provisions Time of exercise The shares the subject of the option Adjustment of the consideration for the option shares Perpetuities Multi-party options Restrictions on disposal Voting rights and dividends Completion Warranties Consideration for grant Tax position Dangers of put options 19 Pre-emption rights on share transfers Introduction Key points in drafting pre-emption rights Beneficial interests in shares and changes in control Price determination Allocation of the shares Completion Ability to transfer to an outsider Waiver of pre-emption article Permitted transfers Compulsory transfers Last right of refusal 20 Purchase and redemption of shares by a UK company Purchase of shares General Procedure Tax consequences Pre April 2017 law 2017 Changes Redemption of shares Introduction The law regarding redeemable shares General points 21 Sale or initial public offering of the company Sale of the entire issued share capital to a third party Introduction Sale following termination Offer from a third party – ‘tag along and drag along’ General Provisions in shareholders’ agreements Provisions in articles Legality of ‘drag along’ provisions in articles Legality of expropriation provisions Conclusion and practical solutions Why not rely on CA 2006, s 979 instead of ‘drag along’ provisions? Sale or IPO Impossibility of legal commitment IPO Institutional protection Precedent 22 Share valuation provisions Introduction Valuing shares Earnings Cashflow Dividend yield Net assets Cost-based methods Turnover Fair value Market value on pro rata basis The drafting of valuation clauses 23 Dispute resolution Introduction Considerations Options Mediation Early neutral evaluation Expert determination Arbitration Litigation Making choices Jurisdictions Enforceability Expertise Accessibility and efficiency Publicity Contractual provisions and service providers Arbitration Expert determination Alternative dispute resolution Combinations Part C Joint ventures and shareholders’ agreements in practice 24 Establishing and documenting a UK corporate joint venture The implementation process Flowchart 8 – steps in implementing a UK corporate joint venture Heads of terms Shareholders’ agreement Articles of association Should the articles refer to the shareholders’ agreement? Other documents 25 Due diligence, warranties and indemnities Introduction Due diligence Warranties Indemnities Remedies other than damages or indemnity payments 26 Considerations relating to joint ventures and shareholders’ agreements involving UK tax resident individuals Tax considerations The taxation of dividends and other distributions received by individuals The taxation of other income received by individuals Special provisions relating to close companies Extended meaning of distribution Loans to participators Relief on interest paid on loans incurred by individual joint venturers Company or partnership? Dividends or remuneration? Employment income tax charges on the acquisition of shares Enterprise Investment Scheme (EIS) Venture Capital Trusts (VCTs) Seed Enterprise Investment Scheme (SEIS) Pension contributions, options, etc Tax considerations on realisation of shareholdings Inheritance tax Transfers to family members and trusts and CGT entrepreneurs’ relief Dealing with resignation, retirement and death Retirement or resignation of working shareholders Death 27 Special considerations for private equity funds, venture capitalists and other equity providers Introduction General structure and exit routes Types of transaction Minority protection and exit machinery Choice of exit Maximising the return before exit Preservation of capital Retaining and motivating management Introduction Service agreements Ratchets Good leavers and bad leavers Conclusion 28 International joint ventures Introduction Overseas joint ventures The choice of the business location Choice of vehicle Choice of law Other tax planning issues affecting structure or operation The UK’s rules for taxing overseas profits Transfer pricing UK corporate joint ventures with non-resident participants Double tax treaties Taxation of dividends and other distributions Diverted Profits Tax (‘DPT’) Loan interest Thin capitalisation and excessive loan interest Royalties Payments for goods and services supplied Consortium relief Table 8 – Forms of business organisation available in selected jurisdictions Canada – Professor Bruce Welling China – Hui Zheng and Hua Wei The Netherlands – Katinka Middelkoop and Jelle Krings (Corporate); Jochem Kin and Ludo Luijks (Tax) Spain – Carlos Paredes and Felipe Carbonell Part D Case studies and precedents Case study 1 – Caspian Pipeline Consortium (‘CPC’) Case study 2 – UK property joint venture Case study 3 – International joint venture Precedent 1 – Checklist of issues for consideration when establishing a UK incorporated joint venture company Precedent 2 – Heads of agreement Precedent 3 – Shareholders’ agreement Precedent 4 – Articles of Association Precedent 5 – International joint venture agreement Precedent 6 – Support agreement Precedent 7 – Limited liability partnership deed Index