The issue of minority protection arises in joint ventures in common with other shareholder agreements and arrangements. The most obvious example of where protection is required by the minority is where one joint venture shareholder has the majority of shares. In this case, the majority shareholder could assume complete control of the joint venture entity in the absence of minority protection provisions.
There may be a 50-50 joint venture in which neither party has overall control. There may be minorities with special blocking rights which are such as to require the majority to have protection against the misuse of those rights. There may be multiple minorities which each require protection.
The minority will usually wish to have at least the right to be involved in important strategic management and policy decisions which affect the company. It may require in addition to board representation (or instead of it) the right to consent to or to veto certain important decisions.
Minimal Default Protections for Minority
In the absence of protection in the constitution and/ or in a joint venture agreement provisions, there are a limited number of statutory remedies available to a minority shareholder under the Companies Act and other default provisions of law. They are expensive to assert as they required court action. The outcome is often unpredictable.
The Companies Act provisions in relation to oppression may be available. Where oppression is found, the court has a broad range of remedies available which may be employed to remedy it.
Relief for oppression is not readily available. It is expensive and may be unpredictable. It is available only where a company is being run in a manner which is oppressive or in active disregard of the interests of the claimant. There is a relatively high bar to establishing a claim for the grant of a remedy.
There is provision for application to the court for the winding up of the company on the basis that it is just and equitable to do so. This may be an ultimate method of termination of a joint venture where no other remedy or course is available, and it is not agreed voluntarily Generally, the of the majority is required for winding up in the case of a company. This contrasts with the default position in respect of partners.
General Protective Provisions
Generally, a minority shareholder may require the following broad protections;
- right to appoint director;
- right to be present for a quorum;
- right to be represented on all or the appropriate committees;
- sufficient notice of board meetings with agenda;
- critical resolutions to require the approval of directors on “each side”;
- right to participate in management if applicable.
There may be a list of fundamental items in respect of which shareholder consent is required from each joint venture party. This may include
- changes to the share capital;
- changes to the company’s constitution;
- change in the nature of the business;
- expenditure over a certain level;
- defined major business transactions;
- dividend policy;
- minimum dividend distribution;
- the appointment of key personnel and executives.
Other Protective Provisions
There may be provisions to prevent dilution of the minority shareholders. This may include a restriction on issue of any new shares without consent, and that new shares be issued pro rata. The right may apply to options and interests in shares and securities.
There may be an exit mechanism to allow the minority shareholder to realise its investment or exit if there is no other reasonable course open.
There may be rights to transfer shares externally with an internal right of pre-emption. There might be pre-emption rights by the majority at fair value, but no discount for the minority nature of the holding. There may be a put option for the minority to the majority. There may be tag-along and drag along rights.
The dividend policy may be provided for. There may be a fixed minimum percentage of profits which is to be distributed. Consent required for dividends or the failure to distribute profits. The approval of director’s and other officer’s remuneration may be subject to similar consent.
Consents to Major Change
In a joint venture agreement, basic changes to the arrangement may require the consent of all parties including
- changes in the company constitution,
- changes in the issued share capital including the issue of further share capital, options and rights
- changes in the nature of the business
- incurring major capital commitments or projects above a certain limit
- borrowing above a limit
- acquisition of a business,
- dividend below or above a pre-agreed level,
- the appointment and dismissal of senior executives or directors
- material dealings in assets
- dealings with other shareholders other than arms’ length exception.
In other circumstances, other or further restrictions may apply.
Board or Shareholder Level
The veto may arise at the board of directors or shareholders level. It might be provided that certain decisions require the consent of all directors and/or all minority parties, a certain percentage of them or the participation of each class of minority shareholders.
Major strategic matters may expressly require consent at the shareholder level. This may reflect the extent of delegation by the participators to the board. The board may comprise persons who are in officer or executive positions of each participator. In some cases, the board might be full-time officers of the joint venture company so that the taking of major decisions at shareholders level is appropriate as part of the basic corporate governance.
In other smaller or more intimate arrangements, senior management may be seconded from each joint venture partner so that they are involved in an ongoing basis at board level. There may be substantial or complete overlap between the shareholders and directors.
Over Powerful Minority
Care needs to be taken to ensure that the minority is not given too many protective rights. In these circumstances, the majority may find themselves inappropriately subordinated to the minority.
It may impede efficient decision making if unanimity or a very high percentage of the shareholders’ votes is required to make decisions which are routine, not critical and not appropriate to this level of control.
The minority shareholder will wish to preserve itself from being diluted by the majority. The capital structure of the company will usually be tied up so that changes require the consent of all parties (or those with a certain level of shareholding). It may be provided that if further shares are to be issued, that they must be issued pro rata. There is a statutory right of pre-emption which itself can be displaced in the constitution or by a members’ special resolution.
A right of pre-emption may not be enough to maintain parity or proportionate rights if one party has the financial ability to take up shares while the other does not. The further dilution may be acceptable if sufficient minority rights and protections remain.
There may be restrictions on the issue of shares to other shareholders or to third parties at all or less than market value. There may be restrictions on all issues of shares without the consent of all parties. There may be restrictions on the joint venture company repurchasing shares or doing so other than equally.
There may be restrictions on changing the rights attaching to shares without the consent of all parties. The consent of the minority may be required to any allotment, issue, repurchase or grant of options over any shares or security or any capital reorganisation.
Where the minority is not in a position to take up particular issues of shares, it may have the right to preserve its equity by having an option to buy back its original equity stake by acquiring shares in the majority at current value or at a price agreed.
Restrictions on Transfers
Generally, there are restrictions on the right to transfer shares during the course of the intended joint venture period. A particular difficulty for the minority is that it may be locked into a company without a satisfactory return, participation or means of realisation and exiting
There may be a right to sell shares to a third party, having offered them to the other parties. It may be provided that the pre-emption rights may be exercised at fair value without any discount for the fact that it is a minority shareholding. It may be provided in such circumstances that transfers must be permissible and registered, once the pre-emption rights have been first exhausted.
There may be provision for the issue of redeemable shares. The redemption may be at the option of the shareholder. This must be subject to sufficient distributable funds being available to repurchase the shares.
The joint venture agreement may provide for the dividend policy. Ultimately, the availability of dividends depends on there being distributable profits. Generally, the board of directors make a proposal in relation to dividends which must be approved by the shareholders under the default provisions.
The availability or appropriateness of dividends may depend on the nature of the joint venture. It may be intended that income is re-invested over a prolonged period. The parties may wish to establish a dividend policy at the outset of the agreement. There may be little prospect of any dividends at all.
The provisions in relation to dividends may be coordinated with the provisions for directors’ remuneration. The mutual approval of each party may be required unless the remuneration and dividend policy are pre-agreed in at the outset in a business plan or in accordance with a procedure.
A shareholder who is not a director has limited rights to information regarding the company’s affairs. His rights are to little more than the receipt of the annual accounts and to inspect the statutory registers and board minutes.
The minority shareholder may expect enhanced rights to information. They may be effectively given by his ability to nominate and appoint a director. The right of the director to particular or comprehensive information should be confirmed.
It may be that information received by the director is confidential, in which event he may not be entitled to pass it on. There may be a provision giving a right to a director to disclose to a shareholder what would otherwise be confidential information of the company, subject to further confidentiality restrictions.
There may be a general right for the minority to be kept informed by the majority or controllers of material matters affecting the company’s business. There may be an obligation on the company to circulate management information on a regular basis. This may include in particular, monthly and quarterly management accounts, budgets, cash flow projections, and forecasts in such manner and on such terms as may be agreed.
Business plans, budgets and proposals which might otherwise be circulated to directors may be circulated to all shareholders subject to appropriate protections in the company’s interests.
There may be an obligation to share and exchange tax computations and information. There may be a requirement to furnish information that is necessary to optimise group and consortium relief for losses and capital allowances, where they are available. There may be obligations to furnish the relevant records and information and to take steps to make the necessary elections to Revenue.
Enforcing against Majority
If the minority claims that the majority party directors are in breach of their obligations, then the first obstacle to enforcement is the so-called rule in Foss v Harbottle whereby the company is generally the appropriate party to take legal and other action against them. There is a limited exception by way of the derivative action which is elaborate and potentially expensive.
The agreement may provide that there is a right to take claims on behalf of the company against the majority’s representatives. It may be provided that the director or party against whom the claim is made is excluded. A committee of the joint venture excluding those parties may be charged with enforcement. The joint venture party through its appointed directors may be obliged not to partake in or obstruct a claim on behalf of the company.
There may be clauses to ensure that the majority cannot prevent the company taking action for wrongdoing against directors or the majority itself. There may be provisions for the conduct of claims by a committee excluding the person against whom the claim is made.
Provisions in Constitution
The question arises as to whether and to what extent protection should be inserted in the company constitution or the joint venture agreement. The company constitution is a public document. Subject to certain protections, it may be amended by a 75 percent majority. There are limitations on the extent to which class rights may be varied.
There are mechanisms for the entrenchment of rights in the company constitution. Provisions can be placed in the memorandum of association which cannot be thereafter amended. However, outside of narrow exceptions. most provisions of the constitution can be varied by a 75 percent majority. It is possible to create shares with rights which in relation to particular issues give additional and artificial majority by way of weighted voting.
Some protection may be written into the company constitution. It may be impractical or undesirable from a confidentiality perspective to set out all of the protections in the company constitution. Frequently, protective elements are written into it, in conjunction with further protection in the joint venture agreement.
There may be different classes of shares such that a representative of each class or a particular class is required at shareholder level or their appointee at director level to assent to particular types of decision. The constitution may provide for the different classes of shareholdings in tandem with the joint venture shareholders agreement which provides for respective decisions and matters which require the assent of each shareholder class.
Provisions in Joint Venture Agreement
In contrast, the joint venture agreement as a contract, may not be varied without the consent of both or all parties.
The company constitution commonly includes provisions which are inserted in parallel with the joint venture agreement including
- quorum provisions;
- the rights to appoint directors;
- classes of shares;
- pre-emption on share issues;
- the creation of share classes, and
- special voting rights.