infopaksm joint ventures international transaction guide: practice notes · venture parties, a...

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

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

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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: Practice Notes

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 an overview of key issues to address, the content of each of these documents, intellectual property issues, and employment issues on an international joint venture. In addition, this document provides an analysis of the various legal structures that are commonly used as vehicles for international joint ventures, control and minority protection at board and shareholder level, key competition issues, and deadlock and termination provisions in the context of an international corporate joint venture.

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. Overview ........................................................................................................................................... 6

A. What, Where and Why? ........................................................................................................................................................ 7

B. Structure of the Venture ........................................................................................................................................................ 8

C. Contributions to the Joint Venture ................................................................................................................................... 11

D. What Will the Parties Take out? ........................................................................................................................................ 14

E. Management ............................................................................................................................................................................ 14

F. Employees ................................................................................................................................................................................ 15

G. Control and Minority Protection ....................................................................................................................................... 16

H. Exit and Termination ............................................................................................................................................................. 17

I. Managing the Negotiations .................................................................................................................................................. 21

II. Structures ........................................................................................................................................ 25

A. Limited Liability Company .................................................................................................................................................... 25

B. Partnership .............................................................................................................................................................................. 25

C. Contractual Joint Venture .................................................................................................................................................... 26

D. Factors in Choice of Structure ........................................................................................................................................... 26

E. Limited Company - for ......................................................................................................................................................... 27

F. Limited Company - Against ................................................................................................................................................. 28

G. Partnership - for ..................................................................................................................................................................... 28

H. Partnership - Against ............................................................................................................................................................. 29

I. Contractual Joint Venture - for .......................................................................................................................................... 29

J. Contractual Joint Venture - Against .................................................................................................................................. 30

K. Limited Partnerships .............................................................................................................................................................. 30

L. Limited Liability Partnerships .............................................................................................................................................. 31

M. European Economic Interest Groupings (EEIGs) ........................................................................................................... 31

N. Share Swaps ............................................................................................................................................................................. 32

O. Dual Company Structures ................................................................................................................................................... 32

P. Income Access ........................................................................................................................................................................ 33

Q. Parallel Joint Ventures ........................................................................................................................................................... 33



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R. Hybrid Structures .................................................................................................................................................................. 34

III. Shareholders' Agreement and Bye-Laws ..................................................................................... 35

A. Statutory Control .................................................................................................................................................................. 35

B. Content .................................................................................................................................................................................... 35

C. Amendment ............................................................................................................................................................................. 36

D. New Parties ............................................................................................................................................................................. 36

E. Publicity .................................................................................................................................................................................... 36

F. The Company as a Party ...................................................................................................................................................... 37

G. Remedies for Breach ............................................................................................................................................................. 37

H. Drafting ..................................................................................................................................................................................... 38

I. About the Authors of Section III ........................................................................................................................................ 40

IV. Intellectual Property ...................................................................................................................... 41

A. Formation ................................................................................................................................................................................ 42

B. Operation of the Joint Venture .......................................................................................................................................... 43

C. Termination ............................................................................................................................................................................. 45

D. Competition law ..................................................................................................................................................................... 46

E. Summary of intellectual property rights ........................................................................................................................... 46

F. About the Authors of Section IV ....................................................................................................................................... 48

V. Control and Minority Protection .................................................................................................. 51

A. Approach to Minority Protection ...................................................................................................................................... 52

B. Defining Powers of Directors and Shareholders ............................................................................................................ 53

C. Documenting Minority Protection ..................................................................................................................................... 54

D. Relationship Between Joint Venture Parties and the Company .................................................................................. 55

E. Local Laws ............................................................................................................................................................................... 55

F. About the Author of Section V .......................................................................................................................................... 56

VI. Competition .................................................................................................................................... 57

A. EU Merger Control ............................................................................................................................................................... 57

B. Article 102 and Joint Ventures ........................................................................................................................................... 72

C. Relationship Between EU Competition Law and National Competition Laws of EU Member States .............. 73

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D. National Merger Controls ................................................................................................................................................... 74

E. US Merger Control ............................................................................................................................................................... 75

F. EU Merger Regulation Timetable ....................................................................................................................................... 77

G. Joint Ventures: Control under EU and National Laws .................................................................................................. 79

H. About the Authors of Section VI ....................................................................................................................................... 80

VII. Employees ....................................................................................................................................... 81

A. Location and Structure of the Joint Venture Vehicle .................................................................................................... 81

B. Transferring Employees to the Joint Venture ................................................................................................................. 82

C. Harmonising Terms and Conditions ................................................................................................................................. 84

D. Secondment ............................................................................................................................................................................. 85

E. Pensions .................................................................................................................................................................................... 86

F. Share Options ......................................................................................................................................................................... 87

G. Other Employment Issues .................................................................................................................................................... 88

H. Restrictions and Issues for Foreign Managers ................................................................................................................. 88

VIII. Tax ................................................................................................................................................... 89

A. Joint Venture Structure ........................................................................................................................................................ 89

B. Corporate Joint Ventures .................................................................................................................................................... 92

C. Double Tax Treaties ............................................................................................................................................................. 99

IX. Deadlock and Termination .......................................................................................................... 101

A. Disputes and Deadlock ...................................................................................................................................................... 102

B. Default ................................................................................................................................................................................... 106

C. Voluntary Exit ...................................................................................................................................................................... 106

D. Expert and Fair Value ......................................................................................................................................................... 108

E. Consensual Termination ................................................................................................................................................... 109

F. Consequences of Termination ......................................................................................................................................... 109

G. Consistent Drafting ............................................................................................................................................................ 110

H. About the Authors of Section IX .................................................................................................................................... 110



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I. Overview The lawyers in a joint venture transaction have to put in place the structure of the joint venture, document the relationship between the parties and deal with any legal and regulatory issues that may arise.

But the lawyers also frequently have to play a commercial role, more so than in many other transactions. Many of the issues affecting the legal relationship will be commercial in nature. In addition:

■ There are a great variety of joint venture situations - many different types oftransactions, such as a partnership or a private equity transaction, as well as acombination to start up a new business or merge existing businesses, are reallyspecies of a joint venture. There is no common template - the legal structure mustbe designed to fit the situation. The lawyer needs to be alive to the commercialbackground.

■ Joint ventures often start with great enthusiasm from all parties and very littleinclination to consider potential problems or situations where their interestsmight conflict until it is too late. The lawyer often has to play devil's advocate,looking for potential problems and asking the difficult questions - all withappropriate tact and perspective.

■ The parties to a joint venture are often competitors and so there is a stronglikelihood of conflicts arising between them. Yet by definition, and unlike in amerger or acquisition, the parties are looking to have an ongoing commercialrelationship through the joint venture. A commercial approach needs to be takenin order to help identify potential areas of conflict and how they might beresolved.

■ There is no one area of law that governs joint ventures - the lawyers often have tothink laterally and draw upon expertise from a wide range of legal areas.

The main issues that should be considered at the outset of a joint venture are:

■ What, where and why?

• what is the business?

• what is the likely turnover/market share?

• where is it to be based - particularly important in the context of aninternational joint venture?

• why have the joint venture: what are the objectives?

■ Structure of the venture.

■ Contributions to the joint venture (initially and on an ongoing basis).


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■ What will the parties take out?

■ Management.

■ Employees.

■ Control and minority protection.

■ Exit and termination.

■ Managing the negotiations.

A. What, Where and Why? This encompasses:

■ What is the business? Understanding the factors that are critical to the success of the business will help the lawyers to identify potential problems for the proposed joint venture and the important legal issues that will need to be covered. Knowing the nature of the client's business will also assist in identifying relevant regulatory issues.

■ What is the likely turnover and market share? Details about the parties' turnover and their respective share in each relevant market will be important in order to identify whether there are any competition concerns and whether shareholder approval is required under the company's bye-laws or relevant stock exchange rules (if relevant) (see Section VI).

■ Where is the business to be based - will this make any difference? This is likely to be a key question in the context of an international joint venture. Commercial factors will be paramount but tax planning will also be important.

■ What are the parties' objectives? What does the client want to achieve from the joint venture? The lawyers should consider what implications the client's objectives may have for the legal structure. What is to happen if the targets are not met? What is to happen if the objectives of the parties change over time?

■ Will it work? Parties negotiating a joint venture will usually check the basic assumptions made about the joint venture - such as sales or market share projections - through a feasibility study at an early stage in negotiations. In addition, each party should carry out as much legal and commercial due diligence as possible about the other, prior to establishing the venture. This might include:

• Formal due diligence in relation to any assets contributed by the other party to the venture.

• The identity of its parent company (if any) and its subsidiaries.

• Its long term aims and corporate culture.



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• Whether there are any financial, regulatory or business problems that are likely to emerge over the next few years.

• Whether it is susceptible to a change of control.

■ Why a joint venture? Is a joint venture actually the best way for the client to achieve its objectives? Is a joint venture necessary? They require much thought and can lead to hidden tensions. Could a simple supply arrangement achieve the same commercial objectives? For example, instead of the parties carrying out a joint tender for a project, one could tender by itself and involve the other party through a sub-contracting arrangement. Could one party buy the other company or sell its division?

Studies indicate that where there is little overlap between the businesses of potential joint venture parties, a joint venture will be more likely to succeed than a merger but conversely where there is a reasonable degree of overlap between the parties' businesses, a merger is significantly more likely to succeed than a joint venture (see box: Will a joint venture succeed?).

Will a joint venture succeed?

B. Structure of the Venture The choice of structure for the venture needs to be addressed at an early stage in the negotiations. Tax is likely to be the most important factor outside the commercial objectives. But competition and employment issues may also be relevant so it is advisable to involve experts from these areas before determining the structure.


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There is a wide range of possible joint venture structures. The most common are:

■ Limited liability company. This is a separate legal entity in which the liability of the owners is restricted to their contribution to the company's share capital. This is the most common structure and is legally well recognised in most jurisdictions.

■ Partnership. This is a business structure where each partner has unlimited liability for the debts and obligations of the partnership (although species of limited partnership exist in many jurisdictions). Partnerships are less commonly used than corporate vehicles for joint ventures, but they may be preferable in some situations, particularly for tax reasons.

■ Contractual. This type of arrangement is often described as a co-operation, collaboration or consortium agreement. Here, no separate entity is formed; instead the parties agree to associate as independent contractors. The rights and duties of the parties derive solely from the provisions of the joint venture agreement.

In some countries, "hybrid" vehicles may be available. For instance, in the UK the new limited liability partnership (LLP) is technically a corporate entity but has features (particularly as regards its "transparent" tax treatment) of a partnership.

The main factors that will influence the choice of joint venture structure are:

■ The type of venture. For example, whether it is likely to be a single project (where a contractual structure may be sufficient) or an ongoing business (in which case a partnership or corporate structure may be more appropriate), and whether regulatory considerations require a specific sort of structure (for example, certain professions in some countries can only operate as a partnership).

■ Liability. Each party's liability for the losses of the joint venture and the acts of the co-venturer. A corporate structure is likely to be preferable if liability is an issue.

■ Tax. On profits, tax relief on losses and capital taxes, transfer duties and any other relevant taxes on transfers into and out of the venture. A tax transparent structure (partnership or contractual arrangement) can sometimes be preferable from a tax perspective.

■ Finance. The form and type of finance. Are outside investors needed? If bank finance is required, what security will the bank want? Do the outside investors want a stake in the venture? Corporate structures generally give greater flexibility for raising finance and giving security.

■ Legal protection and control. Which structure offers the best way of ensuring that a party's interest in the assets of the joint venture is protected and that the business is conducted in accordance with the party's objectives?



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■ Third party involvement. Is it envisaged that other parties will be invited to join the joint venture (either in addition to or instead of the existing parties)? A corporate vehicle may allow a wider range of different ownership interests than the other structures.

■ Accounting. How will each party's investment in the joint venture be accounted for in its books?

■ Publicity and formality. Are the joint venture parties prepared to register details of the joint venture (for example, if a company) and to comply with ongoing regulatory requirements such as filing of accounts?

More complex corporate structures that can be used for joint ventures include:

■ Dual company structures. This is where companies remain separate but are connected by contractual relationships (such as profit sharing or dividend equalisation arrangements) so that they can be operated as a single economic or business unit. Examples include Unilever and Reed Elsevier (see Global Counsel, Article, When two heads are better than one).

■ Income access. If a joint venture has a foreign subsidiary located in the same jurisdiction as one of the joint venture parties, it may be desirable from a tax perspective for the joint venture party to access profits directly from the subsidiary in the same country. This can be achieved by the issue of non-voting income access shares (see box: Income access).

A key point in considering the structure of the venture is to remember that the venture has a commercial raison d'être. The legal factors may be extremely important but there could be a commercial imperative that outweighs them.

(See Section II and VIII).

(See box: Income access).


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Income access

C. Contributions to the Joint Venture There are two principal types of contributions to be considered:

■ Finance/cash.

■ Non-cash assets (possibly including shares in subsidiaries).

1. Finance/cash

Issues to address are:

■ If the joint venture will be borrowing money, what security is being given?

■ Will third party lenders want a guarantee from the parties and how will this affect their exposure? Lenders may want security in the form of charges and/or guarantees from the parties or perhaps a share of the venture's profits.

■ If outside investors will be brought in, how will this affect the structure? They will have different objectives that will need to be considered.

■ What form will the financing take - a loan or a subscription for shares?



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It is also important to consider the future requirements for finance, if any, of the venture. If there is to be no commitment to provide future capital, this should usually be stated expressly in the joint venture documents.

2. Non-Cash Assets

In many cases, the parties will contribute assets (possibly including shares in subsidiaries) to the venture. It is important for the parties to agree on exactly what assets are to be transferred, the basis of the transfer and the value of the contribution.

The choice of assets to be transferred will primarily be determined by commercial needs, but tax implications (for example, tax on chargeable gains, transfer duties and value added tax) and legal formalities may be relevant. A due diligence exercise will usually be required in relation to the contribution of assets. The parties may also wish to enter into a detailed business transfer agreement or agreements with appropriate warranties. If both parties are contributing assets, they may agree not to give warranties and to rely instead on due diligence. If warranties are agreed, it is important to consider to whom they should be given (the joint venture vehicle or the other party).

Sometimes the most valuable contributions that a party makes to a joint venture are not cash or tangible assets but, for example, intellectual property and management skills. Difficulties can arise in putting a value on these items and in agreeing the value with the other party. (See Section IV).

3. Contributions Analysis

Where significant assets are transferred to the joint venture, it will often be necessary or advisable to conduct a "contributions analysis". This is sometimes carried out by an independent accountant in order to value non-cash contributions to a joint venture. The analysis involves putting values on all the contributions made by both parties to the venture using agreed valuation methods - which may require some negotiation, particularly when the venture is cross-border. The accounting bases or policies that have been used in each business may, for instance, have been materially different.

The value of each party's contribution is likely to be the key factor in determining their respective equity shares of the joint venture.

If one party is to control the joint venture, it may be willing to pay a "control premium". Thus it may, for example, be willing to receive only a 51% equity interest even though it contributes 60% by value of assets and finance to the joint venture.

An unequal division may, though, lead to disputes between the parties. A survey published by McKinsey & Co in the early 1990s of over 500 major international joint ventures (the McKinsey Study) suggests that 50:50 joint ventures are twice as likely to succeed as ventures with unequal parties.


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Even though one party's initial contribution may be less valuable than the other's, it may still be possible to form a 50:50 joint venture by "equalising" the contributions in an agreed manner, for example:

■ Making a cash payment.

■ Excluding assets.

■ Including debt.

■ Agreeing to take a disproportionate share of future profits of the joint venture.

(See box: Contributions analysis).

Contributions analysis



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D. What Will the Parties Take out? How will each party make its desired return from the venture? It is important to understand what each party seeks to take out of the joint venture - know-how, income, capital growth and so on.

There are a number of ways of extracting profits that are in part dependent on the structure of the joint venture and the contributions made to it by the respective parties. For example:

■ Dividends.

■ Interest on loans.

■ Management fees.

■ Intellectual property royalties.

Tax considerations play a major part in determining the best way to get profits out of the joint venture.

Other issues to be considered include:

■ What profits will be retained? This is often a source of dispute and the focus for differences in attitudes over long term aims for the joint venture. Participants typically deal with this by agreeing in the documentation a minimum to be left in and maximum to be taken out (subject to contrary agreement).

■ Can either party have access to cash advances and, if so, on what terms?

■ Can the parties to the venture use the joint venture's losses (if any) to set against their own profits for tax purposes? In the context of an international joint venture it is unlikely that losses of a corporate vehicle in one jurisdiction can be surrendered to a parent company in another jurisdiction for tax purposes. If it is anticipated that the joint venture will make heavy losses which either or both of the joint venture parties wish to access, it may be advisable to use a tax transparent structure (such as a partnership or contractual arrangement) or to locate the joint venture in the same jurisdiction as at least one of the parties.

In addition to direct financial return, the parties may have other commercial objectives in mind, for example, using the results of R&D generated by the joint venture for their other businesses. They will not automatically have the right to this research, particularly where the joint venture vehicle is a separate company. This needs to be dealt with in the documents.

E. Management The McKinsey Study indicates that joint ventures are most successful if they have strong independent management in place. Aside from giving more positive business direction, this


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is more likely to lead to a separate identity for the joint venture and a reduction of potential 'inter-party' conflict.

It is sometimes better for the parties to decide the parameters within which the management team will work rather than both parties trying to keep closely involved. The job of the lawyer is to help design the structure and put the agreed framework in place. It is usually necessary in a corporate joint venture to distinguish between operational management decisions and major shareholder decisions.

Procedures that ensure that a joint venture parent is kept informed about what is going on in the joint venture will also need to be agreed and documented. Normally the parties will want to agree an annual budget and business plan. A party will wish to establish the necessary information and monitoring procedures to ensure that the joint venture is operating within the agreed parameters. An important task is to decide on the key decisions that require the consent of all parties.

A joint venture party should not necessarily assume that it will be kept fully informed about activities of the joint venture through the managers that it appoints. Factors that can make this difficult include:

■ Poor systems of communication and reporting between the joint venture and its parents.

■ If the manager is a director of the joint venture company, then he or she may face conflicting legal duties.

■ He or she may also be subject to obligations of confidentiality in relation to the information.

■ The manager that a party appoints may eventually identify more strongly with the joint venture than the appointing party and face conflicting loyalties.

The reporting of information and confidentiality issues should be addressed in the documents.

F. Employees A number of employment issues will arise, particularly if employees are to be transferred or seconded to the joint venture by the joint venture parties.

Key questions will include:

■ Is employee consultation/consent required prior to the establishment of the venture?



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■ Will redundancies be necessary? If so, what procedures should be followed? How much will it cost and who should bear the ultimate cost?

■ Will it be necessary or commercially desirable to harmonise terms and conditions of employees in the joint venture? Local laws may restrict the ability of the parties to do this.

■ If managers are to be transferred or seconded to the joint venture:

• what is their tax position?

• how difficult might it be to obtain work permits for them?

• what is their potential liability as managers or directors of the venture?

If an existing business located in the EU is transferred, the Acquired Rights Directive (as implemented by member states) will apply. Broadly this provides for the automatic transfer to the joint venture entity of the employment contracts of employees engaged in the business.

(See Section VII.)

G. Control and Minority Protection In almost every joint venture, control and (if there is a minority shareholder) minority protection issues will be central to negotiations:

■ How will the proposed joint venture be controlled (the balance of power between the two parties)?

■ How will the minority party be protected?

In a corporate joint venture, decisions are made at at least two levels, board and shareholder. (Corporate vehicles in some jurisdictions may be required to have, or may elect to have, a supervisory board in addition to the management board.) The parties need to decide which decisions are to be made by the management of the joint venture and which are to be reserved to the parties as shareholders. A minority party may seek to ensure that appropriate decisions are made at parent company level by having and exercising rights of veto at board level.

Whatever approach is used, ensuring that a party has appropriate control (or protection if it is a minority shareholder) depends on defining the respective powers of the directors appointed to the venture and the powers of the parties as shareholders and ensuring that this is all properly documented, for example:

■ Power of appointment of directors.

■ Directors' rights of veto.

■ Quorum provisions.


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■ Appointment and powers of chairman.

■ Rights reserved for shareholders.

The relevant corporate law may provide some protection for minority shareholders in a corporate joint venture, even if there are no express provisions, for example to block resolutions changing the company's constitution.

But a minority will undoubtedly want further express rights. Often these will take the form of powers of veto over certain decisions relating to the joint venture, for example, changes in the nature of the business, major acquisitions/disposals, major capital expenditure or borrowings, key executive appointments, changes to the bye-laws and further issues of shares. The powers that a minority has by law, or sometimes is permitted to have, will vary depending on the location of the joint venture.

A question related to control and minority protection is how to ensure that the joint venture parties do not circumvent the agreed arrangements. This can be done by:

■ Arrangements for the audit of transactions between the joint venture and any of the parties.

■ Non-compete clauses seeking to prohibit the parents from competing with the joint venture company during the life of the joint venture.

■ Confidentiality agreements requiring each party to keep information about the joint venture and each other confidential.

If it is intended that the parties should have access to confidential information in the joint venture company, this should be expressly stated. Parent companies do not automatically have this right.

(See Section V.)

H. Exit and Termination Most joint ventures do not have a long lifespan. Less than one third continue for more than 10 years (McKinsey Study). Although termination may be the last thing on the parties' minds when they are establishing the venture, the likelihood is that it will happen, and sooner than they expect. Therefore provision for termination needs to be considered at the outset. The parties need to focus on the mechanics - there are no boilerplate provisions. The mechanics will vary depending on the circumstances but they can have a huge impact on the parties' positions when the issue of termination or exit arises in practice.

One technique is not to provide expressly for termination at all. The theory is that prolonged disagreement would have such detrimental effects on the business that the



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parties will be forced commercially to agree something. However, this approach can cause considerable uncertainty and difficulty.

There are four situations which may need to be provided for:

■ Consensual termination.

■ Disposal by one party of its interest in the venture.

■ Default (or other "trigger event") giving rise to a right of termination.

■ Disputes and deadlock.

1. Consensual Termination

The situation where both parties agree that the venture should end. For example:

■ The joint venture is for a fixed term and the parties agree in advance that the venture will terminate at the end of the term.

■ The joint venture is established for a specific purpose and the parties agree in advance that the venture will end once the purpose has been satisfied.

In each case the agreement will need to deal with the transfer of shares (if it is a corporate joint venture) or the distribution of the venture's assets on termination/winding-up.

The venture could also terminate because, for example, it has failed to meet its objectives and the parties simply agree to cut their losses and end the venture - or perhaps a third party purchaser makes an offer for the business which is accepted by all the joint venture parties. These situations are not likely to be expressly provided for in the documents but will be left to negotiation should the need arise.

2. Disposal of an Interest

This is the situation where the parties are willing for one of their number to leave the joint venture, but for the venture to continue either with the introduction of a new party or under the control of the remaining party or parties alone.

Normally the documents will provide each party with pre-emption rights in respect of a proposed transfer of shares by another party, either at the price that the third party purchaser (if identified) is willing to pay or at an independent valuation. There is often an exception for intra-group transfers so that pre-emption rights will not be triggered if one of the parties transfers its shares in the joint venture to another company in its same group.

Other common provisions relating to the transfer of shares by one party that may be included, in place of or in addition to pre-emption rights, include:

■ Drag along. Where a majority shareholder wishing to sell out to a third party can require the minority (particularly a small minority) to sell to that person on the


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same terms per share, thus enabling the majority party to deliver the whole of the joint venture business - otherwise the majority's stake could be difficult to sell, or not at such a high price.

■ Piggy back/tag along. Where a small minority shareholder can "piggy back" on the sale by a bigger shareholder and thereby achieve the same sale terms for its shares (and avoid being locked in a joint venture with a new majority shareholder).

Most agreements prevent each party from selling part of its shareholding only. This prevents the shareholdings splitting up into many parts.

The discussion so far on disposal pre-supposes the existence of a third party buyer. It may be that one party to the venture wants out and either it is likely to be difficult to find a buyer or time is of the essence. In these circumstances, the parties may consider a "Russian roulette" or other "shoot-out" procedure. This is often used in cases of deadlock and is considered in that context below.

3. Default

The parties may agree that on the happening of a defined event of default (or certain other trigger events) the party in default will be required to sell its shares in the venture.

Common trigger events are:

■ Insolvency of either party to the venture.

■ Change in control of either party.

■ Material breach of the shareholders' agreement or bye-laws (possibly limited to specific provisions).

■ Material breach of any other agreement between the parties.

On the happening of an event of default, the party that is not in default is commonly given a right exercisable by notice to buy the shares of the other or, sometimes, to require the other to buy its shares. This normally follows a cooling off period. The value of the shares will usually be determined by a third party expert, failing agreement between the parties, and the documents should specify any agreed terms or formula for such a valuation.

4. Disputes and Deadlock

Whether the joint venture is a 50:50 venture or one with a minority party with veto rights, the parties need to address the possibility of dispute or management deadlock. The documents should define the matters that are serious enough to start a dispute resolution process and set out the process itself.



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Normally any formal resolution process will not be instigated unless and until informal negotiations between the joint venturers' directors/managers fail to settle the dispute.

Common dispute resolution procedures which may be considered include:

■ Chairman's casting vote. In a corporate joint venture, the board chairman can be given a casting vote. The party that does not have the power of appointment of the chairman is unlikely to be happy with this. (This might be overcome in some cases by providing for the rotation of the position between the directors appointed by each of the parties to the joint venture.)

■ Outsider's swing vote. This refers the decision to an identified outsider - or sometimes an independent non-executive director - but if the parties cannot agree, why should an outsider be able to decide?

■ Arbitration or expert resolution. This is really only suitable for a limited range of disputed matters, which are more factual in nature (for example, a dispute over the valuation of intangible contributions to the venture by either party). Sometimes an agreed mediation or other alternative dispute resolution (ADR) procedure may be contemplated.

■ Escalation. This is where disputes are referred to the chairmen or chief executives of the joint venture parties. The threat of enforcing this provision is often enough to encourage managers to agree before the process is instituted.

Ultimately, if the parties cannot agree then a deadlock will exist. The documents may then provide a procedure for the joint venture to be terminated. This may be by automatic winding up, or more commonly by the operation of a further formal procedure such as a Russian roulette provision or Mexican (or Texas) shoot-out:

■ Russian roulette. Either party can serve notice on the other requiring the other party to buy its shares at a set price or to sell its own shares to the party giving notice at the same price. The other party then has a period in which to accept the offer to buy or sell its shares at that price. This seems a fair solution, likely to establish a fair price. However, in practice it is only suitable for two party joint ventures between parties of roughly equal financial strength and can leave a party in difficulty, for example, being forced to sell its interest against its will because it doesn't have the finance or ability to acquire the other party's shares. Such a route should be carefully considered before it is adopted

■ Mexican or Texas shoot-out. A variation on Russian roulette, if the parties both wish to buy, is for both parties to submit sealed bids, the highest winning. Alternatively there can be provision for bidding by auction.

(See Section IX.)


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I. Managing the Negotiations The initial stages of the negotiations need to be addressed. Managing the negotiations is largely a matter of practicality - who will be responsible for drafting the various documents, how will confidentiality be maintained, how will the parties conduct themselves during the negotiations and exactly who is to be responsible for doing what?

Drafting can be carried out by either party, but it will usually be advantageous to initiate and keep control of the drafting. At the very initial stages a memorandum of understanding, confidentiality agreement and, possibly, exclusivity agreement are likely to be signed.

1. Memorandum of Understanding

Joint venture negotiations usually start with a draft non-binding memorandum of understanding (also called a term sheet, protocol, heads of terms or letter of intent).

There is an argument for not having a memorandum of understanding and negotiating the joint venture straight away. But joint ventures can take a long time to negotiate - and legal documents supporting the arrangement can become very complex. It can help if parties agree the main commercial terms in a non-binding letter before detailed negotiation. It is also sensible for the parties to address the key points of the deal at as early a stage as possible particularly if any of them are likely to be controversial.

Key issues to address include:

■ Commonly the memorandum of understanding is not intended to be legally binding - with the exception of certain clauses (such as confidentiality, choice of law and exclusivity). Clearly distinguish clauses that are intended to be binding and non-binding. It is possible, particularly in some civil code jurisdictions, unwittingly to enter into a binding pre-agreement. This may occur in some circumstances even if the parties specifically state that it is not their intention to do so.

■ Even if the letter is not legally binding, it will have moral force - important in joint ventures because trust is paramount. It may thus prejudice a party's future negotiating position.

■ In most civil code countries there is a duty to negotiate in good faith. The memorandum of understanding will provide evidence of the close relationship between the parties and their expectations. If, for example, either party withdraws from negotiations without cause, damages may be payable. Commonly these will only cover the costs of negotiations but in some jurisdictions, such as The Netherlands, damages may include an amount for loss of profit if negotiations are at an advanced stage.



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■ If either of the parties is a listed company or a subsidiary of a listed company, the memorandum of understanding may trigger disclosure obligations under relevant securities laws or listing rules. For example, in the US it is possible that a company could be liable to investors that trade in a company's shares after a memorandum of understanding has been signed if it is not disclosed.

It is usually a matter of practicality and preference whether the memorandum of understanding contains full details of the parties' proposal, or whether it contains the minimum detail necessary to move the negotiations on (for example, contributions, profits, management and control). In either case the issues should be raised with the client and thought through carefully at an early stage to avoid the risk that time and costs will be wasted if later the parties realise that they cannot agree on a fundamental point of principle.

(See Standard document, Memorandum of understanding and its associated drafting note.)

2. Confidentiality Agreement

It will usually be advisable for the parties to negotiate a confidentiality agreement. This will help to:

■ Protect information and know-how that is disclosed to the other party.

■ Keep the deal secret. If details of the negotiations are leaked, this may have an unsettling effect on customers and employees. However, if either party is listed, a public disclosure may be triggered under relevant stock exchange rules.

■ Reduce the possibility of either party poaching the other's customers or key personnel - the agreement could include non-solicitation covenants.

However, too much reliance should not be placed on confidentiality agreements. They are difficult to enforce. Their main strength is that they focus both parties' minds on having proper procedures in place to protect confidentiality so far as possible. The key is to keep the information to as small a circle of people as possible. In some circumstances it may be appropriate to drip feed information, keeping critical information back until just before signing - although this may undermine the trust that is essential to a successful joint venture.

In many joint ventures, the obligations in the confidentiality agreement will be two way as both parties are likely to provide information to each other.

(See Standard document, Confidentiality agreement and its associated drafting note.)

3. Exclusivity Agreement

Another subject that may arise at this point is exclusivity or lock-outs: seeking to ensure that the other side does not enter negotiations at the same time with other parties.


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Positive obligations (an agreement to negotiate for a defined period) are not enforceable in some jurisdictions such as the UK. A negative obligation (not to negotiate with a third party for a defined period) is more likely to be enforceable. The remedy for breach of an exclusivity agreement is likely to be damages for wasted costs, rather than loss of profit caused by the joint venture not proceeding.

Exclusivity arrangements may be contained in a separate agreement or, more commonly, in the memorandum of understanding.

4. Joint Venture Documents

The lawyers must identify early the legal agreements and documents required. A joint venture will usually involve a raft of different agreements. For example:

■ Shareholders' agreement and constitutional documents of the joint venture company (assuming that a corporate vehicle is used).

■ Share and/or asset purchase agreement(s) and formal transfer documents relating to the transfer of assets (possibly including shares in subsidiaries) by the parties to the joint venture.

■ Disclosures in connection with any warranties (assuming that warranties are given in relation to the assets transferred).

■ Secondment agreements.

■ Services agreements.

■ IP assignments and/or licences.

■ Supply agreements.

■ Distribution agreements.

■ Guarantees.

■ Management agreements.

The parties need to decide who is to have primary responsibility for drafting each document.

In a corporate joint venture, the shareholders' agreement and the company bye-laws are central to the joint venture structure. Most jurisdictions have an established legal framework governing the running of companies and the rights and duties of directors, shareholders and creditors. This is unlikely to be enough in itself to cover all aspects of their relationship which the parties will wish to address. The shareholders' agreement and bye-laws therefore between them should cover all the major legal issues raised in connection with the venture. However:

■ The general law acts as a backdrop to the relationship and in some cases restricts the approach that the parties can take. The amount of flexibility that the parties



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have to determine the terms of the documents can vary widely from country to country.

■ There is some debate over what exactly to cover in the bye-laws as opposed to the shareholders' agreement. Again, approaches can differ widely from country to country.

(See Section III and Standard document, Shareholders' agreement and its associated drafting note.)

Joint ventures can be challenging transactions. Careful preparation of the legal documentation can make an important contribution to the foundation of the venture.


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II. Structures There are many different types of legal structure for a joint venture. The most common forms are:

■ Limited liability company.

■ Partnership.

■ Contractual joint venture.

In some countries, "hybrid" vehicles may be available. For instance, in the UK a limited liability partnership (LLP) is a corporate entity with features (particularly as regards tax treatment) of a partnership.

A. Limited Liability Company This is a separate legal entity in which the liability of the owners is restricted to their contribution to the company's share capital. In many jurisdictions there is a choice between a "public" company (usually necessary where shares are to be offered to the public) and a "private" limited company (usually offering a little more flexibility in its rules).

Examples of limited companies in Europe include the société par actions simplifiées (SAS) and société anonyme (SA) (France); BV and NV (The Netherlands); Gesellschaft mit beschränkter Haftung (GmbH) and Aktiengesellschaft (AG) (Germany); SPA and Srl (Italy); private limited company and public limited company (UK) (search "Top corporate vehicles" on www.practicallaw.com/global for articles on all of these company types).

The European Company (Societas Europaea (SE)) may now provide an additional choice for certain European cross-border joint ventures. The possibility of forming an SE became available on 8 October 2004 (see Towards a European Company).

B. Partnership This is a business structure where the liability of each partner is unlimited and joint with each other partner. In some countries a partnership will be an entity with separate legal personality (for example, Belgium); in others it will not (for example, under English law).

Examples of partnerships include the société en nom collectif (France), offene Handelsgesellschaft (OHG) (Germany) and vennootschap onder firma (The Netherlands).



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Partnerships are less commonly used than corporate vehicles for joint ventures. There may be practical restrictions under local laws. For example, in Italy a company cannot be a member of a partnership (see below).

C. Contractual Joint Venture This type of arrangement is often described as a co-operation, collaboration or consortium agreement. Here, no separate entity is formed; instead the parties agree to associate as independent contractors. The rights and duties of the parties derive solely from the provisions of the joint venture agreement.

It is important to avoid the situation where arrangements for a contractual joint venture constitute a partnership. Sometimes the dividing line is thin. For example, a contractual joint venture can be categorised as a "de facto partnership" under the French and German Civil Codes and under English common law. The test is slightly different in each country but relevant factors usually include profit/loss sharing and a common commercial purpose. The intention of the parties may be relevant but not necessarily conclusive. The main consequence of categorisation as a partnership is that each party will have joint and unlimited liability for the debts and obligations of the joint venture.

D. Factors in Choice of Structure The main factors that will influence the choice of joint venture structure are:

■ Type of venture - for example, whether it is likely to be a single project (where a contractual structure may be sufficient) or an ongoing business (in which case a partnership or corporate structure may be more appropriate), and whether regulatory considerations require a specific sort of structure (for example, certain professions in some countries can only operate as a partnership).

■ Liability - each party's liability for the losses of the joint venture and the acts of the other co-venturer.

■ Tax - on profits, tax relief on losses and capital taxes and any relevant taxes on transfers into and out of the venture.

■ Finance - the form and type of finance. Are outside investors needed? If bank finance is required, what security will the bank want? Do the outside investors want a stake in the venture?

■ Legal protection and control - which structure offers the best way of ensuring that a party's interest in the assets of the joint venture are protected and that the business is conducted in accordance with the party's objectives?


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■ Third party involvement - is it envisaged that other parties will be invited to join the joint venture (either in addition to or instead of the existing parties)?

■ Accounting - how will each party's investment in the joint venture be accounted for in its books?

■ Publicity and formality - are the joint venture parties prepared to register details of the joint venture (for example, if a company) and to comply with ongoing regulatory requirements such as filing of accounts?

It is vital in considering the structure of the venture to remember that the venture has a commercial raison d'etre. The legal factors may be extremely important but there could be a commercial imperative that outweighs them.

E. Limited Company - for Factors often leading to the choice of a limited company include:

■ Independent existence, clear identity and permanence.

■ Each party's liability is limited to its contribution to the company's share capital.

■ Established law and practice with regard to operation. Most jurisdictions have detailed laws governing the operation of companies. Although these rules can restrict the flexibility of the parties at times, they provide an invaluable framework within which the lawyer can define the rights of the parties. In addition, people are very familiar with the way that companies operate in practice.

■ Flexibility in equity finance. The corporate structure allows equity capital to be raised and can generally accommodate shareholders with different equity interests (such as preference shareholders). (Note that some corporate vehicles may not allow different classes of shares (for example, the SARL in France).)

■ Flexibility in debt finance. A company can borrow in its own name, secure the borrowing and generally issue loan stock.

■ The vehicle allows a wide range of participants and changes in identity. As discussed above, a company will support complex structures with a range of participants of different sizes and with different motivations.

■ Employee incentives. Employees may be granted equity incentives in the form of shares or share options.



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F. Limited Company - Against There may be disadvantages:

■ A corporate entity is a relatively complicated, formal and permanent arrangement. Establishing, running and winding up a company costs money and requires formalities to be observed. It may not be suitable for single or fixed term projects.

■ A company is an independent legal and tax entity. Therefore:

• Parties may be liable to capital gains taxes and transfer duty in respect of assets contributed to the venture. Reliefs may be available.

• Profits of the venture are generally taxed separately from those of its "parents".

• Depending on the country in which the joint venture and its parents are resident, only partial or no credit may be given for tax paid by the joint venture company when profits are distributed to the shareholders.

• It may not be possible to offset losses in the joint venture against profits of the parents (and vice versa), particularly if the companies are in different countries.

• Corporate information (including accounts) will generally have to be filed at the relevant companies registry.

• Even the advantage of limited liability may be qualified. Limited liability can be undermined by guarantees. In many cases the participants to a new joint venture may have to guarantee financial debts of the company - for example, in the case of a bank loan.

G. Partnership - for On occasions, a partnership structure may offer advantages:

■ The joint venture parties have a direct share in the underlying assets of the joint venture.

■ Unlike companies, partnerships are generally tax transparent. If so, the participants are treated as having earned a share of the joint venture's profits, which are allocated between the partners in proportion to their shares in the partnership. Note, however, that partnerships are not tax transparent in all jurisdictions.

■ There are no or few registration requirements depending on the jurisdiction in which the partnership is formed. This means that financial details can often be


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kept secret. There are generally fewer formalities associated with creating, running and terminating a partnership in comparison with a company.

H. Partnership - Against Disadvantages include:

■ Partners are jointly and severally liable to the full extent of the debts and obligations of the partnership. Thus they are liable for all acts that their co-venturer carries out on behalf of the venture. (They are usually not liable for debts that the other party incurs outside the business of the partnership.)

(It is possible in many jurisdictions to have a limited partnership where the liability of certain partners is limited but at least one partner must be a general partner with unlimited liability in respect of the business. The limited partner(s) cannot participate in management without losing the right to limited liability (see below).)

■ Partnership law and practice is generally less developed than that relating to companies.

■ Because of the principle of unlimited liability, it is difficult to accommodate partners with different interests within the structure.

I. Contractual Joint Venture - for In some situations, particularly for a fixed project, a purely contractual joint venture offers advantages:

■ There is no deemed responsibility for actions of the other party - each party is responsible only for its own actions (unless the arrangement is deemed to be a partnership (see below)). Contrast partnerships or companies where representatives will have the authority to bind the joint venture as a whole.

■ Property remains in the ownership of each party.

■ Few formalities are required to establish or terminate a contractual joint venture.

■ A contractual arrangement is tax transparent. There is no pooling of profits or losses so each party takes its own profits and losses directly; and because there is no transfer of assets at the start or termination of the venture there are no capital taxes or transfer duty concerns.

■ In general there are no formal registration requirements.



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J. Contractual Joint Venture - Against ■ The parties must be careful to ensure that they are not liable for the acts and

omissions of the other party in relation to the joint business particularly if there is a risk that the relationship amounts to a partnership (see above). (If so, liability may be to the full extent of the co-venturer's actions - contrast a limited company where the company is liable and the participant's liability is limited to the extent of its contribution to the venture.)

■ There is no body of law or procedure that governs the operation of a contractual joint venture other than contract law itself. Unlike a company (and to a lesser extent a partnership), you have to define every aspect of the operation of the joint venture - it is therefore usually inappropriate for an ongoing business and/or where you want to establish a full function joint venture (i.e. one which performs all the functions of an autonomous economic entity).

■ A contractual arrangement is likely to be unsuitable where different ownership interests are needed or the identity of the participants will change. As indicated above, there is no structure for dealing with different interests as there would be with a company.

These are the basic categories. Particular situations may give rise to alternative structures or "hybrid" forms of legal entity. Other possible joint venture vehicles or arrangements include limited partnerships, European economic interest groupings, share swaps and dual company structures.

K. Limited Partnerships Some jurisdictions provide for limited partnerships. In a limited partnership:

■ At least one partner must be a general partner with unlimited liability in respect of the business (although the general partner can generally be a company).

■ The limited partner(s), usually the provider(s) of finance for the venture, often cannot participate in management without losing their right to limited liability.

Limited partnerships tend to be more popular in civil law countries than in the UK (for example, the GmbH & Co KG is used relatively frequently in Germany).


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L. Limited Liability Partnerships Another entity that can possibly be used in some countries for joint ventures - including now the UK- is the limited liability partnership (LLP). These have some characteristics of a company (separate legal entity with formal incorporation and filing requirements) and some characteristics of a partnership (tax transparency).

M. European Economic Interest Groupings (EEIGs) EEIGs are an attempt by the European Commission to encourage cross-border alliances. EEIGs are unincorporated associations which constitute independent legal entities but they have considerable limitations:

■ They must be formed for a limited purpose that has some connection with the common activities of their members.

■ They must have members based in at least two countries in the European Economic Area (the EU plus Norway, Iceland and Liechtenstein).

■ Their main purpose should not be to make profits.

■ They have unlimited liability as regards third parties.

This means they are likely only to have limited uses - for example, they might be formed for joint research and development purposes or the joint collection and dissemination of information for marketing purposes.

The measures relating to EEIGs are contained in Council Regulation No.2137/85.

Some countries have equivalent structures under domestic law such as the groupement d'intérét economique in France. The most famous example of this was the Airbus consortium.

Taking a broad view of arrangements which constitute a "joint venture", the particular structure for the "joint" arrangement may involve the use of other (and often more complex) arrangements - usually associated with careful tax planning. Structures may include use of share swaps, dual companies, income access arrangements, parallel ventures or hybrid structures.



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N. Share Swaps These are where the parent companies agree to buy (usually a small percentage of) shares in each other to cement relationships between the companies. This is not so much a joint venture structure but an arrangement to support a friendly alliance between two parties which may accompany or lead to firmer joint arrangements.

O. Dual Company Structures These are where companies remain separate (often with their own separate public shareholders) but are connected by contractual relationships (such as profit sharing or dividend equalisation arrangements) so that they can be operated as a single economic or business unit. Examples include Unilever, Reed Elesevier and RTZ/CRA (see box Unilever: dual holding company structure). These arrangements may often come close to a partnership.

Unilever: Dual Holding Company Structure


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P. Income Access If a joint venture has a foreign subsidiary located in the same jurisdiction as one of the joint venture parties, it may be desirable from a tax perspective for the joint venture party to access profits directly from the subsidiary in the same country. This can be achieved by the issue of non-voting income access shares (see box: Income access).

Income Access

(For a detailed analysis of dual company and income access structures see Global Counsel, Article, When two heads are better than one.)

Q. Parallel Joint Ventures In an international joint venture, there may be occasions when it is desirable to establish a different joint venture vehicle in a number of different countries where the joint operations are undertaken - rather than a single holding company with subsidiaries. This will usually be determined by a tax analysis in each relevant country.



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R. Hybrid Structures It is also sometimes possible to create "hybrid" structures for international ventures where the vehicle is classified differently depending on the jurisdiction - for example, a UK private company can sometimes elect to be treated as a partnership for US federal income tax purposes. A société en commandite par actions (SCA) in France - a limited partnership with shareholders - may be treated as a company for tax purposes by parent company tax authorities. A common vehicle is also the LLC (limited liability company) which is a corporate entity but which in some US states (e.g. Delaware) can be treated as tax transparent - which may possibly benefit US participants in an international venture.

Legal structures for a joint venture may sometimes be straightforward. In many international ventures, though, issues can be complex and tax and other factors will play an important part - often, not only in the choice of structure but in the choice of location of the joint venture vehicle. The structure must, nevertheless, remain commercially viable.

Ian Hewitt is a consultant with Freshfields Bruckhaus Deringer.


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III. Shareholders' Agreement and By-LawsIn a corporate joint venture, the shareholders' agreement and bye-laws should between them cover the constitutional issues of the joint venture company and its day-to-day operation:

■ How the joint venture is to be managed.

■ The division of power between the parties and the extent of their influence overthe management of the joint venture.

■ The terms on which any party can transfer their shares to a third party.

■ How to deal with disputes and deadlock between them.

■ The circumstances in which the joint venture will terminate and the mechanicsand implications of termination.

There is some debate about exactly which provisions should appear in the shareholders' agreement and which should be in the bye-laws. Practice varies from country to country and even within jurisdictions.

There are a number of important differences between the documents that should be borne in mind when drafting.

A. Statutory Control The main difference in every jurisdiction is that a company is a creature of statute. There is a comprehensive body of law that governs how a company should run. In some jurisdictions, such as the UK, there is little constraint on what may be included in a shareholders' agreement. But in other jurisdictions, such as France, a provision in a shareholders' agreement that might be unexceptionable in the UK may be unenforceable, as contrary to corporate law.

B. Content The shareholders' agreement is a simple contract between all or some of the shareholders, and so can deal with all aspects of the relationship between the parties if required, including the personal rights and obligations of shareholders (for example, how they will exercise their voting rights).



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The bye-laws, however, can generally only take effect as a contract between the shareholders in their capacity as members and so cannot deal with matters which are personal to the members if this could be seen as fettering the company's statutory powers. The company's statutory powers might include, for example, the right to amend the bye-laws or to reduce share capital by a specified majority vote of shareholders.

C. Amendment A shareholders' agreement can generally only be amended by the agreement of all the parties, whatever the size of their shareholding. In most jurisdictions, a shareholder vote to change a company's bye-laws does not require unanimity. This may be to the detriment of a minority shareholder who has insufficient shares to block such a resolution (although there may be rules of law that permit certain actions by the majority to be set aside). Of course, the rights of a minority can be protected in other ways, for example by provisions in the shareholders' agreement (see Section V).

D. New Parties New shareholders in the joint venture company are automatically bound by the bye-laws when they buy shares in the company. However, they are not automatically bound by the shareholders' agreement. Therefore, if the identity of the shareholders (or a section of them) will change frequently (a possibility in a multi-party venture) and you do not want to have to keep executing deeds of adherence to the agreement, the provisions to which you want those shareholders to be bound should be included in the bye-laws. It could, however, be an important factor that, unlike bye-laws, the provisions of a shareholders' agreement (such as confidentiality undertakings) will not automatically cease to apply to a former shareholder.

E. Publicity Bye-laws are generally registrable at the relevant companies registry and so open to public inspection. The loss of privacy must be weighed against the advantage that third parties may be deemed to have notice of the bye-laws (see Remedies for breach). A shareholders' agreement will normally be a private document that does not need to be registered.


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F. The Company as a Party The bye-laws determine the company's actions and will generally bind the company and the shareholders. The company can also be made a party to the shareholders' agreement and this may be useful if the company has any obligations under the agreement, particularly where the company has a high degree of autonomy from the joint venture parties. In such situations the company may be put under an obligation, for example, not to sell assets. Non-compete and confidentiality obligations are also common.

Practice varies: for example, in the UK the company is sometimes (although more often not) a party to the shareholders' agreement, although clauses that fetter its statutory powers may be void. In most civil jurisdictions (including Germany and Spain) the company will not generally be a party to the shareholders' agreement.

G. Remedies for Breach A breach of the shareholders' agreement gives rise to contractual remedies, notably damages (which may be difficult to quantify). Breach of the bye-laws may make a transaction void in many jurisdictions - for example, a transfer of shares to a third party in breach of pre-emption requirements. Further, as mentioned above, third parties will generally be deemed to have notice of the bye-laws. A minority shareholder may therefore be better protected by provisions in the bye-laws than in a shareholders' agreement.

(See box, Which document?, below)



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Which Document?

H. Drafting Some joint venture companies will have a full set of bye-laws because, in theory, they provide a greater level of protection for the parties:

■ They regulate the company itself.

■ They automatically bind new shareholders.

■ More effective remedies may be available for breach.

Possible advantages of inserting provisions in a shareholders' agreement include:

■ Any provision agreed between the parties can be included in the shareholders' agreement without the statutory constraints that apply to the bye-laws (subject to national laws that provide that certain provisions are in contravention of company law and void, for example, in France).


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■ It is generally easier to draft detailed provisions in a shareholders' agreement because they do not have to be phrased in such general terms as bye-laws.

A common division of provisions between the two documents is:

■ Shareholders' agreement:

• object and scope of the venture;

• capitalisation and funding;

• board composition and management arrangements;

• distribution of profits (including dividend policy);

• provisions for dealing with deadlock;

• termination provisions; and

• restrictive covenants.

■ Bye-laws:

• rights to appoint and remove directors;

• quorum (board and shareholder meetings);

• procedures for shareholders' meetings;

• division of shares into classes (if permitted by law);

• chairman's casting vote (if any) at board meetings; and

• notice provisions.

■ Choice likely to depend on country of incorporation:

• share transfer provisions (including pre-emption rights); and

• minority protection.

(See box, Common provisions)



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Common Provisions

It is important to avoid conflicts between the two documents. It is common in the UK to provide that, in the event of conflict, the shareholders' agreement prevails. But in other jurisdictions, such as France, the bye-laws may automatically prevail in case of conflict although it can be timed to provide for a different hierarchy under the provisions of the shareholders' agreement.

I. About the Authors of Section III Danielle Heath is a partner and Simon Howley is a professional support lawyer in CMS Cameron McKenna LLP.


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IV. Intellectual PropertyIt is becoming increasingly common for companies to combine forces in order to maximise business opportunities, particularly in the area of technology. Only rarely can a single company undertake every aspect of, for example, invention, development and exploitation by itself. A company may decide to contract out such activities, or to collaborate with a third party with different skills or resources. Such a collaboration may take the form of a joint venture.

This note considers the main contractual issues relating to intellectual property (IP) rights that are likely to arise in an international joint venture. Despite the trend towards international harmonisation of IP rights, the rules relating to the protection and enforcement of IP rights are still primarily to be found in national laws. On any international transaction it therefore remains necessary to consider local laws applicable to the relevant rights, and, if necessary, to take local legal advice (for discussion of local trade mark and patent laws in a number of key jurisdictions worldwide, see the IP in Business Transactions Multi-jurisdictional Guide and the Life Sciences Multi-jurisdictional Guide).

The individual IP rights that will be relevant to any particular joint venture will, of course, depend on the business of the joint venture, but one or more of the rights described in the box, Summary of intellectual property rights are likely to be relevant.

It is assumed for the purpose of this note that two companies are establishing a joint venture in the form of a limited liability company (a commonly encountered form of joint venture vehicle: see Section II), and that the joint venture will undertake research and development (R&D) together with production and distribution. It is also common for companies to combine forces in a joint venture without establishing a separate corporate entity for this purpose. Many of the IP issues referred to in this note will also apply to such a 'contractual' joint venture. In these circumstances, however, as there will be no legal distinction between the parent companies and the joint venture, it should be noted that the licensing of IP rights by one parent for use by the joint venture may require disclosure of those rights to the other parent.

It is helpful to analyse IP issues relating to joint ventures in the context of the three phases of a joint venture:

■ Formation.

■ Operation of the joint venture.

■ Termination.

This note covers issues with international and cross-border relevance from the authors' English law perspective. The application of competition law to the IP aspects of joint ventures must also be considered carefully.



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A. Formation

1. Rights to Be Contributed by Each Party

On formation of the joint venture, the key issue is to establish what IP rights will be contributed to the joint venture by each of the joint venture parties, and at what time. In many respects, this is a similar process to the due diligence exercise which must be carried out when acquiring IP rights on the sale of a business:

■ Establish whether the IP rights that will be needed by the joint venture are owned by the joint venture parties, or whether they are licensed (or sub-licensed) to them by the parties;

■ Consider whether there is a need for the parties to disclose any know-how and other relevant IP-related information to each other and/or to the joint venture.

■ Whether warranties or indemnities regarding such matters as ownership and non-infringement should be given; and

■ Decide upon the value to be attributed to the IP rights.

Such an approach will be especially relevant where the IP rights are particularly valuable within the context of the transaction, or where one party is contributing IP rights and the other is primarily contributing capital.

Valuation of IP rights is important, as the IP rights may form a key component of each party's contribution to the joint venture, and may have an important impact on the ultimate balance of power between the joint venture parties.

2. Access to Rights

It is then necessary to consider how the rights will be injected into the joint venture and at what time, which will in turn depend on the degree of access to the rights which the joint venture parties wish to retain.

Generally, joint venture parties prefer to license the necessary rights rather than transfer them absolutely by way of assignment. An assignment could mean the loss of the rights on the insolvency of the joint venture, whereas a licence normally gives the licensing party greater control (for example, enabling it to terminate the licence in specified circumstances, such as the insolvency or default of the joint venture). In addition, by expressing a licence to expire at the end of the term of the joint venture, the rights automatically revert to the joint venture party when the joint venture reaches the end of its anticipated lifespan. A similar result may be possible on an assignment by providing for the automatic re-assignment of the rights at the end of the joint venture, but this requires additional steps at the end of the joint venture, and could mean that the rights are more likely to be lost if the joint venture becomes insolvent. It could also involve complicated valuation and tax issues.


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The key terms of any licence or assignment should be settled. A licence or assignment should be formalised in writing and contain all the usual commercial terms, as (among other factors) the arrangement may continue after the relevant party has disposed of its interest in the joint venture. In the case of a licence, it is necessary to decide whether it will it be exclusive (so that only the joint venture may carry on the licensed activities, to the exclusion of the licensor itself and all third parties), sole (where only the joint venture and the licensor may carry on the licensed activities, to the exclusion of third parties), or non-exclusive (so that there is no restriction on the licensor carrying on the licensed activities or permitting others to do so). What will be the scope of the licence (both in terms of the geographical coverage of the joint venture and any restrictions on its use of the underlying rights)? Who will have the right to bring and defend infringement claims and how will any contribution or proceeds be divided? Will the licence be subject to valuable consideration or no consideration? What form of payment will be made? Royalties on sales of products may be appropriate in a production joint venture, but an initial payment may be appropriate in a joint venture purely for R&D where royalties will not arise. Each of these outcomes will have tax implications for the parties to the joint venture and the joint venture itself. In the case of an assignment, consider whether a partial assignment may be appropriate where, for example, the rights in question are for a particular territory or for a particular use (although, while legally possible, this may present difficulties unless the separate fields of the two users are clearly defined and continued use by both does not prejudice the validity or strength of the IP rights). Where rights are to be licensed back to the parties by the joint venture, consider the appropriate payment which is to be made for this benefit.

Consideration should also be given as to when IP rights will be injected into the joint venture. If the joint venture is speculative and certain IP rights are particularly valuable and confidential, then it may be worth delaying their injection until they are absolutely required and the joint venture has made some progress.

The contribution of IP rights may affect what other resources should be contributed to the joint venture. For example, the contribution of patents or know-how will be compromised if the personnel who have knowledge of the underlying technology are not transferred or made available to the joint venture.

B. Operation of the Joint Venture

1. Ownership of New Technology

The question of who owns new IP rights created by the joint venture is of fundamental importance, particularly in the case of joint ventures whose main object is to generate new IP rights through R&D.



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In the absence of a specific provision in the joint venture agreement, the default position at law as to the ownership of IP rights will apply. In general, this provides that the creator of the IP right will own that right, except in the case of works made by employees in the course of their employment, where generally the employer will be the owner. This may result in the ownership of any given new IP vesting in the joint venture company itself, being co-owned by the joint venture company and either or both of the parents, or the ownership of various IP rights in a service or product being separately owned by any of these parties.

Regulating the ownership of new IP rights is often, therefore, preferable. If it is intended that ownership of new IP rights created by the joint venture should vest in one or both of the parents, an assignment to the parent of the relevant new IP rights will be required. Another ownership option is co-ownership of the new rights by the parents as well as, or instead of, the joint venture. This may be suggested from a commercial perspective as a straightforward approach to sharing the benefits of the joint venture's research. In many jurisdictions, however, laws relating to co-ownership of IP rights make this an unattractive option in practice. In the UK, for example, the general position is that co-owners may only exploit the jointly held rights themselves, and each co-owner may not assign or license the rights to third parties without the consent of the other co-owner (which may not be forthcoming if the other has a different policy towards the exploitation of the rights). Other jurisdictions prohibit separate exploitation without the consent of the other co-owner. In the US, on the other hand, co-owners of patent rights have considerable freedom to exploit the rights individually (though this can mean that rights could be devalued if, for example, one party decided to license the rights widely or at very low royalty rates). If one or both parents are to own the new IP rights, it will be necessary to provide a mechanism for identifying those rights and transferring ownership of them back to the relevant parent or parents, and for licences to be granted back to the joint venture. However, any arrangement which gives a parent exclusive control over new IP rights created by the joint venture under licence from that parent may not be viewed favourably from a national or an EU competition law viewpoint (if relevant).

Whichever model of ownership is selected, the parties will have to decide what, if any, rights each of the parents will have to use the new IP rights. In particular, will either of the parents be permitted to use those new IP rights to compete with the joint venture or with the other parent? Likewise, will the joint venture be restricted from using its newly created IP rights to compete with either of the parents? Each of these restrictions would require a national and EU competition law analysis (if applicable).

The question may also arise as to whether the joint venture should have access to new IP rights that are independently developed by the joint venture parties, where such rights are relevant to the research or business of the joint venture. Provision may be made, for example, for any such rights to be automatically licensed to the joint venture, or for the joint venture to have an option over the rights, in which case it will be necessary to agree procedures to identify such rights and to decide what payment and other terms which will apply to such arrangements. Again, where relevant, national or EU competition law considerations should be borne in mind here.


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2. Protection of New Technology

It will be important to consider what steps are to be taken to protect and maximise the value of newly developed IP rights. For example:

■ Should the joint venture be obliged to file for protection of and, where possible, proceed to registration of all registrable rights? The parents may have different views on whether a particular invention (assuming it to be patentable) is in fact worth patenting, or as to the territories in which a patent should be registered.

■ How will the costs of such filings (and ongoing maintenance costs) be borne and to what extent will the parents be bound to assist in the process?

■ How will infringements of the rights by third parties be dealt with? For example, one party may have close commercial relationships with a third party infringer of the joint venture's technology, and may not want the other party or the joint venture itself to commence proceedings against that infringer.

3. Exploitation of New Technology

Consideration must be given as to who will exploit the new rights: the joint venture itself, one or both of the parents or a third party? Appropriate assignments or licences of the rights in favour of the exploiting party may be needed. In the EU, restrictions on the access of any party to rights generated by R&D undertaken by it must be considered carefully from a competition law viewpoint.

C. Termination In the case of a corporate joint venture, there may be no need to deal individually with IP rights on termination of the joint venture as the share capital of the joint venture company may vest in either parent through such mechanisms as put or call options. In this case, however, there may still be a need to deal with licences between the joint venture and the exiting parent company.

Alternatively, there may be competing claims for ownership of and rights in the IP rights of the joint venture. It is therefore important to consider at the outset how these rights are to be dealt with upon termination.

The main issue is to decide to which party or parties the rights should be transferred. One party might be granted a first option over some or all of the rights. Another possibility is to provide that any licences granted to the joint venture company will automatically terminate upon termination. This is common in respect of trade marks of the joint venture where those trade marks contain elements of trade marks of the individual joint venture parents.



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Different solutions may apply depending on the reason for termination of the joint venture agreement. For example:

■ Where termination is on the grounds of the default or insolvency of one of the parties, the agreement might provide that all existing licences to the defaulting party cease, as do its rights to any further licences under the agreement.

■ Where one party withdraws from the agreement in circumstances permitted by the agreement (for example, on the sale of its interest in accordance with any specified pre-emption provisions), the agreement could provide that the right of the withdrawing party to future licence rights ceases, but that existing licences continue subject to certain further terms (for example, royalty provisions).

■ There may be specified events in relation to one party (for example, the acquisition of that party by a competitor or intervention by a regulator) which, while not amounting to a default, nonetheless entitle the other party to terminate. In such cases the agreement could provide that the right of the 'exiting' party to further licences ceases, but that existing licences continue. A similar solution may be appropriate in circumstances where each party has a unilateral right to terminate, as may sometimes be found in R&D joint ventures where the nature of the research is particularly uncertain or speculative.

D. Competition law The application of national and EU competition laws may have an important bearing on the structure of the joint venture from an IP perspective, particularly where the joint venture is for the purpose of R&D. Competition law should therefore be considered at the earliest possible stage. (See Section VI.)

E. Summary of intellectual property rights ■ Patents. The inventive aspect of a new product or process with industrial

application and which is non-obvious may be protected by a patent. Patents are national rights and there is variation between countries as to what inventions qualify for patent protection. It is also possible to obtain a European Patent which is granted by the European Patent Office. These are centrally processed but are in effect bundles of national patents, which are enforceable in whichever of the 38 states the patentee has designated in Europe. A new unitary patent right in Europe is currently being developed (the "Unitary Patent") which will provide patent owners with the opportunity to obtain protection throughout the European Union (currently with the exception of Spain and Italy). It is planned that these, together with existing and future European Patents, will be enforced centrally in a new unified patent litigation system (the Unified Patents Court).


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Patents can be granted for many matters, such as a chemical compounds, drugs, mechanical devices (such as a can-opener) and methods for doing things (for example, a new process for dyeing fabric). In some jurisdictions, such as France and Germany, there is a similar but lesser form of protection in the form of petty patents (also known in some jurisdictions as utility model patents or utility certificates).

■ Copyright. This protects the form in which ideas are expressed (but not the ideas as such). A wide range of literary, artistic and other works are protected by copyright and, importantly, computer software may be protected by copyright. Rights in copyright works are national but, as a result of international conventions, most types of copyright work are automatically protected in most countries. Examples of literary works protected by copyright could include (depending in certain jurisdictions on the level of creativity involved in producing them) design specifications, reports, marketing plans, instruction manuals, materials stored on disks or transmitted over the internet or by means of intranets, computer software and, in certain circumstances, databases (though databases are also afforded separate protection in the EU: see below). Examples of artistic works could include (subject to the same qualification as to creative input) flow diagrams, charts, maps and graphic design materials such as product packaging or promotional materials.

■ Database right. In the EU, the database right is a specific right which protects databases (i.e. collections of data organised so that their contents can easily be accessed, managed and updated) in which there has been substantial investment in obtaining, verifying or presenting the contents. Databases may also be protected, in certain circumstances, by copyright.

■ Rights in designs. Certain novel designs for products may be protected as designs; for example, designs for household goods, sports equipment and fashion items. These may be protected by the UK registered design right, the EU registered design right or the EU unregistered design right. In the UK, a separate unregistered design right protects certain aspects of the shape or configuration of an article which are not commonplace.

■ Trade marks. A trade mark is any sign which can be graphically represented and used to enable the purchasing public to distinguish one trader's goods or services from the goods or services of other traders. The sign may be words, for example "Christian Dior", a shape such as the triangular shape of "Toblerone" chocolate, or even a colour or a sound. Registration of a trade mark protects the use of the mark in relation to a specific class of goods or services. Registered trade marks are granted on a national basis, although in the EU it is possible to obtain Community registered trade marks which cover all EU countries and an international system for making an application across various signatory countries exists in the form of the Madrid system.

■ Passing off and unfair competition. Trade marks (whether registered or unregistered) may also be protected in some jurisdictions under passing off or



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unfair competition laws. These forms of protection may be slightly wider than registered trade mark protection, insofar as they may protect not only the mark itself, but also the trading style or manner of presentation of goods or services. However, before commencing an action for passing off, for example, it must be shown that the business has established goodwill in a particular trading style or logo, and that such goodwill has been damaged by the alleged unlawful activities. Goodwill may be difficult to prove in the case of a joint venture which has only just started trading.

■ Confidential information and trade secrets. Although not IP rights as such, national laws of confidential information and trade secrets prevent the use or disclosure of confidential information or trade secrets in certain circumstances. These laws may be particularly useful where information which is valuable to a business cannot be protected by IP rights. Technical know-how, for example, can be protected as confidential information or trade secrets. While a patent will provide its owner with a monopoly to exploit the relevant trade secrets for up to 20 years, it requires disclosure of the invention claimed and competitors will be free to use that invention at the end of the patent term. Companies therefore commonly rely on laws of confidential information to protect their trade secrets, so as to avoid having to disclose those secrets in the patent application process. Indeed, the publication of an invention before a patent is applied for will in most cases destroy any prospect of subsequent patentability. At present national laws must be relied on to protect trade secrets. harmonised legislation in the EU is currently proposed to align these existing laws.

F. About the Authors of Section IV

1. Rob Sumroy, Partner

Slaughter and May

T +44(0)20 7090 4032 E [email protected] W www.slaughterandmay.com

Areas of practice. Intellectual Property; Information Technology; Outsourcing.

Recent transactions. Rob’s recent work includes advising:

■ STAR India and STAR Middle East on their successful bid for the global audio-visual rights for ICC Events from 2015 to 2023.

■ CSR, a leading designer and developer of silicon chips and software for the consumer electronics market, on a high profile global mobile connectivity and technology licensing deal with Samsung.


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■ Bloomsbury Publishing Plc on the acquisition of Hart Publishing Ltd, the Oxford-based legal publisher.

■ Royal Mail on a major, strategically important and transformational IT and outsourcing project.

■ Marks & Spencer in relation to its global franchising network.

■ Ericsson on a number of key strategic network management services arrangements with leading telecoms providers and on Ericsson’s successful court case against H3G.

Professional associations/memberships. Rob is a member of the PLC, IPIT and Communications Law Editorial Board as well as the Communications Law Editorial Board and the Outsource Magazine Editorial Board. He also sits on the National Outsourcing Association’s Cloud Computing Steering Committee.

Publications. Rob writes regularly for Practical Law. In addition to authoring the section on Intellectual Property in International Joint Ventures, he contributes to the Multi-jurisdictional Guide on Outsourcing and writes regularly for PLC magazine (for example “Electronic Signatures – are we getting there?” (March 2012) and "A digital single market: the European Commission unveils its strategy" to be published in the June 2015 issue). Rob has also written several articles for Outsource Magazine.

2. Hardip Shokar, Associate

Slaughter and May

T +44(0)20 7600 1200 E [email protected] W www.slaughterandmay.com

Areas of practice. Intellectual Property; Information Technology; Outsourcing

Recent transactions

■ GlaxoSmithKline on its major tri-partite deal with Novartis, and in particular on IP matters relating to the establishment of a consumer health joint venture.

■ Rolls-Royce on the IP aspects of the formation of a long-term joint venture with Hispano-Suiza that will use the complementary resources and expertise of its two parent companies to develop world-leading accessory drive train transmission systems for Rolls-Royce civil aero engines.

■ Royal Mail on a major, strategically important, transformational IT and outsourcing project.



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■ Ericsson in various outsourcing related matters including the renegotiation ofexisting arrangements and the development and on-going management of itsmanaged services arrangements with key mobile customers.

■ The Cabinet Office on its regulated procurement to put in place identityassurance arrangements for GOV.UK Verify.


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V. Control and Minority Protection The question of control can be complex. In a corporate joint venture it is easy to assume that the party making the biggest investment will have the biggest say in the management of the venture. But surveys of joint ventures in America, Europe and Japan have tended to show that success is more likely where there is a true balance of power rather than a strong and weak party.

Every joint venture starts as a blank sheet. The degree of autonomy of the joint venture from the joint venture parties and the level of control or influence enjoyed by each party will be different depending on the individual circumstances of the parties and the nature of the proposed venture.

The identity of the joint venture parties and the proposed business of the joint venture will determine to some extent the powers and controls that the parties are given, whatever the size of their contribution (if any). For example:

■ In a 60:40 joint venture between competitors both of which bring significantassets and expertise to the venture, the minority might expect sharedmanagement and extensive veto rights.

■ But if one party is a customer of the other, it might expect less managementcontrol if the business of the venture is closer to the other's business.

■ Conversely on a 50:50 joint venture, one party may be given managementcontrol. This was the proposed structure of the Time Warner/EMI joint venturewhere it was proposed that Time Warner could appoint six of the elevendirectors. (This deal was blocked by EU competition authorities.)

Greater importance attaches to control and minority protection provisions in multi-party joint ventures and where there is a greater disparity between the size of each party's investment.

This note focuses on the minority shareholder's perspective. However, it is important to remember that the major player or players will be equally keen to bolster their positions in the company. The success of the minority shareholder in entrenching his position will depend upon the relative bargaining powers of all parties.



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A. Approach to Minority Protection When considering minority protection it is helpful to take a systematic approach following three steps:

1. Step 1- Identify All Potential Areas of Conflict

A sensible starting point for the minority in approaching these issues is to identify all the matters that could arise in the management of the joint venture where the interests of the parties could diverge. For example:

■ Business plan.

■ Access to profits.

■ Future investment requirements.

■ Future finance (share issues/loans).

■ Acquisitions/disposals.

■ Change of business.

■ Access to intellectual property and research and development.

2. Step 2 - Divide the Areas into Three Categories

Having identified areas of potential conflict, the minority should then consider how important each issue is and what type of control he requires over decisions relating to these matters. These items may be divided into three categories:

■ Matters over which the minority would require a veto.

■ Matters over which the minority should have a positive right of action (for example, to appoint and remove a quota of directors).

■ Matters on which a majority vote will be acceptable.

3. Step 3 - Divide Board and Shareholder Powers

In a corporate joint venture there is then an additional question to answer: who should have control over each matter: the board or the shareholders? (Most countries recognise a division between board and shareholder powers but this is not universal. In China, for example, the board of directors is the supreme decision-making body in limited liability companies and there are no shareholder meetings).

The distinction can be crucial. In most jurisdictions, the directors of the joint venture company owe their fiduciary duties and obligations to the joint venture company and not to the shareholder that appoints them. Shareholders may act in their own self-interest


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subject to any obligation to act in good faith and statutory provisions or case law relating to abuse of their majority position.

A further potential complication is that the directors of the joint venture may begin to muddle their allegiance to the joint venture company and their loyalty to the party that appointed them.

The documents can detail the division of power between the management and shareholders of the joint venture company or alternatively, in a 50:50 venture, the structure may be such that the deadlock provisions will ensure that appropriate decisions are made at the joint venture party level. It is best practice even in a 50:50 venture to define the extent of each party's control because of the independence (at least as a matter of law) of the company's management.

Many clients will have a pre-existing policy on joint ventures covering the powers they would be prepared to concede to a minority partner and the powers they would expect to maintain if they were a minority stakeholder in a joint venture.

B. Defining Powers of Directors and Shareholders Whatever approach is used, ensuring that the client has appropriate control or protection depends on defining the powers of its appointed directors and its powers as a shareholder and ensuring that this is appropriately documented.

1. Directors

■ Appointment and removal. What power does each party have to appoint and remove directors? What proportion of the board is appointed by the respective parties?

■ Veto. What powers of veto do those directors have and when? What happens when any veto is used?

■ Quorum. Is there a requirement for directors appointed by all parties to be present for a quorum? Care is needed with the quorum provisions. For example, if one of the directors that a party wants to appoint to the board of the joint venture company is often abroad, it is important to ensure that notice must be given to directors abroad.

■ Chairman. Who appoints the chairman? Is he/she to have a casting vote? Even where the chairman does not have a casting vote he/she often exercises considerable influence over meetings.



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2. Shareholders

What rights will the parties have as shareholders? In a 50:50 joint venture the rights of the shareholders will be based on the division of control between the joint venture company board and the joint venture parties. The extent of shareholder rights will be more of an issue where there is a minority shareholder.

C. Documenting Minority Protection It is possible for a minority shareholder to build protection into the joint venture documents in a number of ways.

1. Bye-laws

The method of protection will depend on the law of the joint venture company. Few jurisdictions allow a company to fetter its statutory rights. For example, in the UK a company's bye-laws can be amended by a 75% majority; a provision in the bye-laws allowing a 10% shareholder to veto amendments would be invalid. (Note however that other jurisdictions (such as Germany and Italy) sometimes allow bye-laws to provide for stricter voting requirements.)

It may also be possible to give an effective veto right in some other way. For example, in the UK, the shares of a company can be divided into different classes. It is possible to provide that certain matters (such as amendments to the bye-laws) are deemed to be a variation of class rights and therefore require the approval of that class of shareholder.

Alternatively, the bye-laws may provide for weighted voting rights. So, for example, on a resolution to amend the company's bye-laws, all shareholders are deemed separately to have a sufficient number of votes to defeat the resolution.

Another option would be to provide that a representative of each shareholder should be present at general meetings in order for the meeting to be quorate. A minority shareholder could then ensure that a resolution cannot be passed simply by not turning up at meetings - although the law of the relevant jurisdiction may provide recourse to the courts in order to overcome this tactic; or shareholder decision-making might be possible by written resolution of the requisite majority.

2. Shareholders' Agreement

It is also possible to list the matters over which the parties are to have a right of veto in the shareholders' agreement providing that the company cannot do any of the things listed without the consent of all parties (see Standard document, Minority shareholder protection). (If


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the company is a party to the shareholders' agreement, care should be taken not to fetter its statutory powers. Any such provision may be void.)

D. Relationship Between Joint Venture Parties and the Company A related question to control and the protection of minority rights is how to ensure that the joint venture parties (and other members of their corporate group) do not circumvent the agreed arrangements. The following are possible protections:

■ Audits of any transactions between the joint venture parties and the joint venture (for example, if one of the joint venture parties supplies materials to or manages the joint venture).

■ Non-compete clauses seeking to prohibit the joint venture parties from competing with the joint venture company during the life of the joint venture. In most jurisdictions these will need to be reasonable in order to be enforceable.

■ Non-solicitation clauses covering customers and employees. Again, these will need to be reasonable in order to be enforceable.

■ Confidentiality undertakings. The shareholders' agreement will usually require each party to keep information about the joint venture and each other confidential.

■ Conflict provisions setting out how disputes between the joint venture company and a joint venture party are to be handled (for example, to avoid that party’s appointees to the board of directors being able to prevent the joint venture company from enforcing its rights). This is particularly important where a joint venture party enters into a commercial arrangement with the joint venture company. In practice, negotiation of these terms can be contentious, as the party concerned may well anticipate that the other party’s appointees will take unfair advantage.

E. Local Laws Having decided what forms of protection the minority requires, advice should be obtained from local lawyers in the joint venture vehicle's country of incorporation:

■ What, if any, protections are automatically given to a minority shareholder under local law (for example, provisions against abuse of a majority position and the right to appoint a defined number of directors)?

■ Can additional protections be given?



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■ If so, should they be contained in the company's bye-laws or a shareholders'agreement?

■ How easy will they be to enforce and what remedies are available?

Most forms of protection are available in most jurisdictions provided that the appropriate joint venture vehicle is chosen.

For example, in France, legislation relating to the société anonyme (SA) is quite rigid. Any attempt to alter the voting requirements at general meetings has to be regarded as invalid (whether in the bye-laws or a shareholders' agreement). But the société par actions simplifiées (SAS) is much more flexible:

■ Voting agreements are valid.

■ The majorities required for votes and quorum requirements can be fullydetermined without restriction.

F. About the Author of Section V Danielle Heath is a partner and Simon Howley is a professional support lawyer in CMS Cameron McKenna LLP.


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VI. CompetitionThe creation and operation of a joint venture can be subject to competition regulation in every jurisdiction that it affects. By way of example, a UK-based joint venture can be subject to the UK's competition regime and/or the competition regimes of the EU and of any other jurisdiction in which it has an economic effect. In addition, the venture can be caught by merger control provisions and/or prohibitions against anti-competitive agreements, and, more rarely, by prohibitions against the abuse of a dominant position.

This note summarises the regulation of joint ventures under EU competition law. Key aspects of national laws are considered in the country-specific information at the end of the note. US merger control law is also considered.

The application of EU competition law to joint ventures differs, depending primarily on whether or not the venture is a full-function joint venture or purely co-operative. Full-function joint ventures are potentially subject to the EU Merger Regulation (Regulation 139/2004 OJ 2004 L24/1, Merger Regulation). If a full function joint venture falls within the scope of the EU Merger Regulation, it is subject to both a merger-style analysis and a review of the aspects that have as their object or effect the co-ordination of the competitive behaviour of the joint venture parents outside the scope of the joint venture (see Article 101 and joint ventures, below). Purely co-operative joint ventures are potentially subject to Article 101 of the Treaty on the Functioning of the European Union (Article 101).

In the US, the creation of a joint venture may subject the parties to the notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The requirements of this Act, and therefore its application to the new joint venture, vary depending upon whether the new venture is a corporation or an unincorporated entity.

A. EU Merger Control The EU Merger Regulation may apply to any concentration that has sufficient nexus with the European Union (see EU dimension below), whether or not the parties to the transaction are based in the EU.

The EU Merger Regulation is supplemented by the Implementing Regulation (Commission Regulation 802/2004 OJ 2004 L133/1, as amended by Regulation EC 1033/2008, OJ 2008 L279/3), which sets out the procedures for:

■ Calculating time limits.

■ Accessing documents, requesting hearings and the submission of commitments.

■ Submitting notifications as required under the EU Merger Regulation.



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On 10 July 2007, the Commission adopted a Consolidated Jurisdictional Notice on the control of concentrations between undertakings (Jurisdictional Notice) (OJ 2008 C95/1) (see Legal updates, Commission consults on new consolidated merger control jurisdictional notice and Commission adopts consolidated merger control jurisdictional notice). This provides formal guidance to help Regulation, and includes guidance on what may be considered a full-function joint venture for EUMR purposes.

More recently, the European Commissioner launched a consultation on whether the jurisdictional scope of the EU Merger Regulation should be extended to cover acquisitions of minority shareholdings that do not confer "decisive influence" (see below), but do nonetheless allow the acquirer to influence the competitive strategies available to the joint venture, or create incentives for the parent to refrain from competing with the joint venture (see Commission consultation on measures to improve the effectiveness of EU merger control).

1. Substantive Test

The EU Merger Regulation allows the Commission to examine "concentrations" with an "EU dimension" for their compatibility with the internal market. Concentrations are incompatible, and so can be prohibited, if they significantly impede effective competition in the internal market or in a substantial part of it in particular as a result of the creation or strengthening of a dominant position.

The Commission's analysis focuses on the economic impact of a concentration in the marketplace. Some guidance as to the Commission's approach is provided by the Commission Guidelines on the assessment of horizontal mergers (OJ 2004 C31/3). The Commission has also issued Guidelines on the assessment of non-horizontal (for instance, vertical and conglomerate) mergers (OJ 2008 C265/7).

One important aspect of the Commission's approach to assessing joint ventures is that if the controlling parent companies retain interests which compete with the activities of the joint venture, those outside interests will often be combined with those of the joint venture for the purpose of assessing its competitive effects. For example, if a joint venture will have a market share of 30% in a relevant market and one of its shareholders retains a separate competing business that has a market share of 30%, then the Commission will typically view the joint venture as giving rise to a combined market share of 60%, notwithstanding that there are other controlling shareholders that may act to prevent or inhibit a complete alignment of conduct between the joint venture and the competing shareholder.

a. Jurisdictional Test

There are three principal questions that determine whether the EU Merger Regulation applies to a joint venture:

■ Is there an acquisition of joint control?

■ Is the joint venture a full-function joint venture?

■ Does the joint venture have an "EU dimension"?


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The Jurisdictional Notice provides formal guidance to help firms to establish whether these criteria are met.

2. Joint Control

For a joint venture to constitute a concentration under the EU Merger Regulation it must be jointly controlled. An acquisition of sole control will be a concentration in the form of a merger or acquisition.

Joint control exists where two or more undertakings are each able to exercise decisive influence over another undertaking. Decisive influence refers to the power to block actions which determine the strategic commercial behaviour of an undertaking. Cases of joint control have been found to exist in the following situations:

■ Where the participants have equal voting rights. It is not necessary for a formal agreement to exist between the participants (Jurisdictional Notice, para 64).

■ Where a minority shareholder has the right to veto key strategic decisions, such as in relation to the appointment of senior management, determination of budget, business plan, and so on (Jurisdictional Notice, para 65-73) (for example, British Steel/Europipe, Case No. IV/M.1014).

■ Where minority shareholders act together (for example, Channel Five, Case No. IV/M.673) (Jurisdictional Notice, paras 74-80) in a way that allows them to exercise decisive influence collectively..

The key factor for joint control under the EU Merger Regulation is the ability to veto strategic decisions of the joint venture. Accordingly, joint control can be held even by a party who is not a shareholder and has no equity or ownership rights, provided that party has been granted sufficient control rights by contract (for example, Lehman Brothers/SCG/Starwood/Le Meridien, Case COMP/M.3858). Conversely, joint control may not be held if a shareholder has a large minority equity interest but insufficient control rights (for example, see Ryanair/Aer Lingus, Case COMP/M.4439, where a shareholding of as much as 29% did not confer decisive influence, given, among other things, the presence of another, active minority shareholder).

The EU Merger Regulation covers operations resulting in the acquisition of sole or joint control, including operations leading to changes in the quality of control (Jurisdictional Notice, paras 83-90). So, for example, transactions that result in changes to a joint venture's controlling shareholders, or a change from joint control to sole control, or vice-versa, will be notifiable if the other jurisdictional criteria are met.



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2. Full-Function

A joint venture will be a full-function joint venture if it performs on a lasting basis all the functions of an autonomous economic entity on the market. There are three essential characteristics:

■ Functional autonomy. The joint venture must have sufficient resources to operate independently on a market (Jurisdictional Notice, paras 94-102). Where the joint venture is substantially dependent on its parents for its purchases or sales, this may preclude the joint venture from having functional autonomy. In addition, a joint venture will not be full-function if it only takes over one specific function within the parent companies' business activities without its own access to or presence on the market (for example, for joint ventures limited to R&D or production). The joint venture need not have autonomy with regard to its commercial strategy (if it does, it may not satisfy the requirement for "joint control" described above), but must have independence in relation to its day-to-day operations.

■ Duration. The joint venture must be "intended to operate on a lasting basis". In this context, a three-year fixed-term joint venture has been held insufficient (Banco/Santander/BT, Case No IV/M.425) but a seven-year term has been accepted (Go Ahead/VIA/Thameslink, Case No IV/M.901). Deadlock and termination provisions do not preclude the joint venture from satisfying this part of the test.

■ Resources. The joint venture must have the necessary resources in terms of finance, staff and assets to carry out its activities for the duration envisaged.

If the joint venture is a full-function venture, it will be a concentration for the purposes of the EU Merger Regulation.

3. EU Dimension

Deciding whether or not a joint venture has an "EU dimension" depends on the application of turnover thresholds. A concentration will have an EU dimension if either:

■ The combined worldwide turnover of all the parties concerned is more than EUR5 billion (as at 10 October 2013, US$1 was about EUR0.7) and the EU-wide turnover of each of at least two parties concerned is over EUR250 million; or

■ The combined worldwide turnover of all the parties concerned is more than EUR2.5 billion and the EU-wide turnover of each of at least two parties concerned is over EUR100 million and, broadly, the parties have substantial operations in at least three member states.

But the EU Merger Regulation does not apply in either case if each party concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same member state. Effectively, therefore, if the main impact of the joint venture is in one EU member state, the joint venture will not have an EU dimension. It may, however, still be


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subject to national competition regulations in the member state of its main impact as well as other EU member states.

For the purpose of applying the above thresholds in the context of a joint venture, the "parties concerned" will usually be each of the parent companies with the ability to exercise decisive influence over the joint venture, post-transaction, although where the joint venture is already in existence and active on a market, it too will be a "party concerned". This means that, in principle, the thresholds can be met even if the joint venture has no turnover, presence or assets in the EU whatsoever, provided that its controlling parents have sufficient EU turnover. In practice, while the Commission does require notification of joint ventures with no conceivable nexus to the EU (and will apply the "simplified procedure" described below), the parties concerned will sometimes take the view that the risk of enforcement action by the Commission for failure to notify (which includes potential "gun jumping" fines of up to 10% of the worldwide turnover of the parties that should have notified) is not sufficiently high in such cases to justify the costs and delay associated with making a filing. Where the failure to file a joint venture with no nexus to the EU is inadvertent, a remedial notification to the Commission should mitigate liability for gun jumping fines.

In June 2013, the Commission launched a consultation on whether (among other things) the jurisdictional scope of the EUMR should be limited so that it no longer requires notification of concentrations that do not have any effect in the EEA, such as the creation of a full-function joint venture located and operating outside the EEA, with no conceivable impact on markets in the EEA (see Commission consultation on measures to improve the effectiveness of EU merger control).

The EU Merger Regulation operates as a one-stop shop: once a joint venture falls within its scope, it cannot also be reviewed under the merger regimes of the EU member states. However there are exceptions. Broadly, a joint venture with an EU dimension may still be reviewed in whole or part under the laws of an EU member state if the venture has a particular impact in that member state. This can be effected at the request of the joint venture parties or the member state concerned (for example, Acea/Ondeo Italia/Acque Blu JV, Case COMP/M.5254). Conversely, a full function joint venture that does not have an EU dimension may still be reviewed by the Commission at the request of one or more EU member states (for example, RTL/Veronica/Endemol, Case IV/M.553) or the parties (provided that in the latter case the joint venture would otherwise be examined under the merger laws of at least three EU member states). An EU member state can request that the Commission review the effects of a joint venture within that member state, even if the joint venture is not reviewable under the national merger control laws of that member state (for example, Procter & Gamble / Sara Lee Air Care, Case COMP/ M.5828).

Joint venture parties may prefer to request that the transaction is reviewed by the Commission as this provides greater certainty and avoids the procedural burden of having to notify several European competition authorities.



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4. Procedure

Notification to the Commission of a concentration with an EU dimension is mandatory. A full-function joint venture with an EU dimension must be notified to the Commission prior to implementation of the joint venture agreement. Notification can be made in the absence of a definitive agreement. However, the joint venture partners would need to demonstrate a good faith intention to conclude a binding agreement (for example by signing a letter of intent).

The joint venture agreement may not be put into effect either before notification or until it has been declared compatible. Notification must be made on the Form CO, as published by the Commission. A short form notification is possible for joint ventures that are likely to have minimal activities within the EEA (the EU together with Iceland, Norway and Liechtenstein), as more fully explained in the Commission's Notice on a simplified procedure (OJ 2005 C56/4). The simplified procedure is available to a joint venture where:

■ Turnover of the joint venture and/or the contributed activities in the EEA is less than EUR100 million; and

■ The total value of assets transferred to the joint venture in the EEA is less than EUR100 million.

In March 2013, the Commission issued a consultation on simplifying the EU merger filing process (see Commission consults on proposals to simplify procedures under EU Merger Regulation). This included a proposed amendment to the Notice on simplified procedure which would reserve a right for the Commission to disapply the simplified procedure for certain joint ventures with turnover and assets below the above thresholds, including in situations where the products or services of the joint venture constitute important inputs for products or services that are sold in the EEA, or where the joint venture is likely to achieve significant sales in the EEA in the future.

The Commission must decide within 25 working days from notification (which can be extended to 35 working days if undertakings are offered or a request for referral to a member state authority is received) whether the concentration is to be cleared or if it is to carry out an in-depth investigation, which must be completed within a further 90 working days (with a possible extension of a further 20 working days if requested by the notifying parties, or by the Commission with the agreement of the notifying parties, to allow more time for investigation and another 15 working days if companies offer remedies, unless these were offered less than 55 working days after the initiation of the in-depth investigation).

Parties to a transaction often negotiate undertakings as a way of avoiding the opening of an in-depth investigation. Such undertakings have included the divestment of overlapping businesses (Neste/Ivo, Case IV/M.931) and the regulation of future behaviour (for example, Wegener/PCM/JV Case COMP/M.3817).

For a typical timetable of a Commission investigation under the EU Merger Regulation, see Section VI.F.


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5. Ancillary Restrictions

Restrictive covenants, for example, non-compete covenants, are commonly entered into as part of a joint venture agreement, as are contractual arrangements such as supply agreements and intellectual property licences.

Under the EU Merger Regulation, the clearance of a concentration is deemed also to cover restrictions directly related and necessary to the implementation of that concentration. This means that restrictions which are truly ancillary to the joint venture are automatically cleared with the joint venture at the end of the merger review process.

The Commission has provided guidance on which type of restrictions can be considered ancillary to a full-function joint venture (Notice on restrictions directly related and necessary to concentrations (OJ 2005 C56/24)).

An ancillary restriction is one that is directly related and subordinate to the main object of the joint venture but necessary to its implementation.

Where the concentration involves the acquisition of joint control, the following are generally considered as ancillary:

■ Arrangements relating to the methods of implementing a break-up of the acquired business or company, including sharing-out of production facilities, distribution networks and trade marks among the parties, provided there is no co-ordination of future conduct between them.

■ Non-compete clauses requiring parent companies not to compete with the joint venture, even those which last the lifetime of the joint venture.

■ Licences granted by the parties to the joint venture, even those that are exclusive and unlimited in duration (although if the licence is limited to particular fields of use these fields must correspond to the activities of the joint venture).

■ Purchase and supply obligations, provided that their duration is limited to a period necessary for the replacement of the relationship of dependency (a period of five years is generally considered acceptable).

Restrictions on non-controlling shareholders will not usually be considered to be ancillary.

It is for the joint venture parties themselves to determine whether the restrictions forming part of the transaction are truly ancillary to the implementation of the joint venture. The Commission will not usually make this assessment in its ultimate decision, although it may do so, at the request of the parties, where the restraints concern novel or unresolved questions, giving rise to genuine uncertainty (see recital 21, EU Merger Regulation). Questions that give rise to genuine uncertainty are questions that are not covered by the relevant Commission Notice or published Commission decisions.

Disputes between the parties as to whether restrictions are ancillary fall under the jurisdiction of national courts. Restrictions which are not ancillary will have to be assessed



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under Article 101 and may possibly fit into one of the existing EU block exemptions (see Article 101 and joint ventures).

6. Remedies

Formal undertakings may be given by the parties to a joint venture in order to meet specific competition objections raised by the Commission in the investigation and so obtain clearance of the transaction. The Commission can accept undertakings even before the merger review procedure is opened. The specific requirements for submission of remedies in merger review proceedings are set out in the Commission's Notice on remedies to competition problems raised by mergers and acquisitions (OJ 2008 C267/1), which is supplemented by the Best Practice Guidelines for divestiture commitments. The Commission tends to prefer structural remedies, usually divestiture of assets, rather than behavioural commitments (for example, Telia/Telenor Case IV/M.1439 or Areva/Urenco/ETC Case COMP/M.3099).

7. Sanctions

The Commission has wide powers to impose sanctions:

■ Any concentration that is implemented in breach of the EU Merger Regulation can be separated back into its individual parts and the offending parties can be fined up to 10% of their worldwide turnover.

■ Fines of up to 10% of the parties' worldwide turnover can be imposed for failing to notify a concentration, or for implementing a concentration prior to clearance. Fines of up to 1% of the parties' worldwide turnover can be imposed for giving misleading or false information or failing to comply with Commission requests for information.

■ Fines of up to 10% of the worldwide turnover of offending parties can be imposed for a failure to comply with undertakings given.

■ Daily fines of up to 5% of the parties' average daily worldwide turnover can be imposed for failing to supply information requested by the Commission or failing to comply with a condition of clearance.

The Commission also has wide powers of inspection when carrying out the merger review:

■ To enter any premises, land and means of transport.

■ To examine books and other records.

■ To take or obtain any copies of or extracts from such books or records.

■ To seal any business premises and books or records.

■ To ask any representative or member of staff of the notifying parties for explanations and to record the answers.


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The Commission has used its investigative powers, for example, to examine whether merging parties have implemented a transaction prior to the Commission granting clearance (Ineos/Kerling, Case COMP/M.4734), or where it has indications that the parties may have provided incorrect or misleading information to the Commission (Caterpillar/MWM, Case COMP/M.6106).

The parties to a concentration (and affected third parties) can appeal to the General Court against decisions made by the Commission under the EU Merger Regulation. An example of the complications that may arise as a result of third party appeals is the case of the joint venture between Sony and Bertelsmann Music Group (BMG), which was cleared by the Commission in 2004. In 2006, the General Court annulled that clearance decision of the Commission, further to an appeal by a third party, the Independent Music Publishers and Labels Association (Impala). The General Court found that the Commission's conclusions that the merger would not result, overall, in a significant detriment to competition were not adequately supported by reasoning (Case T-464/04 Independent Music Publishers and Labels Association (Impala) v Commission). While the General Court's judgment was subsequently annulled by the European Court of Justice on appeal (Case C-413/06 P Bertelsmann AG and Sony corporation of America) in the meantime the transaction was re-notified to the Commission and cleared in October 2007. Impala's appeal against this second decision (Case T-229/08 Impala v Commission) and its then-ongoing proceedings before the General Court in relation to the first decision, were both withdrawn after the Commission approved a third transaction in September 2008 involving the acquisition by Sony of Bertelsmann's interest in the Sony BMG joint venture.

8. Article 101 and Joint Ventures

Article 101(1) of the TFEU prohibits agreements or concerted practices between undertakings which may affect trade between EU member states and which have the object or effect of restricting competition within the EU.

Any agreement provisions that infringe Article 101(1) are void and unenforceable, and the agreement parties may be subject to fines (and, possibly, subsequent court actions for damages by third parties who have suffered consequent loss), unless the agreement comes within the exception contained in Article 101(3) or within the scope of a block exemption.

The following joint ventures will be subject to assessment under Article 101 of the TFEU:

■ A joint venture that does not constitute a "concentration" within the meaning of the EU Merger Regulation.

■ The creation of a non-full-function joint venture could breach Article 101, as could any (non-ancillary) anti-competitive agreements between the parties to a joint venture and the joint venture company itself, for example, any exclusive distribution arrangements. Assistance in this analysis comes in the Commission guidelines on the applicability of Article 101 of the TFEU to horizontal co-



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operation agreements (Guidelines on the applicability of Article 101 of the TFEU to horizontal co-operation agreements (OJ 2011 C11/1)) (the Guidelines).

■ A full-function joint venture that is caught by the EU Merger Regulation but involves the actual or potential co-ordination of the competitive behaviour of its parents. In such a case, the joint venture will be assessed not only under the EU Merger Regulation but also under Article 101 criteria, all within the procedures of the EU Merger Regulation. Co-ordination of competitive behaviour may arise because the parents both have activities in the same market as the joint venture or in upstream or downstream or neighbouring markets. In practice, the Commission very rarely finds that a full-function joint venture is likely to give rise to co-ordination of its parents' competitive conduct, in breach of Article 101. One example of a case in which it did is Areva/Urenco/ETC (COMP/M.3099), in which the Commission raised concerns about the parties ability to co-ordinate their activities as a result of the joint venture, leading to possible market sharing and price rises. As a result the parties offered commitments which included the removal of veto rights, reinforcing barriers to information exchange and allowing ongoing monitoring. As a result of the commitments offered, the Commission cleared the transaction.

In most cases clearance is granted in Phase I of a merger procedure, although this is sometimes made subject to conditions (for example, Hutchinson/ECT, Case COMP/JV.56). In the case of some joint ventures (for example, Sonoco/Ahlstrom/JV, Case COMP/M.3431 and Hutchinson/RCPM/ECT, Case COMP/JV.55) the Commission proceeded to a Phase II investigation before granting clearance subject to conditions.

In the case of full-function joint ventures that do not have an EU dimension, the Commission has stated that it will leave the assessment of any co-operative elements to national competition authorities, so far as possible.

Basic principles for assessment of non-full-function joint ventures under Article 101(1). According to the Guidelines, the following do not infringe Article 101(1) unless the parties involved have significant market share and the agreement is likely to cause foreclosure of third parties:

■ Joint ventures between parties who do not compete.

■ Joint ventures between competitors who could not independently undertake the joint venture activity.

■ Joint ventures involving an activity far removed from the marketing level.

Joint ventures that have as their object the restriction of competition through means of price-fixing, output quotas or market or customer sharing will invariably violate Article 101(1), and satisfying the requirements of Article 101(3) will be difficult. An exception to this is production joint ventures which by their very nature envisage that output decisions be taken jointly. Provisions for such joint decisions in production joint ventures should be assessed together with the other elements of the joint venture to determine their competitive effect on the relevant market.


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Joint ventures that do not fall into the categories mentioned above may fall under Article 101(1), depending on the parties' market positions and the structure of the relevant market. The Guidelines set out the relevant factors for the assessment of whether a joint venture is restrictive of competition:

■ Whether the joint venture will cause the maintenance of or an increase in the parties' market power on the markets affected by the joint venture.

■ A low combined market share will usually indicate that a restriction on competition is unlikely and further assessment is not generally required. On the other hand, a high combined market share is not necessarily indicative of a restrictive effect on competition, in particular where one of only two parties has an insignificant share and does not have important resources. The Guidelines do not provide a general market share threshold above which it can be assumed that market power will be restrictive of competition.

■ The number of competitors on the market and their respective market position.

■ Depending on the parties' market position, market share stability over time, barriers to entry, potential competition, buyer power and product characteristics (such as stage in product life cycle) may all be relevant to the assessment of the restrictive effect the joint venture may have on competition.

The Guidelines set out the Commission's approach in relation to specific types of joint ventures:

■ Commercialisation joint ventures cover agreements between competitors for the selling, distribution or promotion of products. Sales joint ventures, by their very nature, have as their object and effect competitor co-ordination of pricing policy, thereby restricting competition. Alternatively a commercialisation agreement may simply be an agreement covering a single aspect of marketing a product, such as advertising. For those joint ventures that fall short of joint selling, the Commission's main concern relates to the prospect of the exchange of sensitive commercial information. In addition, competition at the final sales level may be restricted where the joint venture represents a significant input in the costs of the competitors. The Commission will also be vigilant that commercialisation joint ventures do not lead to market partitioning.

■ Purchasing joint ventures between competitors whereby the joint venture's purchases account for a significant proportion of the total purchasing market, such that the joint venture's buyer power could push prices below competitive levels or foreclose the purchasing market to third parties, will be examined carefully. In addition, the Commission will also be concerned if the purchasing joint venture leads to competitors purchasing a substantial proportion of their inputs together, and at the same price, such that their incentives to compete on the downstream selling market or markets is reduced. In either case, the Commission is concerned that efficiencies from such joint ventures may not be passed on to the consumer if the joint venture (or the parties to it) will have a



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significant degree of market power on the downstream selling market(s). Significant buyer power may also lead to increased prices for third parties, as suppliers raise prices in an effort to recoup price reductions negotiated by the joint venture. The Guidelines indicate that a purchasing joint venture is unlikely to have anti-competitive effects if the parties have combined market shares of under 15% on both the purchasing market(s) and the selling market(s).

■ Production joint ventures that produce an important input into the parties' end product may lead to foreclosure effects where the parties have a strong market position on the relevant input market, and to "spill-over" effects where the input product represents a high proportion of costs and the parties have a strong position on the market for the end product. The Guidelines state that a production joint venture is unlikely to infringe Article 101 if the combined market share of the parties to it is less than 20% (if that is the case then the specialisation agreements block exemption may also apply – see below).

■ R&D joint ventures between non-competitors in most cases will not restrict competition. However, such co-operation may lead to market foreclosure if the R&D results are exploited on an exclusive basis and one of the parties possesses key technology. Likewise, where the parties have significant market power on existing markets, R&D joint ventures between competitors may cause negative effects on the market by restricting innovation, by leading to co-ordination of behaviour or foreclosure effects, again by virtue of exclusive exploitation of results and where one of the parties also possesses key technology.

■ Co-operation which is confined to the theoretical stage, far removed from the exploitation of possible results of the research, co-operation with specialised companies, research institutes or academic bodies which are not active in the exploitation of the results of R&D and co-operation which does not include the joint exploitation of possible results of R&D by means of licensing, production or marketing will most likely fall outside the scope of Article 101(1).

9. Exemptions

Liability under Article 101(1) can be avoided if:

■ A block exemption (available, for example, in respect of R&D agreements, technology transfer agreements, vertical agreements and specialisation agreements) applies, automatically exempting the joint venture agreement from Article 101(1).

■ The joint venture satisfies the requirements of Article 101(3) on the basis of the "legal exception" regime and the pro-competitive benefits of the agreement outweigh the anti-competitive restrictions.

■ The Commission's de minimis notice applies to the joint venture (Notice on Agreements of Minor Importance (OJ 2001 C368/7)).


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• the Notice provides that Article 101(1) will not generally apply to a joint venture where in the case of agreements between actual or potential competitors the combined market share on any relevant market is 10% or less, or in the case of agreements between non-competitors the parties each have a market share, on any relevant market, under 15%;

• however, this "safe-harbour" will not apply if, even despite these market shares, 30% or more of the market is covered by similar agreements (having a cumulative "network effect") and the parties' market share exceeds 5%. In addition, the Notice will not apply if the agreement contains any "hard core" provisions (for example, if an agreement between actual or potential competitors seeks to or has the effect of fixing prices, limiting outputs, restricting sales or partitioning the market in any way, or an agreement between non competitors aims to or results in imposing resale prices or other prohibited restrictions on resale).

a. Block Exemptions

■ R&D block exemption (Regulation 1217/2010, OJ 2010 L335/43), which grants an exemption to certain agreements for joint R&D and joint exploitation of the results, or joint R&D agreements which do not extend to exploitation, provided that certain conditions are satisfied, the most important of which are that:

• all parties have access to the results of the joint R&D for the purpose of further research or exploitation;

• where the agreement provides only for joint R&D (without extending to exploitation), each party is granted access to any pre-existing know-how of the other parties, if this know-how is indispensable for the purposes of its exploitation of the results;

• where there is joint exploitation, it must only relate to results that are protected by IP rights, or constitute know-how, and which are indispensable for the manufacture of the contract products or the application of the contract processes.

The duration of the exemption depends on whether the parties to the agreement are competitors. If they are not competitors, the exemption applies for the duration of the R&D programme and, if the results are jointly exploited, for a further seven years from the time when the contract products are first put on the market in the EU. If the parties are competitors, and the results are to be jointly exploited, the seven-year period applies only if, at the time the agreement is entered into, the combined market share of the parties does not exceed 25% of any market for products, technologies or processes capable of being improved or replaced by the contract product or contract processes. In either case, after the seven-year exploitation period, the exemption may continue to apply indefinitely as long as the 25% market share threshold is not exceeded.



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■ Technology transfer block exemption (Regulation 316/2014 OJ L93/17), which came into force on 1 May 2014, applies to licences of patent, know-how, and software copyright (and combinations of these rights) (replacing Regulation 772/2004 (OJ 2004 L123/11)). A licence to the joint venture from one of its parents can fall within the scope of the block exemption, but only if certain market share thresholds are satisfied. The technology transfer block exemption is structured similarly to the horizontal block exemptions and vertical block exemption, that is, an automatic exemption will apply provided that certain market share thresholds are met and the agreement does not contain certain "hardcore" restrictions. There are different market share thresholds and hardcore restrictions depending on whether the parties are competitors, and if competitors whether the licence in question is part of a wider arrangement under which the licensee grants a reciprocal licence to the licensor.

■ Vertical agreements block exemption (Regulation 330/2010, OJ 2010 L102/1), which applies to agreements entered into between firms operating at different levels of the production or distribution chain, and which relate to the conditions under which the parties may purchase, sell or resell certain goods or services (for example, distribution agreements, exclusive purchasing agreements or franchising agreements, as long as the parties are in a vertical rather than a horizontal relationship). An automatic exemption will apply provided that certain market share thresholds are met and the agreement does not contain certain hardcore restrictions.

■ Specialisation agreements block exemption (Regulation 1218/2010, OJ 2010 L335/43), which applies to specialisation agreements (a form of co-operation whereby one or more parties agree to give up the manufacture of a particular product and instead only to obtain it from another party, or to have the product manufactured only jointly) where the combined market share of the parties to the agreement does not exceed 20%. If the parties to a production joint venture satisfy these thresholds and also jointly distribute the products in question, the specialisation agreements block exemption permits them to fix the prices charged for those products to immediate customers.

All the block exemptions contain certain hardcore restrictions, the inclusion of any one or more of which will automatically take the whole agreement outside the scope of the block exemption, and will be presumed by the Commission to be in breach of the competition rules. In each case, the list of hardcore restrictions is long and should be checked carefully. Examples of hardcore restrictions are price-fixing, certain restrictions on output and bans on passive sales outside the sales territory granted to a party.

b. Article 101(3) "Legal Exception" Regime

If a block exemption does not apply, the parties will need to consider whether the "legal exception" requirements of Article 101(3) are fulfilled or, if commercially feasible, restructuring the arrangements so as to benefit from a block exemption or take the arrangement outside the scope of Article 101(1) altogether.


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The old regime providing for notification and individual exemption of agreements was abolished on 1 May 2004. Instead, parties to an agreement that may violate Article 101(1) must themselves consider whether the requirements of Article 101(3) have been met. Parties to such agreements are expected to be guided by previous Commission and European Court cases and guidance published by the Commission. National courts and national competition authorities are also able to rule on and examine whether the criteria of Article 101(3) are satisfied.

Where a non-full-function joint venture gives rise to genuine uncertainty because it presents a novel issue not provided for in the case law and guidance, the parties can seek individual guidance from the Commission (see Commission Notice on Informal Guidance relating to Novel Questions (OJ 2004 C101/78)). However obtaining such guidance is subject to the discretion of the Commission, and the guidance (published on the Commission website) is not binding on EU courts, national courts or member state authorities. To date, no such guidance has ever been issued.

Alternatively, it may be possible for the joint venture parties to seek informal advice from the national competition authority of a member state affected by the joint venture. This advice can be on Articles 101 and/or 102 and on equivalent national laws. Whether the national authority is willing to give informal advice will depend on the individual procedural rules or position of the particular authority.

Given that the prospect of obtaining certainty for a non-full-function joint venture is limited, the parties may wish to structure their joint venture to fall within the EU Merger Regulation.

The Commission's Guidelines on the assessment of horizontal agreements set out the principles to be applied in deciding whether the requirements of Article 101(3) have been satisfied:

■ R&D joint ventures that do not fulfil the conditions of the R&D block exemption will nonetheless generally be viewed positively. Where considerable market power is created or enhanced through the R&D joint venture, the parties must be able to show significant efficiencies. A joint venture involving both joint R&D and production will usually be assessed firstly on the R&D element of the agreement, given that joint production will only take place where the joint R&D has been a success. However, this will not be the case if only partial R&D integration is envisaged in combination with full integration of production or if the parties would have engaged in the joint production in any event, irrespective of the joint R&D. In such cases, assessment will start with the joint production element of the agreement.

■ Production joint ventures that do not fulfil the conditions of the specialisation block exemption will most likely satisfy Article 101(3) where the parties can show improvements of production or other efficiencies.



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■ Purchasing joint ventures between parties who together do not have significant buyer or seller power may be viewed positively if the cost savings resulting from economies of scale in ordering or transportation are passed on to customers.

■ Commercialisation joint ventures between small producers are more likely to be viewed positively as they are more likely to result in economies of scale or scope. Efficiencies claimed by the parties must be demonstrated. Joint ventures that amount to mere sales agencies are unlikely to satisfy Article 101(3).

10. Sanctions

The risks of a joint venture agreement infringing Article 101 are that:

■ The parties may be ordered to cease operating the agreement, and possibly to undertake such behavioural or structural actions as are necessary to achieve this aim.

■ The parties may be fined up to 10% of turnover.

■ The restrictions (and sometimes the agreement itself) may be unenforceable.

■ Third parties may bring an action for damages or, in appropriate cases, an injunction in the national courts of a member state.

■ The parties may suffer reputational harm.

B. Article 102 and Joint Ventures Article 102 of the TFEU will only apply if the joint venture results in the abuse of a dominant position on the relevant market. Dominance is measured principally (but not exclusively) by reference to market share and involves a careful analysis of the relevant product and geographic market in which the companies operate. In the context of the creation or operation of a joint venture, dominance could arise in a number of ways, including:

■ Where a joint venture is formed between two companies who are competitors in the joint venture company's market, at least one of whom is dominant, and where the joint venture's function extends to sales. In this case, the joint venture will have a similar effect to a merger or acquisition, as the two companies will be deemed to constitute one for the purpose of assessing market share.

■ Where a dominant company forms a joint venture company with a supplier or customer and as part of the arrangement, the supplier or purchaser is to supply to or purchase from the joint venture company exclusively.

Dominance itself is not prohibited, only its abuse. Examples of abuse include:

■ Refusal to supply.


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■ Prices that are predatory (below cost), excessive or discriminatory.

■ Exclusivity arrangements with suppliers or customers, or discount and rebate schemes that create strong incentives for exclusivity.

■ Tying and bundling, in other words conditioning the sale of one product (or the availability of a discount on that product) on the customer's purchase of another, related product.

The penalties for any breach of Article 102 are similar to those for Article 101.

In practice, the Commission is more likely to rely on the application of Article 101 to control the conduct of joint ventures, rather than Article 102.

For a more detailed analysis of the application of EU competition law to joint ventures see Transactions and practices: EU Joint ventures.

C. Relationship Between EU Competition Law and National Competition Laws of EU Member States

When considering the competition aspects of a joint venture, the first question must be "does the EU Merger Regulation apply"? This is because the EU Merger Regulation gives the European Commission exclusive jurisdiction over mergers with an EU dimension. When the EU Merger Regulation does not apply, national merger control regimes within the EU may apply. It is worth noting that, by virtue of the EEA Agreement of 1 January 1994, the EU merger control regime also applies to Norway, Liechtenstein and Iceland.

The Commission's exclusive jurisdiction is, however, subject to limited exceptions, including the right of a member state to carry out a parallel investigation if "legitimate interests" other than competition concerns are affected, or where the Commission, at the request of one or more member states, has referred a notified concentration back to the relevant authority of the member state or states concerned.

If the joint venture does fall within the EU Merger Regulation the parties may nevertheless request that it be examined in whole or part by one or more member states. Conversely, if the joint venture does not have an EU dimension the parties to the venture can request that it be examined by the Commission where it would otherwise fall within the merger control regimes of three or more member states. This latter option may be preferable to avoid the burden of notifying the joint venture to several member state authorities.

Article 101 and equivalent national rules may apply simultaneously to joint ventures which are not full-function, or which (although, in practice, this will be less likely), though full-function, are not of an EU dimension because the relevant turnover thresholds are not met, but may result in the co-ordination of parents' activities outside the joint venture. EU



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national authorities and courts can apply and enforce Article 101 directly in parallel to equivalent national rules.

The circumstances in which joint ventures may be subject to EU and/or national competition rules are summarised in Section VI.G.

D. National Merger Controls All major jurisdictions have some form of statutory merger control. The common triggers for these controls are thresholds based on the parties' turnover, assets or market shares. The substantive tests that are applied are usually related to creating or increasing market power or otherwise reducing competition in the relevant market.

The national regimes of EU member states will not apply where the EU Merger Regulation applies. But where the EU Merger Regulation does not apply, a joint venture may be subject to regulation under a number of different member states' national merger regimes. Other merger laws in non-EU jurisdictions may also apply irrespective of the application or non-application of the EU Merger Regulation. In such cases, co-operation agreements (for example, between the Commission and the US and Canadian authorities) may provide for the sharing of information relating to transactions of common interest (but not confidential information) and detailed consultation and co-operation in respect of cases which may have an effect in the other jurisdiction.

A number of questions need to be addressed in respect of national regimes:

■ What are the triggering events/jurisdictional thresholds?

■ Is notification mandatory or voluntary, and is there an obligation to suspend? Where notification is mandatory, what is the deadline for notifying and what sanctions can be imposed for failure to notify?

■ Who notifies?

■ What authority do you inform?

■ What is the relevant substantive test?

■ What is the time limit for the first stage decision?

■ What is the time limit for a final decision and what decisions can be made?

■ Who do you appeal to?

■ What are the filing fees?

■ Can you complain about competitors?

■ What are the penalties for implementing a transaction before it has received clearance?


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Jurisdictional thresholds are often framed in such a way that they can be satisfied by the turnover, assets or market shares of a joint venture's parents, even if the joint venture has no such sales, assets or presence in the jurisdiction in question (as is the case under the EU Merger Regulation – see above). In such cases (which are, unfortunately, not uncommon), the parties to the joint venture will need to consider whether there is a formal exception from the applicable filing obligation for cases having no conceivable competitive effects in, or nexus to, the jurisdiction in question and, if there is not, consult with their legal advisers and possibly also the local regulator.

E. US Merger Control The following description provides a general overview of the application of the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the formation of joint ventures. The requirements vary as between corporate joint ventures and non-corporate joint ventures, which may include partnerships, limited liability companies formed under the laws of the United States, co-operatives, and business trusts.

1. Formation of a Corporate Joint Venture

The formation of a corporate joint venture is analysed under section 801.40 of the Hart-Scott-Rodino rules. The parties contributing to the corporate joint venture are treated as acquiring persons, while the corporate entity being formed is deemed to be the acquired person. Such formations are analysed as the acquisition by each contributor of voting securities of the newly-formed corporation. A contributor that will hold voting securities of the corporate joint venture is required to file notification and observe a waiting period if all of the following conditions are satisfied:

Any contributor to the joint venture, or any entity included within any such person, is engaged in commerce in the United States or in any activity affecting United States commerce, and either:

■ As a result of the formation, the contributor will hold voting securities of the joint venture valued at more than US$305.1 million; or

■ (i) as a result of the formation, the contributor will hold voting securities of the joint venture valued at more than US$76.3 million but not exceeding US$305.1 million and (ii) either:

• the joint venture will have total assets of US$152.5 million or more and the contributor and at least one other contributor each have US$15.3 million or more in total assets or annual net sales; or

• the joint venture will have total assets of US$15.3 million or more and the contributor has total assets or annual net sales of US$152.5 million or more and at least one other contributor has total assets or annual net sales of US$15.3 million or more.



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For purposes of calculation, the total assets of the joint venture corporation include all assets that any person contributing to the formation has agreed to contribute at any time and any amount of credit or any obligations of the joint venture which any person contributing to the joint venture has agreed to extend or guarantee. Certain assets such as cash are considered exempt assets, which may be excluded when calculating the size of the joint venture. If the joint venture's total non-exempt assets are valued at less than US$76.3 million, then no notification will be necessary. If notification is required, each contributor meeting the reporting thresholds is required to file as an acquiring person. The joint venture corporation is not required to file notification.

2. Formation of a Non-Corporate Joint Venture

The formation of a non-corporate joint venture is analysed under section 801.50 of the Hart-Scott-Rodino rules. The rules relate to all forms of unincorporated entities, including partnerships, limited liability companies formed under the laws of the United States, co-operatives and business trusts.

The parties contributing to the non-corporate joint venture are treated as acquiring persons, while the non-corporate entity being formed is deemed to be the acquired person. Such formations are analysed as the acquisition by each contributor of interests of the newly-formed non-corporate entity.

In contrast to a corporate joint venture, the formation of a non-corporate joint venture is potentially reportable only by any contributor that will hold a controlling interest in the non-corporate joint venture. Control is achieved if a person has the right to:

■ 50% or more of the profits of the non-corporate entity; or

■ 50% or more of the assets of the non-corporate entity upon dissolution.

A contributor that will hold an interest in the non-corporate joint venture is required to file notification and observe a waiting period if all of the following conditions are satisfied:

■ The contributor will control the joint venture; and

■ Any contributor to the joint venture, or any entity included within any such person, is engaged in commerce in the United States or in any activity affecting United States commerce; and

■ Either:

• as a result of the formation, the contributor will hold an interest in the joint venture valued at more than US$305.1 million; or

• as a result of the formation, the contributor will hold an interest in the joint venture valued at more than US$76.3 million but not exceeding US$305.1 million and

■ Either:


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• the joint venture will have total assets of US$152.5 million or more and the contributor has annual net sales or total assets of $15.3 million or more; or

• the joint venture will have total assets of US$15.3 million or more and the contributor has total assets or annual net sales of US$152.5 million or more.

For purposes of calculation, the total assets of the non-corporate joint venture include all assets that any person contributing to the formation has agreed to contribute at any time and any amount of credit or any obligations of the joint venture which any person contributing to the joint venture has agreed to extend or guarantee. Certain assets such as cash are considered exempt assets, which may be excluded when calculating the size of the joint venture. If the joint venture's total non-exempt assets are valued at less than US$76.3 million, then no notification will be necessary. If notification is required, each contributor meeting the reporting thresholds is required to file as an acquiring person. The non-corporate joint venture corporation is not required to file notification.

Several exemptions from the requirement to file are available for the formation of both corporate and non-corporate joint ventures. These include the intra-person exemption (section 802.30 of the HSR rules), the acquisition of interests in entities holding exempt assets (section 802.4), and the exemption of foreign assets or voting securities of a foreign issuer with minimal nexus to the United States (sections 802.50 and 802.51).

F. EU Merger Regulation Timetable

Pre-notification Do as much as possible during this period:

■ Decide strategy as to whether to ask for a reference to the member states or the Commission.

■ Prepare detailed market information with the help of economists.

■ If the deal is likely to be controversial, decide a strategy including remedies that you can offer at an early stage.

■ Discuss remedies if necessary at pre-notification meeting with the Commission.

■ Assess what third parties are likely to say and how you will respond.

Notify (Form CO)

Formal notification must be made on Form CO. The notification can be made as soon as there is a good-faith intention of the parties to conclude



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an agreement or they have announced an intention to make a public bid.

Provide as much information as possible as clearly as possible. The clock starts ticking.

Phase I (25−35 working days)

The first phase investigation begins on receipt of the Form CO. The Commission has 25 working days to complete the first phase (this can be extended to 35 working days if undertakings are offered or if a referral request is received). The investigation involves an intensive analysis of the information in the Form CO and contact with third parties: competitors, customers and where relevant trade associations.

This is the crucial stage. Be as co-operative and helpful as possible with the case team. Be prepared to make concessions if these can avert a Phase II investigation.

End Phase I At the end of the first phase the Commission will declare that either:

■ The concentration is not caught by the Merger Regulation.

■ The concentration is caught by the Merger Regulation but is compatible with the common market (possibly subject to undertakings from the parties).

■ There are serious doubts as to the compatibility of the concentration and a Phase II investigation is required. Historically, only 5% of cases have gone on to a Phase II investigation.

Phase II (90−135 working days)

The parties and third parties will be given an opportunity to respond to the Commission's findings in the first phase. Some may withdraw the notification and restructure the deal in order to avoid the further delay of the Phase II investigation (which may last up to 135 working days). Withdrawing the notification is possible at any stage (a formal withdrawal document is required).

Phase II: Statement of objections

If the Commission is still not satisfied six to seven weeks (or later if a request for an extension has been made) into Phase II it will issue a statement of objections. Parties are increasingly abandoning at this point as many believe that the case is effectively decided.

Phase II: Hearing

This is held two months and one week (or later if a request for an extension has been made) into Phase II. It is attended by the Commission, the parties, third parties and representatives from competition authorities of member states.

Phase II: Last date

Undertakings can technically be given up to 65 working days into Phase II. If undertakings are offered 55 days or more after initiation of Phase II


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undertakings the period of 90 working days (or longer if a request for extension has been made) will be extended by another 15 working days.

Phase II: Decision

The transaction may be cleared (perhaps subject to undertakings) or prohibited.

Advisory Committee Opinion

The Advisory Committee (comprising representatives of member states' competition authorities) issues an opinion on the Commission's decision. They have no power to overturn the decision.

G. Joint Ventures: Control under EU and National Laws

Nature of joint venture EU law National laws

Full-function joint venture above EU Merger Regulation thresholds with no co-operative elements (i.e. ordination of parents' activities outside the joint venture):

■ Where two-thirds rule does not apply.

Commission has jurisdiction under EU Merger Regulation

No national jurisdiction (unless reference back or "legitimate interests")

■ Where two-thirds rule applies.

No jurisdiction under the EU Merger Regulation (unless reference by member states)

Subject to national merger and competition rules

Full-function joint venture with co-operative elements above EU Merger Regulation thresholds:

■ Where two-thirds rule does not apply.

Commission has jurisdiction under EU Merger Regulation: applies merger test to concentration resulting from the joint venture and reviews the co-operative elements

No national jurisdiction (unless reference back or "legitimate interests")



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■ Where two-thirds rule applies.

No jurisdiction under EU Merger Regulation (unless reference by member states) but Article 101 may apply to the co-operative elements

Subject to national merger and competition rules. National authorities may also apply Article 101 directly

Full-function joint venture with no co-operative elements below EU Merger Regulation thresholds

No jurisdiction under EU Merger Regulation (unless reference by member states) or Article 101

Subject to national merger and competition rules

Full-function joint venture with co-operative elements below EU Merger Regulation thresholds

No jurisdiction under EU Merger Regulation (unless reference by member states), but Article 101 may apply to the co-operative elements

Subject to national merger and competition rules. National authorities may also apply Article 101 directly

Non-full-function joint venture No jurisdiction under EU Merger Regulation, but Article 101 may apply

Subject to national competition and (possibly) merger rules. National authorities may also apply Article 101 directly

H. About the Authors of Section VI Alex Nourry is a Partner and Dan Harrison is a Senior Professional Support Lawyer in the London Office of the Global Antitrust Practice of Clifford Chance LLP.

Timothy Cornell is Counsel and Elizabeth Chen is a Senior Associate in the Washington DC office of the Global Antitrust Practice of Clifford Chance LLP.


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VII. Employees Employment and management issues must be considered at the outset of any joint venture negotiations.

The extent of employee protection and participation varies widely in different jurisdictions. It is important to establish early on which set or sets of employment rules will govern the joint venture (as a matter of contract law and statutory protection) and how the employment structure and policies of the joint venture will fit in with the human relations approach of its parents.

This overview considers the following key issues:

■ Location and structure of the joint venture vehicle.

■ Transferring employees to the joint venture:

• individual employees and their contracts;

• transferring employees as part of a business;

• harmonising terms and conditions of employment; and

• secondment.

■ Employee benefits (including pensions and share options).

■ Other employment issues.

■ Restrictions and issues for foreign managers.

A. Location and Structure of the Joint Venture Vehicle In most jurisdictions, people who work for the joint venture will derive their rights from two sources, an employment contract and mandatory statutory rights provided by the relevant jurisdiction in which they work.

The parties (employer and employee) have a great deal of flexibility in structuring the employment relationship under pure contract law (notably including the identity of the employing entity (see Section VII.D)). But as a matter of mandatory law, regardless of the chosen law of the employment contract and the chosen identity of the employer, the location of the joint venture work is all important.

While the law of a foreign jurisdiction may apply as a matter of contract, the joint venture may find itself liable under local statute to people working for it. The exact extent of statutory regulation governing the employment relationship will therefore need to be carefully considered in each jurisdiction where the joint venture will employ people. There



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are significant differences in statutory protections, for example, in relation to the level of worker protection, the need for worker participation in decision-making and the right of workers to be consulted by the employer in relation to key business issues, including major disposals and redundancies.

For example, multinational companies with at least 1,000 employees in the European Economic Area (including at least 150 employees in at least two countries) must establish a European Works Council if requested to do so by employees (European Works Council Directive (2009/38/EC)). Perhaps more pertinently for a local joint venture, in March 2002 the EC directive for national works councils to be established in all businesses employing 50 or more people was formally adopted. This had to be implemented by 2005 in each member state (although full effect was staggered until 2008 in some jurisdictions, including the UK).

Taxation of employees will also often be a crucial factor in establishing individual contractual relations, particularly with the most senior staff. In many jurisdictions, this is governed by the location of the employee's job rather than by the employee's permanent residence (although some countries of citizenship, like the US, will always tax worldwide income).

B. Transferring Employees to the Joint Venture The joint venture parties may wish to transfer employees (and all contractual rights and obligations) to the joint venture entity. The legal issues are likely to be different depending on whether or not the employee is part of an existing business that is being transferred to the joint venture. For example, in the EU, if an existing business is transferred as an economic entity, employees that work in the business are automatically transferred to the acquiring entity with certain statutory protections (under the Acquired Rights Directive (EC) 77/187, subsequently consolidated in Directive 2001/23/EC) (as implemented in member states) (see Section VII.B.2).

1. Individual Employees

Where an individual employee and his contract are transferred to a joint venture entity (not as part of an existing business) the legal issues are likely to be relatively straightforward.

The consent of the employee will be required to the move unless there is an express power of assignment in the employment contract. This would be unusual, particularly if the employee is required to move to a different country.

The main legal issues will be:

■ The terms of departure from the existing employment relationship. Care should be taken to ensure that the employee does not have a claim against the transferring employer.


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■ The terms of the new employment contract. From a commercial perspective, these should ideally be the same as or similar to those of other employees of the joint venture.

■ Whether the employee retains his accrued period of continued employment with the new employer. This may be relevant, for example, in the event of a later dismissal or redundancy and will often depend on whether the old and new employers are considered to be "associated" under relevant employment law. If rights are not accrued, the employee may request compensation for the loss of any benefits that such continuous employment might otherwise bring.

■ Whether the joint venture is sufficiently associated for the employee to retain the benefit of particular contractual entitlements (for example, the right to belong to a group pension or share option scheme (see Section VII.E and F)).

■ What to do if an employee refuses to transfer. Refusal of such an offer may give rise to statutory claims against the current employer if termination of the current employment then ensues. Examination of the individual circumstances may be necessary - for example, rejection of a new job in the joint venture may result in an employee becoming redundant in their current job if the joint venture is part of a change in output by the current employer.

2. Transferring Employees as Part of a Business

If either of the joint venture parties transfers an existing business to the joint venture entity, the legal position in relation to employees working in that business may be more complex.

For example, in the EU, the Acquired Rights Directive (as implemented in member states) (Directive) provides for the automatic transfer of employees with various protections on the transfer of a business located in the EU.

The Directive does not apply on share sales or on a mere sale of assets but will apply where there is a significant transfer of personnel and/or assets which amounts to a transfer of a business or part of a business. Where there is such a transfer, the broad position is that employees who are assigned to work within the relevant business or part of a business will transfer. The collection of assets transferred must amount to the transfer of an economic entity, which retains its identity on transfer.

Where the Directive applies, it contains three main principles:

■ Automatic transfer principle. This is effectively a statutory novation of the employment contract. Employees are deemed to transfer to the new employer upon the same terms and conditions of employment with their statutory rights intact (such as period of continuous employment and any employment related claims).



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■ Special protection against dismissal. Any dismissal connected with a transfer is automatically unfair unless it is for an economic, technical or organisational reason entailing changes in the workforce. This has generally been taken to mean that in order to escape claims of automatic unfairness, the dismissal must relate to the day-to-day running of the business being transferred and must concern the level, functions or numbers of employees (similar to the criteria for redundancy in some jurisdictions).

■ Informing and consulting with employee representatives. Employers must give specified information to the recognised trade unions or elected employee representatives of employees affected by the transfer (which may be a broader class than simply those transferring). The information includes the date or proposed date of the transfer, the reasons for the transfer, the legal, economic and social implications of the transfer for the employees and any measures envisaged in relation to the employees.

Like all directives, the Directive is essentially "framework" legislation and has been implemented slightly differently in different member states.

C. Harmonising Terms and Conditions If employees are transferred to the joint venture entity from different joint venture parties, it will be commercially desirable to harmonise their terms of employment. It is important to consider whether there are any legal obstacles, particularly if it is intended that the pay or benefits of a certain category of employee should be reduced. Any change in terms and conditions should ideally be secured by consent after consultation.

If the Directive applies, any reduction in pay or benefits at the point of transfer is likely to breach the automatic transfer principle (see above). This would include, for example, the withdrawal or downgrade of a company car, subsidised travel, bonus or sickness scheme. These benefits must technically be transferred or replicated.

In general terms, the options available to the joint venture to harmonise terms and conditions in such circumstances are:

■ To agree the changes and take the risk that these will be declared void if challenged if there is no economic, technical or organisational reason as defined above.

■ For the joint venture parties to dismiss the employees and for the joint venture to re-engage them on new terms, subject to agreement with the employees not to pursue any dismissal-related claims.

■ To delay the changes until a later date, when it may be easier to establish that changes are not motivated solely by reason of the transfer. In some jurisdictions, pre-transfer terms are only secured for a specified period.


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D. Secondment Employees may be seconded to the joint venture entity by joint venture parties. Under a secondment arrangement, the employee remains employed by the joint venture party but is "borrowed" by the joint venture for a period of time. A number of issues should be addressed:

■ Whether the employee can be obliged to work under secondment for the joint venture depends upon the terms of his employment contract, in particular his job description and whether his contract contains a mobility clause. Such clauses would have to be applied reasonably and may not cover, for example, secondment abroad.

■ A joint venture party that seconds an employee may remain vicariously liable for the acts of the seconded employee even if the employee follows the instructions of the joint venture entity or other party. Although in theory, liability can transfer to the joint venture entity, this is an uncertain area of law in some jurisdictions and the burden is likely to be difficult to discharge. The employing joint venture party should consider an appropriate indemnity in the shareholders' or secondment agreement.

■ Whether responsibility for the health and safety of the employee transfers to the joint venture depends on the situation - courts are usually reluctant to accept that this has taken place. Once again, this can be addressed by an appropriate indemnity - although this does not, of course, give protection against criminal liability.

■ The employment contract will have to be checked to ensure that restrictive covenants and confidentiality clauses are appropriate.

■ Ownership of intellectual property created by an employee in the course of his employment usually rests with an employer. If the seconded employee is likely to be involved in the creation of intellectual property rights, the parties should address how ownership should be dealt with.

■ Any secondment fee charged by the employer to the joint venture entity may attract tax, for example VAT in the UK.

■ If a key employee is seconded to the joint venture, it would be advisable to insert a provision into the shareholders’ agreement preventing the joint venture entity and other joint venture party from poaching the employee during the continuance of the joint venture or on its termination.



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E. Pensions Pensions issues can be complex in an international joint venture. It may be very difficult to establish a single pension plan that can be operated for employees in all jurisdictions (unlike international stock option plans).

Different jurisdictions have very different approaches to pensions provision. For example, France has a predominantly state-funded system whereas the UK and US encourage private schemes.

Tax will be a key factor. In some jurisdictions, tax relief is available on contributions (by employers and employees) to approved pension schemes. This relief can be very valuable but may not be available where members of the scheme are employed in other jurisdictions.

Numerous structures can be used, although the basic options are:

■ Employees of the joint venture could participate in schemes set up by one or more of the joint venture parties. The tax authorities in some jurisdictions allow employees of subsidiary companies to participate in parent company approved schemes (even if the subsidiary is in a different jurisdiction), often subject to certain conditions. This may be an attractive option for parties that have existing schemes. They can save start up costs and re-charge a proportion of ongoing costs to the joint venture. Employees of the joint venture may also participate in more than one pension plan of the parent companies although this can be quite complex. One of the advantages of using existing plans for employees of the joint venture is their familiarity with the plans.

■ A scheme set up by the joint venture entity (or possibly different schemes in each jurisdiction that it operates). This would enable its employees to associate themselves more closely with the new company than would be the case had they been members of one of the parties' existing plans. In addition, it will also cater for new joiners of the joint venture who would otherwise participate in one of the parents' plans, a company with which they probably had no previous connections.

Different decisions can be taken for different groups of employees although if the joint venture is likely to be reasonably permanent it is commercially desirable for employees to be part of the same scheme.

If an employee is transferred to a joint venture entity as part of a business, the transferee may be under an obligation to honour existing pension rights or provide equivalent rights (for example, under the Acquired Rights Directive (as implemented by certain member states of the EU)).


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F. Share Options Share plans, and options in particular, are an increasingly popular method of incentivising employees and are now almost always a significant consideration in the establishment of international joint ventures.

A preliminary question is what happens to options held by employees who are transferred to the joint venture entity from the joint venture parties. Depending on the group relationship and the terms of the relevant scheme, if the transfer terminates employment within an eligible employer, options may have to be exercised within a limited period (usually 6 to 12 months). The employee may lose tax benefits for early exercise (such as income tax relief) and the employer may prefer the employee to remain within the plan. It may be possible to amend the trigger provisions, although careful consideration will have to be given to the amendment powers in the relevant plans. The alternative, for valuable employees who may not wish to transfer as a result, is to agree a secondment only.

The transferring company may be under an obligation to provide an equivalent scheme (for example, under the Acquired Rights Directive).

Once the hurdle of dealing with the consequences of transfer has been dealt with, the joint venture entity will wish to consider how to provide incentives to its employees.

There are various options:

■ A plan could be set up at joint venture level using the shares of the joint venture company or of either or both of the joint venture parties.

■ The joint venture parties may be able to extend their own existing plans to employees of the joint venture (depending upon the definition of covered companies).

The issuer will need to carry out a full review of applicable securities laws in the jurisdiction in which the employees are resident. Wherever the shares of the joint venture parties (as opposed to joint venture company shares) are used, there is a risk that the exemptions which usually apply to employee share plans will not apply, because these are often restricted to employees of the company whose shares are being used, and those of its subsidiaries and holding company. This may mean that filings have to be made and/or prospectuses issued. Similarly, company law provisions which exempt share plans from financial assistance and other requirements may not apply.



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G. Other Employment Issues Other employment issues may include:

■ How to deal with different union recognition agreements (particularly where two or more different unions represent employees of the joint venture parties).

■ Redundancy selection procedures, new policies for work organisation and management responsibilities and chain of command.

■ Restrictive covenants that apply to any transferring employees should be reviewed. If they exist, they are likely to have been drafted in the context of the groups of companies of each of the joint venture parties, with their respective activities, customers and products. It is very likely that the restrictive covenants will need to be amended to take into account the new activities and client base of the joint venture as well as mandatory law if the employee will be living and working in a new jurisdiction.

■ Consideration also has to be given to confidentiality obligations. If there is close co-ordination between the joint venture and its parties, then appropriate clauses need to be put into employment contracts to protect any confidential information belonging to the joint venture parties being leaked by employees working for the joint venture.

H. Restrictions and Issues for Foreign Managers Important practical issues need to be considered if senior managers are to be seconded or transferred to a foreign joint venture. In particular:

■ Do foreign nationals require immigration permission and, if so, how difficult is it to obtain and how long does the process take?

■ Are there any restrictions on foreign managers or directors?

■ Are there any circumstances in which directors or managers can be personally liable in respect of the actions of a joint venture company?

■ How will foreign managers that are seconded or transferred to the joint venture be taxed? A benefits package which makes sense at home may be a tax nightmare in a foreign jurisdiction. The manager who stays on to assist the joint venture longer than originally planned may unwittingly lose beneficial non-resident tax status and expose himself to major liabilities. (See Country Q&A 5 and 6).

Keeping the workforce committed and productive will involve lateral thought and acknowledgement that employment issues in an international joint venture need careful planning.


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VIII. TaxThis note is divided into two main sections:

■ Tax factors to be considered in the choice of joint venture structure.

■ Tax issues applying specifically to the formation and operation of joint venturecompanies.

Tax factors and issues will always need to be evaluated in light of commercial considerations.

A. Joint Venture Structure The tax objectives of the parties when setting up a joint venture will commonly be to:

■ Ensure that the tax position of the joint venture is no worse than if the jointventure parties were to carry on the business directly.

■ Avoid or minimise taxes on the disposal of assets to the joint venture. Thesemight include, for example, tax on capital gains arising on the disposal, transferduties, value added or similar turnover tax, and balancing charges on thedisposal of assets that have qualified for depreciation allowances.

■ Obtain relief for losses that the joint venture may sustain. Ideally, the parties willwant the joint venture vehicle to be able to surrender losses to one or both of thejoint venture parties or at least carry them forward to offset against future profitsof the venture.

■ Minimise tax in the joint venture vehicle.

■ Avoid tax leakage on the distribution of profits/gains in the joint venture vehicleto the joint venture parties. So, for example, the parties will, if possible, wish toobtain credit for any taxes paid by the joint venture vehicle and avoid doubletaxation on any distribution.

■ Minimise taxes on the termination of the venture or changes in participants.Similar issues will arise as on the formation of the venture.

Applying these objectives to different structures:

1. Corporate

Potential advantages of a corporate vehicle are that:



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■ A corporate vehicle may be preferable if the joint venture company is liable to a lower rate of tax or more favourable basis of taxation than the joint venture parties. (However, profits of a joint venture company in a low tax jurisdiction may, in certain circumstances, be imputed to a joint venture party in another jurisdiction (see Controlled foreign companies).)

■ A corporate joint venture may be better placed to benefit from double tax treaties than either of its parents if it is located in a jurisdiction with a wide range of double tax treaties such as The Netherlands (see box, Double tax treaties). However, some modern double tax treaties, particularly those with the US and Switzerland, contain "anti-conduit" or "anti-treaty shopping" provisions. Even in the absence of such a provision, treaty benefits have been denied to a conduit company where the concept of beneficially owning interest was interpreted within its international fiscal meaning where there was fiscal evasion (see Indofood International Finance Ltd v JP Morgan Chase Bank N.A. London Branch [2006] EWCA Civ 158).

■ A holding company may be needed if there are operations in more than one country.

Potential disadvantages of a corporate vehicle are that:

■ A corporate vehicle is a separate legal entity. Various taxes may arise on the disposal of assets to the joint venture: tax on capital gains arising from the disposal, transfer duties, value added or similar turnover tax and balancing charges on the disposal of certain assets if the disposal price is greater than their tax written down value (see Contributions to the joint venture).

■ Historically, it was most unlikely that losses of a joint venture company that was tax resident in one country could be surrendered to a joint venture company that was tax resident in another country to offset against its own profits. However, the Court of Justice of the European Union (ECJ) ruled in Marks & Spencer v David Halsey (Case C–446/03) that, in certain limited circumstances, this restriction is contrary to the EC Treaty (now the Treaty on the Functioning of the European Union (TFEU)) if the companies are in different member states. The UK has since introduced legislation to allow very limited surrender cross-border. The European Commission is also considering proposals for cross-border group loss relief. (See Taxation of the joint venture.)

■ In a cross-border context, it is almost inevitable that there will be tax leakage on the distribution of profits from a joint venture company in one jurisdiction paid to a shareholder in another. Credit may not be available for underlying taxes paid by the joint venture company and there may be withholding tax on distributions that cannot be fully re-claimed or credited (see Taxation of payments in and out). If relief cannot be obtained under a treaty (in particular), there is doubt about the legality of withholding tax on dividends paid within the EU following the Denkavit (French withholding tax) and Amurta (Dutch withholding tax) cases. The Commission has referred other member states to the ECJ regarding imposing withholding tax on dividends.


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2. Partnership

The tax treatment of partnerships varies from country to country. In some countries, partnerships are tax transparent so that profits and losses accrue directly to the joint venture parties in proportion to their share of the partnership. But a partnership may be taxed as a separate legal entity in other jurisdictions. Special rules may apply if there are limited partners.

Taxes may arise on the disposal of assets to a partnership but reliefs may be available. For example, in the UK, the partner in question is treated as making a part disposal of the asset equal to the fractional share that passes to the other partners. There is no general relief which applies to avoid a chargeable gain arising to the partner but other reliefs may be available to it.

Different jurisdictions also apply different rules to the tax treatment of losses incurred by a partnership located in another country or from activities taking place in another country. For example, in the UK, a UK partner's share of trading losses of a partnership incurred in overseas activities cannot be offset against profits of the UK partner from other sources. It is irrelevant whether the entity is formed under foreign law (save to determine if it is a partnership or a company for UK tax purposes). If it is a foreign partnership, a corporate partner which is tax resident in the UK will obtain the same relief in respect of its share of losses as it would for a UK partnership carrying on the same activities.

Partnerships may be able to take advantage of double tax treaty benefits but not in all jurisdictions. This is generally only possible if the partnership is not transparent for tax purposes.

Some joint venture vehicles may be classified as partnerships for tax purposes in some jurisdictions and companies in others (for example, the UK limited liability partnership).

Difficulties can arise in joint ventures if a vehicle is treated as opaque for the purposes of one party's tax purposes but transparent for the other's.

For example, if HMRC regards a non-UK vehicle as opaque for UK tax purposes but the vehicle is transparent for the joint venture partner (which might be the case if the joint venture comprised a US limited liability company (LLC) between a UK and US partner), HMRC will apportion a notional tax rate to the vehicle for the purposes of calculating the amount of credit given to the UK party. This notional rate will be a "blended" rate based on the tax paid by the two parties. If the non-UK partner is able to shelter its tax, the blended rate will be lower than the actual rate the UK partner will pay and will also require a disclosure by the other partner of its own tax affairs.

3. Contractual

In a contractual joint venture, there is no separate legal entity so there is no disposal of assets on the formation of the joint venture (and consequently no tax liability). Any losses



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on the venture will accrue directly to the joint venture parties who should be able to offset them against profits of other activities. Depending on the law applicable to the operations and the participants, it may be difficult to avoid causing a partnership to come into existence (see Section II).

B. Corporate Joint Ventures When establishing a corporate joint venture in any jurisdiction, key issues to address are:

■ Capitalising the joint venture vehicle (debt/equity ratio).

■ Contributing assets to the joint venture.

■ Taxation of the joint venture company (profits, ability to surrender losses to foreign corporate shareholders and other group arrangements).

■ Double tax treaties.

■ Payments in and out.

■ Controlled foreign companies.

■ Transfer pricing.

■ Income access and dual company structures.

1. Capitalising the Joint Venture

As discussed below (see Section VIII.B.4), interest (unlike dividends) is generally deductible as an expense and, therefore, reduces a company's liability to tax. It may, therefore, be beneficial from a tax perspective for the capital of a joint venture company to be made up mainly of debt (for example, parent company loans) rather than equity (particularly if the rate of tax that the joint venture company pays is higher than the rate applicable to its parents). In these circumstances, the subsidiary is said to be "thinly capitalised".

Many countries have anti-avoidance legislation against capital structures that have a large proportion of loans from foreign affiliates. If affiliate debt exceeds certain levels, the subsidiary is thinly capitalised and interest payments on the debt are unlikely to be tax deductible. (Thin capitalisation rules do not generally apply to third party bank borrowing but may apply in some circumstances where there is a guarantee from an associate of the borrower.)

The application of thin capitalisation rules to payments made by a company resident in one EU member state to a company resident in another member state has been challenged most notably in two cases in the ECJ.

In the first case, the Court held that the application of German thin capitalisation rules to interest payments made by a German company to a Dutch company in the same group


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breached Article 43 of the EC Treaty (freedom of establishment) (now Article 49 TFEU) (Lankhorst-Hohorst GmbH v Finanzamt Steinfurt (Case C-324/00)). As a result, a number of member states, including the UK, Germany and The Netherlands revised their thin capitalisation rules.

In the second case, the Court held that, although the old UK thin capitalisation rules (before they were revised to apply domestically as well as cross-border) were discriminatory, they were justifiable as anti-abuse legislation if they prevented wholly artificial arrangements which did not reflect economic reality. In contrast to the old German thin capitalisation rules, the old UK rules never prescribed an acceptable debt-to-equity ratio in the legislation. Consequently, the old UK rules may have been flexible enough to allow genuine commercial transactions to fall outside them.

2. Contributions to the Joint Venture

In many joint ventures, the parties will contribute assets (possibly including shares in subsidiaries) to the joint venture. It is important to assess the tax cost of contributions. A variety of taxes may be relevant:

■ Capital gains taxes. The country in which the asset is located or the country of residence of the contributor may charge tax, broadly, on the difference between the acquisition cost of the asset and the disposal value to the joint venture.

■ Transfer taxes. Most countries charge transfer duties on the sale of certain assets such as shares and land. Notarisation fees may also be payable.

■ Valued added taxes. The transfer of assets may be subject to value added tax (VAT) or similar indirect taxes.

■ Capital duties. Some jurisdictions charge capital duty on the issue of shares. This will be relevant if the joint venture company issues shares in consideration for the transfer of assets to it.

Relief from some of these taxes may be available. For example, under the European Mergers Tax Directive (Directive 90/434/EEC as amended by Directive 2005/19/EC), relief from capital taxes may be available on the transfer of a business located in one EU member state to a company located in another. However, that Directive is silent on transfer duties and VAT (although the VAT Directive (Directive 2006/112/EC) permits the transfer of a business as a going concern to be left outside the scope of VAT).

If the tax costs on contributions are likely to be very high, it may be worth considering whether it is necessary for the transfers to be made. Instead, assets could be leased to the joint venture or (subject to transfer pricing considerations) otherwise made available to it at a low/no cost.



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3. Taxation of the Joint Venture

Relevant questions include:

■ What is the relevant tax rate applicable to the joint venture company and/or participants and how is it assessed? For example, will it have to pay tax on its worldwide earnings (including profits of foreign branches and subsidiaries) or only on profits attributable to trading activities in the country in which the company is tax resident (see Section VIII.B.1)?

■ Is there any form of loss relief? A joint venture may incur losses. The joint venture parties may want to offset these losses against their own profits. At the moment, there are limited opportunities to do this if the joint venture company is tax resident in a different country from its "parents". However, it may be possible to locate it in the same country as one of the parents and for payments to be made by that parent to the joint venture company for losses that are surrendered. If offsetting losses is a particular concern, it may be worth considering a tax transparent structure (such as a contractual joint venture or partnership) if losses of the venture may accrue directly to the joint venture parties (see Sections VIII.A.2 and3).

■ The prospect of the cross-border surrender of losses within the EU has a chequered history. A positive development came with the ECJ case of Marks & Spencer v David Halsey (Case C–446/03) (a case challenging the UK's old rules restricting surrender of tax losses cross-border). In this case, the ECJ held that if a non-resident subsidiary has exhausted the possibilities of using its losses in its state of residence against existing or past profits and is unable to carry these forward or surrender them to a third party, a member state should allow the surrender of the losses to a company in its jurisdiction (or else be in breach of the EC Treaty). The Court's judgment does leave some questions of interpretation open to the local court but an Advocate General's opinion in a later ECJ case encourages the judgment to be interpreted "extremely restrictively". The UK has already taken advantage of this view in the very limited legislation it introduced for cross-border surrender of losses.

■ In addition, the European Commission's revised June 2015 proposal for a common consolidated corporate tax base (or CCCTB) envisages cross-border loss relief. One of the main benefits of the CCCTB proposal is EU group consolidation, which will eliminate the tax effects of intra-group transactions and enable losses of one EU group company to be set against the profits of another. However, work on the more complicated consolidation rules will be postponed until the common base has been agreed and implemented. In the meantime, the Commission proposes that groups be able to offset profits and losses made in different member states and pay tax on their net EU profit.

■ If it is not possible to transfer losses to either of the joint venture parties, can the joint venture company at least carry forward losses and offset them against its future profits?


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4. Taxation of Payments in and out

What is the tax treatment of payments made to the joint venture company from foreign group companies and branches and payments made by the joint venture company to the joint venture parties?

Payments may take a variety of forms such as dividends, interest, intellectual property royalties and service fees.

There are a number of issues:

■ Interest is tax deductible. In most jurisdictions, there is a fundamental difference between the tax treatment of dividends and interest, namely that interest payments are tax deductible and dividends are not. The joint venture parties may seek to take advantage of this by giving the joint venture company a large loan capital and small share capital. The taxable profits of the joint venture company are thereby reduced. Many jurisdictions have anti-avoidance legislation to prevent this capital structure, so-called "thin capitalisation" (see Section VIII.B.1).

■ Withholding taxes. Many countries impose withholding taxes on dividend, interest, royalty and licence fee payments, on account of the local tax liability of the recipient. Rates of withholding tax are commonly around 20% to 25%. This liability is often reduced or eliminated under the provisions of a double tax treaty (see box, Double tax treaties). Withholding tax on dividend payments is eliminated on payments made within the EU provided the Parent/Subsidiary Directive applies (Directive 90/435/EEC as amended by Directive 2003/123/EC). (The "parent" must have at least a 10% interest in the "subsidiary".) Withholding tax is also eliminated on most payments of interest and royalties between associated companies resident in different EU member states (Interest and Royalties Directive (Directive 2003/49/EC)). The European Commission has been consulting on proposals to recast the Interest and Royalties Directive. The overall aim of the recast proposal is to align the Interest and Royalties Directive requirements with those of the Parent/Subsidiary Directive.

■ Dividends. In addition to withholding tax, the availability of foreign tax credits or exemptions should be considered. If the profits from which dividends are paid by a subsidiary to its parent have borne tax (by the paying company) and the dividends are then fully taxable in the hands of the parent, the effect will be that those profits have effectively borne tax twice. Most countries provide relief through exemption or credit. Countries like The Netherlands, Belgium and the UK provide that dividends received by a company from its foreign subsidiary are entirely (or substantially) exempt from tax in the hands of the parent. This helps to make these countries attractive locations for headquarters companies. Other countries give credit for local tax paid on underlying profits. The amount of credit is usually determined by reference to the rate of tax paid by the subsidiary.



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■ Intellectual property and know-how. Most joint venture arrangements involve the payment of fees to the joint venture for the right to use intellectual property or access to know-how. These arrangements may be tax effective if the payments are deductible against taxable profits but withholding tax may apply (see above).

5. Controlled Foreign Companies

Profits of a company that is tax resident in one country can often be imputed to a "parent" in another country under so-called controlled foreign company rules.

So, for example, a parent company may be liable to tax on the profits of a joint venture company that is tax resident in another country even if no distribution is made. These rules are intended to stop multinationals sheltering profits in low-tax jurisdictions.

6. Transfer Pricing

Most countries operate some form of transfer pricing rules. These permit the tax authorities to adjust the amount of income earned or expenses accrued on transactions between affiliates if it appears that the transaction was not at arm's length. Without transfer pricing rules, international groups could manufacture high profits in low tax jurisdictions and low profits in high tax jurisdictions through intra-group transactions, thus minimising the overall charge to tax.

7. Income Access and Dual Company Structures

If a multinational joint venture has significant operations in countries in which the joint venture parties are resident it may be beneficial from a tax perspective to establish income access arrangements. These can reduce or eliminate withholding taxes on the payment of dividends and direct taxes on the receipt of dividends.

Take for example, a 50:50 joint venture headquartered in The Netherlands with UK and US shareholders and subsidiaries generating significant profits in the UK and US.


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Income Access

Rather than routing profits from the subsidiaries through The Netherlands holding company and back to the shareholders, the UK and US subsidiaries could issue (non-voting) income access shares to the relevant parents in the UK and US. Each parent would have primary dividend access to profits from the income access share(s) of the subsidiary resident in its own country. The parent's dividend entitlement from The Netherlands holding company would be correspondingly reduced. The income access shares and the parent's shares cannot be held by separate owners.

Care will be needed to tailor the income access share(s) to local requirements.

Similar tax considerations are taken into account in the dual holding company (DHC) structures adopted on many cross-border mergers. Rather than creating a single holding company, two companies retain their separate listings and identity but put in place arrangements to ensure that the group as a whole operates as if it were a single enterprise. There are three basic structures for DHCs principally:

■ The separate entities structure.

■ The twinned share/stapled stock structure.

■ The combined entities structure.

Under a separate entities structure, the shareholders enter into equalisation arrangements (commonly a cross-holding of special shares or contractual arrangements) under which the company's top tier shareholders are treated equally. From a tax perspective, profits and



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dividends retain their original sources thereby reducing tax inefficiency and avoiding additional taxes either at corporate or shareholder levels. However, in the UK the better view is that equalisation payments are non-deductible whereas receipt of payments by a UK company are taxable. It is therefore preferable for equalisation payments to be received by way of a cross-holding of special shares (although it may be necessary to have a minimum percentage cross-shareholding to receive tax efficient dividends for certain jurisdictions). Prior to their unwinding, examples of this structure were the BHP/Billiton DHC and GKN/Brambles DHC.

The Thomson Reuters structure is another example of a separate entities structure with equalisation arrangements (see Thomson Reuters: a dual listed company transaction) which was recently unified.

A variation is the stapled stock structure. This is similar to the separate entities structure except that the shares in each of the entities are "stapled" so that they cannot be separately traded. This avoids price variance/market discounts arising from shares in each of the companies being traded but may be unattractive from a tax perspective in certain jurisdictions (for example, the US).

The third type of DHC is the combined entities structure. In this case, the top tier companies retain their domiciles and corporate entities as before but the assets of the top tier companies are held by one or more jointly owned companies (similar to a joint venture arrangement). This can be combined with the use of income access shares. An example of this structure is the Reed Elsevier corporate structure.

Recent years have seen some multinationals remove their dual holding company structures, for example Shell and GKN/Brambles.


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Unilever: Dual Holding Company Structure

C. Double Tax Treaties Multinational companies can potentially be taxed on the same profits in more than one jurisdiction. Tax is levied on a variety of different bases:

■ Residence. Profits earned by a company resident in a particular country are generally subject to tax in that country (irrespective of where the profits are earned geographically).

■ Place of activities. Profits earned as a result of trading activities in a particular country (for example, through a branch) are generally subject to tax in that country.

■ Source. Profits arising from a source in a particular country (for example, interest payments made on a loan) are generally taxed in the country of payment.



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Take, for example, a manufacturing company which is resident for tax purposes in Country A and establishes a trading branch in Country B. The profits of the branch could be taxed in Country A (being part of the world-wide profits of a company resident in Country A) and also taxed in Country B (being profits earned out of trading activities of the branch in Country B).

Double tax treaties are concluded to alleviate double taxation in circumstances such as this - taxing rights are allocated between the two countries.

It is therefore often important when choosing a location for a joint venture vehicle to ensure that it has a full range of treaties with other countries in which the venture is to conduct business.


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IX. Deadlock and TerminationVarious surveys of joint ventures in Europe, America and Japan show that:

■ Only 50% of joint ventures succeed.

■ The average life of joint ventures is seven years; most survive for between threeand seven years with less than one-third continuing for more than ten years.

■ Most joint ventures face serious management or financial difficulties within thefirst two years.

■ Three-quarters of joint ventures end with one party buying out the other(s).

It is important therefore that very early on in the negotiations the joint venture parties address the questions of how to deal with the inevitable disputes that will arise between the parties and how to deal with the termination of the venture. This is very closely related to the question of control and, where relevant, the protection of the minority shareholder.

A starting point is to identify the areas of potential dispute between the joint venture partners (the same issues that arise when considering control and the balance of power (see Section V) and to distinguish between:

■ Matters that can be left for resolution by the joint venture management at boardlevel (for example by majority vote or the exercise of a chairman's casting vote (ifany)); and

■ Matters that are serious enough to merit the instigation of a formal disputeresolution process between the parties themselves.

In each case the parties need to consider the mechanics of any formal resolution process and the potential effects and implications. In documenting all of this it is essential to ensure that the provisions dovetail with those dealing with the management of the joint venture and any minority rights. A complete termination of the joint venture is likely to involve the winding-up of the joint venture company and the distribution of its assets, which will have tax consequences.

Termination can be the end result of:

■ Unresolved management disputes and deadlock.

■ Default by a joint venture party.

■ Voluntary exit - where one party wishes to leave the joint venture. (Although theventure may continue with a new party being introduced, this is still oftenreferred to as a termination.)

■ Consensual termination.

In addition, the termination may be due to insolvency.



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A. Disputes and Deadlock Many day-to-day disputes between the parties in the management of the joint venture will be settled by the joint venture company board in the ordinary course of business by majority vote or chairman's casting vote if available.

Some joint venture documents remain silent on how disputes are to be resolved if not settled at board level by the joint venture company itself, preferring to leave the matter to negotiation between the joint venture parties, with the parties having the ability to exit from the venture in the event that a resolution cannot be reached.

However, most joint ventures will provide express procedures for dealing with situations beyond settlement by the joint venture company board.

Normally this will be done by a deadlock clause that will come into operation when there is an irreconcilable conflict between the parties over the management of the joint venture. A deadlock clause will usually provide for:

■ A definition of events that represent "deadlock".

■ The definition and operation of a formal resolution process to settle the deadlock.

■ Ultimately, in the event that the process fails and the parties remain deadlocked, for the exit of a party and/or the termination of the joint venture.

The very existence of the clause and the ultimate sanction can often act as an incentive to the joint venture company management to resolve the matter themselves. It does, however, inevitably offer scope for manipulation by a party, which is why some prefer to omit such clauses and leave the matter to negotiation.

1. Defining Deadlock

There are several ways in which deadlock can be defined. For example, by reference to:

■ Matters which the parties have specified require unanimous agreement (for example, a change to the bye-laws).

■ Voting against a resolution.

■ The requirement for quorum.

■ Non-attendance at meetings.

■ One party wanting to sell its shares but the other refusing to buy them.

A majority shareholder may want to limit the ability of a minority party to create a deadlock.


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2. Dispute Resolution Procedures

Once a deadlock occurs, there is commonly provision for either party to serve a deadlock notice.

(See box, Disputes and deadlock.)

Disputes and deadlock

There are various mechanisms that can be used to resolve a deadlock between the parties following the serving of a deadlock notice. For example:

■ Outsider's swing vote. This refers the decision to an independent third party. But it will be inappropriate in most cases, particularly those relating to commercial judgement.

■ Arbitration or expert resolution. Again, this is really only suitable for a limited range of disputed matters, which are more factual in nature (for example, a dispute over the valuation of intangible contributions to the venture by either party).

■ Escalation clauses. This is a common mechanism where disputes are referred to the parent companies for resolution (possibly to the chairman or a committee of directors). The threat of enforcing this provision is often enough to encourage managers to agree before the process is instituted.



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3. Provision for Exit/Termination if Deadlock Cannot Be Resolved

Should the dispute remain unresolved and deadlock prevail, the agreement needs to provide for further mechanisms for one party to leave the joint venture and/or the joint venture to terminate.

One common means of providing for the exit of a party in such circumstances is a "Russian Roulette" clause under which one party will sell its shares to the other with a fall back of winding up the company if neither party acts. Alternatives are to go straight to automatic winding-up or, in cases where fault can be apportioned, a compulsory transfer provision (these provisions are considered below).

4. Russian Roulette

Under a Russian Roulette clause, either party can serve notice on the other offering either to buy the other's shares or to sell its own shares to the other party at a specified price. The other party can either accept the offer or reverse it at the same price. This risk of reversal acts as an incentive for the offering party to put forward a fair price.

(See box, Russian roulette.)

Russian roulette

This type of provision may sound like a fair solution and has historically been popular in two-party joint ventures but in practice is only suitable for 50:50 ventures and others where


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both sides are likely to be in a position to buy the other out. By definition it is open to manipulation by a party that knows, for example, that the other party to the venture is in serious financial difficulty. It can trigger a deadlock, serve a Roulette Notice and buy out the other party, probably at a discount, with little fear of reverse.

5. Mexican or Texas Shoot-out

There are a number of variations on a theme, and obviously the parties can agree any mechanism for dealing with an unbreakable deadlock. A common variation is the Mexican or Texas shoot-out where, if the party receiving the offer to sell decides that they would like to buy out the other party themselves, then both parties can submit sealed bids, the highest winning. Alternatively there can be provision for bidding by auction.

(See box, Texas shoot-out).

Texas shoot-out



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B. Default The parties may agree that certain events of default affecting a party may trigger a Russian Roulette type provision or, more commonly, a compulsory transfer provision. Common events of default are:

■ Insolvency of any party to the venture.

■ Change in control of either party.

■ Material breach of the shareholders' agreement or bye-laws.

■ Material breach of any other agreement between the parties.

Great care should be taken in defining a material breach as neither party will want to trigger a termination process against it for a relatively minor breach. Commonly material breach provisions will be limited to key provisions, such as breach of a further finance clause.

If a party is in default, it may be deemed to have served a transfer notice on the other which triggers pre-emption provisions similar to those that apply on a normal share transfer (see below). Where a sale is forced by an event of default, the transfer to the non-defaulting party will commonly be at a fair value agreed by the parties or, failing agreement, determined by an independent expert.

Events of default have to be considered and worded carefully to ensure that termination is not inadvertently triggered when, for example, one party is undergoing a legitimate group restructuring.

C. Voluntary Exit In the absence of deadlock or an event of default the parties need to decide whether or not provision is to be made for a transfer of shares in the joint venture company and the extent of any restrictions on the parties' freedom to exit.

1. Restrictions on Transfer

Commonly the bye-laws prohibit share transfers without the consent of all parties. The shareholders' agreement may then set out the terms on which a transfer can be agreed, usually subject to a right of pre-emption for the other party or parties. The parties will commonly agree further restrictions on the ability of a party to transfer their shares.

Common restrictions on transfer include:

■ Prohibition on any transfers within a defined period after the commencement of the venture.


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■ Prohibition on the transfer of part only of a shareholding. This will be more relevant in two-party joint ventures. In any case, part-sales are often prohibited simply to avoid the complexities of redefining the party's rights (for example, to appoint directors and so on).

■ Pre-emption rights for the remaining shareholder(s) at either the third party price or a fair value set by an expert.

■ Restrictions on the identity of third party purchasers.

2. Attached Rights

In addition it is common in two-party joint ventures to find that the transfer provisions include "attached rights" to include the other shareholder in the sale.

A minority shareholder may be placed in a difficult position if the majority wants to sell its shares and it (the minority) cannot afford to buy them. It may seek to provide that if the majority shareholder finds a purchaser for its shares it must procure that the purchaser also buys out the minority on the same terms. This type of provision is commonly called a piggy-back or tag-along.

The reverse provision is a drag along clause, where a majority shareholder wishing to sell out to a third party can require the minority (particularly a small minority) to sell to that person on the same terms - otherwise the majority's stake might be difficult to sell.

3. Multi-Party Joint Ventures

In multi-party ventures there will be the added complications of deciding on the division of shares between the other parties and what happens when some but not all of the other shareholders decline to exercise their pre-emption rights.

4. Enforcing Transfer Restrictions

One problem with introducing a series of restrictions on the transfer of shares is how to enforce the restrictions. In many jurisdictions, the restrictions should be included in the company's bye-laws so that a third party will be deemed to have notice of them and any transfer in breach of the restrictions will be void.



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D. Expert and Fair Value In a situation of forced transfer following an event of default or in relation to the exercise of pre-emption rights on a transfer of shares, the agreement may provide for the calculation of a fair value for the shares by an expert.

The key points to be agreed by the parties in relation to the appointment of an expert include:

■ How the expert is to be appointed and who will appoint him if the parties cannot agree.

■ Specific factors to be taken into account by the expert, for example:

• the impact that the departure of one shareholder will have on the future performance of the business;

• whether a minority stake should be valued as such or as a proportion of the fair value of the entire business;

• whether the valuation is to be on the assumption that the other shareholder(s) will remain or as if all the shares in the company are being sold at the same time.

■ The deemed date of sale for valuation purposes (for example, the date of service of a termination notice). This may have a significant impact on value if the process is prolonged.

■ The extent of access that the parties will have to relevant information and the obligations that will be imposed on them and the joint venture company itself to provide that information.

■ How costs will be borne (for example, equally, in proportion to the shareholdings or solely by the party calling for the appointment of an expert).

In most jurisdictions, an expert will potentially be liable for negligence but will normally seek a waiver from the parties and/or indemnity in his terms of appointment. Normally, a valuation will not be binding on the parties if the expert has departed from his remit.

An alternative to leaving the valuation to an expert is to spell out, in the agreement itself, a formula for determining value in a dispute. Even then it is likely that some provision will be made for the involvement of an expert in, for example, opining or reporting on values to be used under the formula.


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E. Consensual Termination The fourth situation in which the documents may provide for the joint venture to terminate is where the parties agree that it should. This may be because:

■ The venture was intended to be for a fixed term which has expired.

■ The venture was intended to be for a single purpose, which has been achieved.

Commonly a joint venture terminates because the parties simply agree to end it, for example, because it has failed to fulfil all parties' expectations. This will not necessarily be provided for in the documents but left to negotiation if and when it happens. In the same way, both parties may agree to sell out to a single third party purchaser, either selling the shares in the joint venture company or selling its assets and liquidating the company.

F. Consequences of Termination Whatever the reason for termination of the joint venture, the parties should endeavour at the outset to provide for the consequences of termination. This may however be difficult to do as circumstances may change significantly during the life of the venture. Issues to address include:

■ Distribution of assets. These may comprise assets originally contributed by the parties and assets acquired or developed independently by the joint venture. Key assets may include, for example, intellectual property rights licensed to or from the joint venture by either party and those created by and belonging to the joint venture company. If the party buying out the other party's shares is paying a price based on the company's value as a going concern, it will want to ensure that the joint venture company continues to have all the assets and facilities it needs in order to carry on as a going concern. Care might be needed to avoid problems in relation to maintenance of share capital if the company distributes assets, or grants releases or waivers to shareholders.

■ Non-compete, non-solicitation and confidentiality clauses. Will these continue to apply? It is often sensible for them to be re-executed on the sale - this can help the enforceability of non-compete clauses, which may be subject to public policy restraint of trade rules (for instance, they must be reasonable and there must be a legitimate interest to protect, and so on).

■ The return of all confidential information held by the joint venture company but relating to the individual parties to the relevant party.

■ What happens to ancillary agreements such as any distribution agreements with either party.

■ Whether loans from either party become repayable or guarantees transferable.



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In practice, many of these issue are not addressed in the agreements that are concluded at the outset of a joint venture. There is a close analogy with pre-nuptial agreements: a sensible precaution but not the most optimistic way in which to start a marriage.

G. Consistent Drafting A lot of thought needs to go into negotiating and drafting the deadlock and termination provisions for a joint venture. The provisions must be consistent with the terms agreed for the control of the joint venture and with the rights given to any minority party. There are no correct solutions, each approach carries its own risks as each will be double-edged: what is good for one party may be good, if not better, for the other.

H. About the Authors of Section IX Danielle Heath is a partner and Simon Howley is a professional support lawyer in CMS Cameron McKenna LLP.