Management Structures

The appropriate management structure for a joint venture will depend on the circumstances and the respective shares in the company held by the joint venture parties. Commonly, joint ventures are organised on a 50-50 basis with equal voting and representational rights. Most matters require the agreement of both parties.

There may be a joint venture with a majority shareholder and a minority shareholder or with several minority shareholders. Minority shareholders may need the same protections as are found in shareholder’s agreement generally.

There may be a joint venture where several investors/venturers who are passive investors only and do not wish to be involved in the management of the joint venture.

Issues of tax residence may arise. Generally, the place of central management and control of a corporate entitle is the country of residence which has the primary taxing power. In many countries, the place of incorporation is also a determinant. Even in a contractual venture, a branch may be established in another jurisdiction whose profits are taxable.

Corporate JVs

In the case of a corporate joint venture, each party usually has a right to appoint one or more directors or representatives to the board for the purpose of supervising and managing the joint venture company business. There may be a requirement that certain high level and important transactions need the consent of all joint venture parties. More routine matters may be determined by the majority. This is particularly important for minority parties who may require a list of reserved matters to which their consent is necessary.

Where the parties participate equally, they will usually expect equal representation at board level. They may agree to consult each other regarding their respective appointments. A chairman may be appointed who may or may not have a casting vote. There may be a rotation of the chairman’s role on an annual or more frequent basis. There may be co-chairmen with the chairmanship changing from meeting to meeting.

When one party makes a greater input than the others, that party may have the ultimate control on key matters at board levels. This may be reflected in the right to appointed chairman with a casting vote, the right to appoint the majority of directors or directors with majority voting rights at board level.  In such cases, the minority shareholder is likely to require a veto on fundamental reserved matters as defined.

Reservation of Issues to Shareholders / Participators

The joint venture agreement may provide for a division of decision-making authority. Very important decisions fundamental to the investment strategy may be left to the shareholders or may require the assent of their representatives at board level. This enables the joint venture parties to consider the matter without the decision being made at board level in the JVC.

Commonly, a range of important key decisions is reserved to shareholders. The joint venture agreement may define the fundamental matters which must be referred to the shareholders. They may require ongoing information and management reports. They may require the setting of business plans, their approval, review, enforcement and modification.

More Complex Structures

In smaller joint ventures, all decisions may be made at board level with each party’s appointee director representing the joint venturer. In this context, there may be a requirement for unanimity in respect of important decisions as defined.

In larger scale joint ventures, there may be a non-executive board which delegates most of its management powers to a manager or executive committee. The senior managers need not necessarily be directors. The board of directors may be an advisory board with whom the management consults and refer. The advisory board need not necessarily be directors of the JVC company.

In more complex joint ventures, there may be a holding company and a subsidiary. The holding company may determine strategic matters. The operating company’s board may consist of senior management and be involved in the day-to-day running of the joint venture company’s affairs.

There may be independent management with defined roles such as chief executive, chief financial officer et cetera. They may be conferred with powers under their employment or service contract by the board.

Issues re Duties of Directors

Under the Companies Act, directors owe statutory duties of skill and care and fiduciary duties.  They are owed to the company and not to the shareholders. The Companies Act 2014 has facilitated the appointment of directors for individual shareholders for the first time.

Subject to this limited modification, that position remains that directors’ duties are owed to the company and that therefore, their primary duty is to advance the interests, objectives and business of the company.

Conflicts of Interest Issues

Joint venture transactions will often be entered with the joint venture participants. They raise conflicts of interest issues. The joint venture company constitution may relax the default constitution to facilitate contracts with persons connected with the directors (the appointing joint venture or another connected party.

Some matters may arise which raise severe conflicts of interest which are beyond the routine conflicts which are inherent in the nature of the parties’ positions. In some cases, the conflict may not be readily apparent to the other party, whereas in others they may be very evident. In these cases, the agreement may provide that the appointee directors should declare their interests and not participate in the board proceedings on the matter.

Proprietary and confidential information arising or developed by the company whether by employees or at board level belongs to the company. It does not belong to the shareholders. Provision is sometimes made in the constitution allowing the directors to disclose information to their appointers notwithstanding that it might otherwise be a breach of a confidentiality obligation.

Directors Indemnity

The Companies Act limits the extent to which companies may indemnify their directors against their negligence and breach of duty to the company. Statutory provisions allow a director or officer to be indemnified by the company where he has been found to have acted honestly and reasonably. The constitution / articles may provide that a director is entitled to an indemnity to the fullest extent permitted by law.

Directors’ insurance may be available for the benefit of directors in respect of their liability for negligence and breach of duty together with costs. The insurance does not cover circumstances of fraud or default.

The appointing shareholder may give a broader indemnity. That company may indemnify its appointed director in relation to their acting as such in the joint venture company. The issue of fiduciary duty does not arise in this instance as the indemnity is not from the joint venture company itself.

Partnership JVs

In the case of a partnership joint venture, the partners in their meetings, manage the joint venture. Under partnership law, partnership agreements may create any levels of authority and relationships as is desired. There may be a board or a committee with rights to manage the partnership’s affairs.  There may be a management committee to which each joint venturer/partner is entitled to appoint one or more or an equal number of representatives.

In some cases, a corporate manager acts. This may happen in a partnership under the joint venture entity. The company offers the legal structure with a board of directors, shares etc. to operate as manager of the joint venture without being the joint venture vehicle itself.

The parties may contract with another entity to provide management services or to operate the business in return for a payment.

In a corporate joint venture, the board of directors is generally the management entity. In theory, the shareholders can control the board by changing it. However, this power would rarely need to be exercised where the shareholder’s nominees comprise the board.

Partner’s Mutual Duties

Partners owe each other duties of good faith. This means that they cannot unfairly take advantage of their position. In particular, they cannot secretly benefit from corporate property or opportunities.

In contrast, shareholders do not generally owe each other a duty of good faith. They may exercise their shareholding rights selfishly. In the context of a joint venture, this default position may be varied, and a duty of good faith may be created. Where the relationship is one of quasi-partnership, the courts may in some cases imply such duties. In other cases, however, they have held that the ordinary company law position applies.

The courts may be influenced by the fact that joint venture arrangement is undertaken through the medium of a company in the mutual and common interests of the joint venturers. In such cases, the courts may imply a duty of good faith by way of analogy with the partnership position.

Deadlock resolution

Joint venture participants may be unable to agree on important matters affecting the joint venture business. Joint venture agreements may provide for a number of mechanisms to avoid or resolve the deadlock. If there is no mechanism, a deadlock may require an agreed compromise or the winding up of the joint venture company or partnership.

There are a number of types of dispute, which may arise. Legal disputes may turn on the interpretation of obligations, contracts and rights. They are capable in principle of resolution by a court arbitrator or an independent expert. Business disputes may be related to management, commercial issues or strategy. These types of dispute are less capable of resolution on an objective basis.

There are a number of well-tried mechanisms for dispute resolution. They may be incorporated in the Joint Venture Agreement, in which event a party may be compelled by the other party to follow it. The parties may agree to invoke any mechanism they desire by agreement after the dispute has arisen, irrespective of whether it is provided for by the JVA.

As with most legal agreements, the dispute resolution provisions will not necessarily be operated. They create a backdrop or fall-back position against which a resolution might be negotiated.

Types of Deadlock

Deadlock may arise at board or shareholder level. Most operational matters are decided at board level. However, critical and strategic matters may be decided at shareholder level.

There may be minority protection provisions which give the minority blocking rights of veto in relation to important decisions. Deadlock can arise in these cases where the minority holder refuses to consent in relation to the matter

Deadlock may arise where one party refuses to attend directors and shareholders meeting so that there cannot be a quorum. There may be special provisions in the constitution or shareholders agreement to deem there to be a quorum where one party refuses to participate so as to avoid this risk. If this is not present, a court order may be required to deem there to be a valid meeting in the manner specified.

Chairman Casting Vote

The chairman may have a casting vote. Where the chairman is appointed by one or other party, this may not be acceptable as it gives one party ultimate control. It may be that in some cases, an alternate chairman appointed by each party would suffice to resolve minor disagreements. Where however a fundamental matter arises, this may not be satisfactory.

The chairperson could in principle be an external person / outsider with a casting vote. However, an outside chairman may not be acceptable in many cases. In any event any outsider could be given the right to determine a deadlock or a vote on a matter in the event of a dispute, when it arises. He or she may be an additional director or a designated third-party who determines the matter pursuant to the joint venture agreement.

Outsider Resolution

An outsider may be given a swing vote. A suitable person with appropriate business expertise must be available and parties must be able to agree on the appointment either at the outset or at the time the dispute arises.  There may be a role for mediation, which is a non-binding dispute resolution mechanism

The potential usefulness of this mechanism of resolution depends on the practicality of finding an appropriate person with the requisite business expertise who is acceptable to both parties. The person may be named from the outset. Alternatively, the person may be nominated pursuant to a process by agreement or by the ultimate determination of some third-party appointer.

It may be feasible to resolve the deadlock by reference to the chief executives or other senior officers of the joint venture parties / shareholders.  It may be provided that the dispute is first or ultimately referred to directors or managers at a very senior level in each participant. It may be the chief executive or chairman of the joint venture participant entity.

There are limits to the above types of provision as it will not resolve fundamental differences of approach. It may however, concentrate the minds of the joint venture board members in resolving matters themselves in order to avoid unnecessary references.

Expert or Arbitrator

Disputes may be referred to arbitration or expert determination. Arbitration is more appropriate in the case of a legal dispute. Expert determination may work well in relation to specialist disputes where the opinion of a particular professional is determinative. Arbitration or expert determination is usually inappropriate for a business / commercial dispute.

The expert or arbitrator may be appointed by agreement or by an independent body, appropriate to the nature of the dispute. This is usually inappropriate for business decisions where there is no right or wrong answer. The arbitrator may not generally have a sufficient knowledge of the business and may only be a short term solution, unlikely to resolve basic differences.

The arbitrator acts on the basis of information put before him in an objective way. This is not appropriate where there are differences in approach to relation to strategic business matters, funding decisions, and matters which impact on the respective financial and other interests of the parties differently. It may be possible to formulate criteria with reference to the interest of the joint venture company. However, it may be difficult to isolate its interest from those of its shareholders.

Liquidation or Compulsory Transfer

Where none of the above mechanisms is sufficient to resolve the dispute, the last resort may be to trigger the termination of the joint venture. This will involve transfer and sale of shares or liquidation and winding up of the company’s assets. The whole business may be sold to an outsider. In a liquidation the assets are sold, the liabilities paid and any surplus proceeds are distributed.

There are a number of resolution mechanisms, which seek to provide a means to end a joint venture by its winding up or purchase by one party in the event of an out and out, unresolvable dispute. The solution may be extreme but it may have the effect in most cases of forcing an agreement and compromise.

The parties may agree that in the event of a deadlock, that the company should be placed in liquidation. It may be possible to apply to the court to have the company wound-up on a fair and equitable basis in such circumstances, in any event. Generally, a minority shareholder cannot have a company wound-up on its unilateral application. In contrast, a partner may do so under the default position. Most partnership agreements change this default position.

Purchase out of Dissenting Shareholder

A deadlock which cannot be resolved after a certain period or after exhausting other dispute resolution possibilities may be expressed to be an event giving rights to the compulsory transfer of shares to a third-party or to the other party. If a new substitute joint venturer can be found, this may avoid winding up. It may be provided that if an external buyer cannot be found, that there will be a winding-up.

There may be mutual put and call options by which one party may require the other party to purchase its shares or allow it to purchase the other’s shares at a price to be established. Difficulties of valuation may arise. It may be difficult to pre-set a price by given formula. There may be provision for its determination by an independent third-party. There may be a fair market value with specified criteria.

It is not practicable for both parties to have mutual put and call options at the same time unless one has priority. If it is a matter of timing as to who first exercises the option, the matter becomes somewhat arbitrary and could lead to instability. There may be mechanisms in the JV agreement to determine who shall buy. This is usually the venturer who offers the higher price.

Fixing Buyout Price

There are a number of other mechanisms of dispute resolution involving the purchase out of one party’s interest by the other. Under one well-known mechanism, each party is obliged to specify a price at which it is prepared to sell or purchase. In theory, this motivates the parties to set out a fair price, i.e. one where he is indifferent to purchase or sale. It is workable only provided that each party has the financial resources to buy out the other.

It may be subject to abuse if one party has the financial strength to purchase the other, while the other does not. It is not appropriate where one party wishes to exit the venture. Under some variance, one or other party may have the alternative option to require a liquidation.

The parties may agree that the price should be set as the higher of two sealed-bids. The acquire may be the higher bidder or, where non- financial factors are involved, an independent party will decide which is the fairest bid. This may be the price or offer closest to the fair value as determined by him. In this case, the losing party is required to sell to the other.

The highest sealed-bid method allows the party making the highest bid to purchase the other. In some more unusual cases, there may be an option that one party is purchased out pursuant to an initial public offering of shares.