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Advanced Corporate Practice PS04 – 26 October 2017

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  Advanced Corporate Practice PS04 –  26 October 2017 I. Key Differences between a Shareholders’ Agreement and Joint Venture Company (JVC)’s  Constitution Joint Venture/Shareholders’ Agreement      Shareholders’ agreement is also called the joint venture agreement (JVA)   The shareholders’ agreement embodies terms reflected/to be reflected in the JVC ’s constitutional documents   o   For tax/other reasons, the actual shareholder in the JV/shareholders’ agreement may not be the ultimate parent company but a subsidiary  –  if so, the parent company is not bound by the JV/shareholders’ agreement   o  There should be a separate agreement/undertaking by the parent company to observe confidentiality, non-compete obligations and guarantee of performance by the subsidiaries o    Alternatively, the parent companies can enter into the JV/shareholders’ agreement, but agree to transfer the shares to the subsidiaries, and guarantee performance by the subsidiaries   Supplements the relevant constitutional documents of the JVC      Purpose : To establish the rights and obligations of the parties in relation to the joint venture, to ensure that the company and its business is established in accordance w ith the parties’ objectives and to set out procedures for dealing with any difficulties which may arise    Key Matters Covered o  Business of the joint venture o  Composition of the board and management arrangements o  Share capital and funding of the JVC o  Distribution of profits o  Restrictive covenants o  Protection of minority and majority interests (if applicable) o  Resolution of deadlocks o  Transfer of shares o  Termination    Board and Management Arrangements   o  The JVA will usually allow each joint venture party to appoint a certain number of directors to the board of the JVC. For example, in a 50/50 joint venture, the agreement will usually provide for the parties to have the right to appoint an equal number of directors to the board, whilst in a majority/minority situation, the majority shareholder will usually be permitted to appoint more directors to the JVC's board than the minority shareholder. The right to appoint directors with specific roles, such as a chairman and the executive directors, should also be considered. o  The JVA will also set out the scope of the board's decision-making powers and may provide for certain important or sensitive decisions to be reserved to the board and/or the shareholders. o  Furthermore, the agreement will usually set out responsibilities for the day-to-day management of the  joint venture, including responsibilities for accounting, drawing up business plans and budgets and preparing and distributing financial information.    Decision Making Power o  It is prudent for the shareholders to agree on those decisions which will require their unanimous consent, such as a change in the main activity of the company, the removal of a director, the issue of additional shares and winding up the company. o  The shareholders should also identify those decisions which require a certain special majority (e.g., 75 percent). These may include the company incurring borrowings or obtaining any other financial accommodation over a set amount, the acquisition or disposal of corporate assets, entering into any  joint venture or partnership arrangement and applying to list the company on a securities exchange. o  Further, the shareholders should identify decisions which require a simple majority. These may include entering into leases of real property with rental payments between a certain pre-agreed range, adopting or varying the business plan for the company, declaring or paying any dividend, and entering into any related party contracts.    Share Capital and Subscription for Shares   o  Details of each party's subscription for or acquisition of shares in the company will also be set out in the JVA. Where the company's share capital is split into different classes of shares, the company's articles of association will set out details of each class of shares and the JVA will usually provide for each party to subscribe for or acquire a different class of shares. o  The JVA should also set out the consideration payable for shares in the company (whether cash, assets or a combination). o  Details of procedures for shareholder meetings may be covered, although they may equally be dealt with in the articles of association rather than the JVA.    Funding Arrangements and Other Contributions to the Joint Venture   o  The JVA will usually set out details of the initial funding of the joint venture, which could include cash subscriptions for shares in the JVC and/or loans provided by the shareholders or third parties.  o  In addition to initial funding requirements, the parties should consider the extent to which the source of any future funding of the JVC should be legislated in the JVA. o  The shareholders may also make non-cash contributions to the joint venture. The parties will need to carefully consider how any non-cash contributions are to be valued. Details regarding the provision of non-cash contributions may be set out in separate agreements, eg asset or business transfers, secondment agreements and intellectual property licences, rather than in the JVA itself. o   The shareholders’ agreement should make provision for the shareholders’ funding obligations in respect of a start up company where the shareholders provide capital to cover the costs of incorporation and to fund the company’s operations in its early stages. o  Provision may also be made for funding to be provided by the shareholders in the future if required.    Distribution of Profits   o  The JVA may set out the agreed method for extracting profit from the JVC. The most common method of profit distribution is by way of dividend from the JVC and the JVA will often set out the extent to which any distributable profits must be distributed to the shareholders and the timing of such distributions. o  Depending on the nature of the parties, interests in and contributions to the JVC, other methods of extracting profit may be possible, eg fees for services provided to the JVC. o  Shareholders should give consideration to how any profits made by the company will be dealt with. The distribution policy should be flexible enough to change from time to time with changes in the circumstances of the company.    Restrictive Covenants   o  If the JVA is intended to establish an ongoing business, the JVA may contain restrictive covenants which limit the extent to which the shareholders are permitted to compete with the business of the JVC and/or to solicit the JVC's customers, employees or suppliers. o  The competition law implications of any restrictive covenants included in the JVA should be considered and care should be taken to ensure that such restrictions are reasonable and likely to be enforceable.    Protection of Minority Shareholders   o  A minority shareholder will be particularly concerned to ensure that it has some level of control over the conduct of the joint venture and that it is in a position to protect its investment. For example, if the majority shareholder is able to appoint the majority of directors to the board, the minority shareholder will be at a clear disadvantage as most board decisions can be taken by a simple majority of directors present at the board meeting. The minority shareholder will therefore need to consider the extent of its statutory rights and will also seek to include additional contractual protection of its position in the JVA and/or the articles of association of the company. o  Minority shareholders will usually seek to negotiate a list of veto rights or reserved matters which require the consent of the minority shareholders before any action can be taken. Common reserved matters include: the issue of new shares and the creation of rights over shares; the introduction of new shareholders; the payment of dividends and other financial matters; the entry into major transactions; and other significant changes to the joint venture business. Matters can be reserved at either board level or at shareholder level.    Deadlock   o  A joint venture in which two joint venture parties each own 50% of the shares in the JVC is sometimes known as a deadlocked or deadlock joint venture. Such a joint venture will be governed by the principle that the joint venture parties must reach agreement on any step to be taken by the JVC; if they cannot agree on a certain cause of action, the action will not be taken. As already mentioned, the structure and management of the joint venture will usually reinforce this deadlock position. Clearly, problems will arise if agreement cannot be reached. o  Whilst some joint venture parties prefer not to specify in the JVA how any deadlock is to be resolved, others will require the drafting of detailed deadlock resolution procedures.    Transfer of Shares   o  When deciding whether to enter into a joint venture, parties will want to consider carefully the identity of the other proposed parties to the joint venture and the experience and resources that they will bring to the table. They are therefore unlikely to want the other parties to be able to freely transfer their shares in the joint venture to whoever they choose. For this reason, most joint venture agreements and/or articles of association will contain a number of restrictions on the transfer of shares. These restrictions could include:   permanent or temporary prohibitions on transfers of shares   a prohibition on transfers of shares to competitors   a prohibition on any shareholder transferring part of its interest   conditions which must be complied with before intra-group transfers or transfers to family members or a family trust can be effected   pre-emption rights (or rights of first refusal) which may apply before a shareholder can transfer its shares to a third party, and   drag-along and/or tag-along rights   a requirement for any transferee to sign a deed of adherence to the JVA o  Similar to an issue of shares, the parties often agree that no shareholder can transfer its shares without the prior approval of some or all of the other existing shareholders. This is designed to prevent the  introduction of a new investor to the business who does not share the same vision or objectives as the existing shareholders. The shareholders’ agreement should contain prescriptive provisions dealing with how shares in the company may be transferred by an existing shareholder.    Valuation o  One of the most common difficulties in respect of shareholdings in a company relates to the valuation of shares in the event of an issue of new shares or a transfer of existing shares. It is vital the shareholders consider and agree on how the price of shares will be determined in these circumstances. The valuation methodology may involve agreement between the relevant parties, reference to an adopted formula (e.g., based on the net assets of the company or on certain accounting principles), or independent valuation by an appropriately qualified valuer. In some cases, shareholders may rely on a combination of these approaches.    Termination o  When entering into a joint venture, the parties may already have views as to the circumstances in which, and the timing when, the joint venture will terminate. For example, some parties may enter into a joint venture to carry out a specific project, intending that the joint venture will terminate when the project has been completed. Others may agree that the joint venture will have a fixed term, following which the  joint venture will come to an end. However, even where the parties have no explicit intentions at the outset as to the circumstances and timing for termination of the joint venture, they should give some consideration to the types of event which could lead a joint venture to terminate and provide in the JVA for how such events should be dealt with. o  Common termination events include: agreement of the parties to terminate; expiry of a fixed term or completion of a specified project; where there are two shareholders, one party selling its shares in the JVC (exit); material breach of the JVA which has not been remedied; insolvency; change of control; and unresolved deadlock on a key issue between the parties.    Other Provisions o  Conditions to commencement of the joint venture o  Accounting and tax matters o  Precedence of the agreement over the articles of association o  Confidentiality o  Warranties o  Boilerplate provisions Differences     The Constitution will set out the broad provisions relating to the governance of the JVC, whilst the Shareholders’  Agreement is a more specialized document tailored to the particular purposes of the Company, the nature of its business and the wishes of its shareholders o  Can enter into a JVA even if there is no company forever, can draft a JVA as if it is a shareholders’ agreement o   Can call each party a JV party, just don’t call it a shareholder    o  Nothing is stopping parties from coming together to operate a business/startup as if it is like a company  –  there is just no company incorporated o  When no company is incorporated under the laws of Singapore, then you call it a JVA (or consortium agreement, partnership agreement) o  If commercially they intend for certain rules of CA to apply, it is for them to bring some of these provisions in o  If you do not want CA to apply to unofficial entity, you would not bring in express terms in the CA into the JVA o  Interchangeability issue  –  does not matter whether the company has been incorporated or not   But can say that the agreement is subject to the successful incorporation of the company    Shareholders’ Agreement usually includes more prescriptive requirements relating to the operation of the Company and controls what all shareholders would like to see in regard to the operation and management of the Company    Shareholders’ Agreement bind the parties to the agreement, but does not necessarily bind future shareholders   o  Governed by the ordinary rules of contract o  Incoming shareholder, whether it is by a sale, or transfer of shares, or issuance of new shares to a new party, will only be bound by the terms, if he enters into a document which indicates that it will be similarly bound   Deed of accession  –  document that says that you will step into the shoes of the shareholders that you are replacing as if you were an srcinal party, assuming that this is a transfer situation   If it is a new issuance situation, you would have to subscribe to new shares   Constitution is regulated in all aspects by Singapore Companies Act  –  will automatically bind all shareholders, current or future o  Social, legal contract between shareholders and the public o  Constitution can be amended    Majority/Minority Shareholder Protection  o   Without a Shareholders’ Agreement, minority shareholders may  be exposed to the actions of the majority who are able to amend the company’s constitution provided that they hold the requisite voting power of 75% o  Majority shareholders may wish to ensure that the entire share capital of the company can be sold if a bona fide purchaser for value makes an offeror all the shares  –   the Shareholders’ Agreement can include Drag Along Rights, but a standard Constitution may not include such clauses    Major difference is that a shareholders’ agreement is governed by the ordinary rules of contract. However, the constitution is regulated in part by the Companies Act. o   Under the Companies Act, a constitution can be amended from time to time by a special resolution  –  by shareholders holding 75% or more of the voting rights. o   On the other hand, a shareholders’ agreement can generally only be varied with the consent of all the parties. o  Thus, it may be preferable for shareholders (particularly those with minority shareholdings) to enter a shareholders’ agreement in order to entrench ce rtain rights, e.g. pre-emptive rights in respect of the transfer or issue of shares. o   In the absence of a shareholders’ agreement, minority shareholders may be exposed to the actions of the majority who may amend the rights of all shareholders, providing they hold 75 percent or more of voting rights (notwithstanding that any such action may be oppressive against the minority). o    A shareholders’ agreement may often be preferred for particular shareholders’ rights as shareholders consider it to be a more privat e document than the company’s constitution.       A shareholders’ agreement is confidential between the relevant shareholders and the company whereas a company’s constitution maybe publicly available.     A shareholders ’  agreement is typically more cost-effective and easier to enter into as it follows standard contract law and doesn’t require a special resolution to be effective and enforceable.     The shareholders of a particular class may wish to enter into a private arrangement as between themselves. It could, therefore, be a question of practicality.     A shareholders’ agreement can: 1) confer a specific power to appoint a director or directors, and remove those directors, on a particular shareholder or shareholders holding more than a specified percentage of shares; 2) alter the usual voting power of directors, for example, by adopting voting entitlements which reflect the proportional shareholding of the shareholder who appointed them; 3) prescribe arrangements for meetings, including who must be present for a quorum and how often they must be held; 4) include a list of decisions which the directors must take to shareholders, such as decisions to sell key assets or businesses, acquire businesses, acquire assets of a specific type (e.g. land), borrow money or make certain personnel decisions (e.g. appointing or removing a CEO): this is in addition to those decisions which the Act says directors must take to the shareholders (changing the company name, constitution, certain share buy-backs etc.) o    A shareholders’ agreement c an thus give shareholders more certainty regarding when, and the nature of, decisions which directors must refer to them.   The constitution would have provisions regarding the issue and transfer of shares, and the process by which these transactions can take place. The starting point is that the power to issue shares or approve transfers rests with the directors, but they may also be required to offer shares to existing shareholders in proportions (known as pre-emptive rights). o    A shareholders’ agreement would more specifically regulate these transactions, by   Valuation  –  agreeing on the method of valuing shares   Succession plans  –  providing for the transfer of shares at particular times, e.g. in order to give effect to succession plans   Call options  –  agreeing on which events may give rise to other shareholders having a right to purchase the defaulting party’s shares     Put options  –  agreeing on which events may give rise to shareholders having an obligation to buy other shareholders’ shares     Drag along  –  prescribing when majority shareholders can require minority shareholders to join in a share sale to a third party   Tag along  –  prescribing when minority shareholders can require majority shareholders to involve them in a share sale to a third party II. Should the joint venture company be a party to the shareholders’ agreement? (A) Advantages and disadvantages of JVC becoming a party to the shareholders’ agreement; b) Ways to overcome the disadvantages)       Advantages of making the JVC a party to the JV/shareholders’ agreement   o  Undertaking of obligations is direct o  Easier to enforce obligations, particularly if the directors have little regard for shareholders’ wishes, or whether there are multiple parties to the JV (especially if there is a material risk that the directors of the company do not observe undertakings) o  Easier to enforce obligations, especially if the joint venture/sharehold ers’ agreement embodies more than rights qua members of the joint venture company o  Easier to enforce obligations of co-venturers in a bankruptcy situation where there is a receiver or trustee in bankruptcy
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