What's a Joint Venture?
Companies that have a common goal and are considering a joint venture can enter into a joint venture (JV). Agreements that are made in the context of responding to the cooperation are included in the agreement between the joint venture partners, i.e. in the joint venture agreement or joint venture agreement (JVA) or a shareholders' agreement (SHA). At the time the joint venture is formed into a BV or NV, the arrangements will also be included in the articles of association.
Design Joint Venture
A joint venture is entered into in order to achieve a common goal. This is often aimed at bringing together knowledge and a product or service, achieving economies of scale or expanding the product market. The parties will always first examine whether a joint venture brings more or less advantages than other forms of cooperation such as outsourcing or a merger. The parties will then, if they opt for a joint venture, assess the legal form in which they wish to form the joint venture. This can be a partnership or a legal entity. Usually a BV is chosen as the legal form for the joint venture, this probably has to do with the limitation of liability. In contrast to a BV, a partnership has the advantage that it is fiscally transparent. For further information on this knowledge base-page: joint venture agreement, the situation in which the joint venture is formed into a BV is discussed.
Influence of the introduction of Flex-BV on the Joint Venture Agreement
Thanks to the introduction of the flex-bv legislation, it has become even more attractive for companies to design the joint venture in a bv-construction. From now on, the granting of voting and profit rights to individual shareholders can be arranged more satisfactorily. In addition, the minimum capital requirement has been abolished and the partners can enter into cooperation more quickly without having a certain amount of capital at their disposal. A disadvantage of the introduction of the flex CV for the joint venture agreement is that dividend payments now have to be approved by the board of directors. To this end, the distribution test must be completed positively. The joint venture agreement often includes a profit percentage whereby the joint venture will distribute profits to the shareholders, bearing in mind that this provision can only be complied with if the distribution test allows this.
Relationships within Joint Ventures
The relationships within joint ventures have a major influence on the corporate governance of the company, on the profit and on the voting rights. Normally, the mutual relationships are determined by looking at the percentage contribution of the partners. However, the ratios can also be determined by making a valuation, looking at (i) how much the value of the company has increased; and (ii) how large the share of the party in question in this increase in value was. In addition, there may also be a proportion of profit rights, and the joint venture agreement should therefore consider what happens to the control rights if the profit rights change.
Duration of the Joint Venture Agreement
A joint venture agreement can be entered into for an indefinite period of time or for a definite period of time. An indefinite agreement may be terminated by either party in accordance with the terms and conditions of the joint venture agreement. In the case of a fixed-term joint venture agreement, the agreement may provide for the agreement to be (automatically) renewed for a specified period.
If the joint venture is formed in a BV or NV, the joint venture agreement provides that it will last as long as the shareholders are shareholders of the company. The agreements included in the joint venture agreement that relate to the aspects of exit, drag along and tag along then determine whether, and in what way, the JV partners can terminate the JV. Finally, under certain circumstances, the shareholders may decide to liquidate the JV. Depending on the relationship of control in the company and the position of the shareholders therein, it will have to be determined by agreement to what extent the various termination options can actually be used.
Deadlock
It may be the case that a joint venture is formed in a BV or NV where the shareholders both own 50% of the shares. This can result in voting being suspended because one half wants option A and the other half wants option B. Such a situation is called a deadlock situation. In order to avoid deadlocks, it is very important to regulate in the joint venture agreement how deadlock situations are resolved; deadlock situations can be resolved by making use of so-called escalation arrangements.
The end of the Joint Venture Agreement
As mentioned above, the joint venture partners can agree that the joint venture will be liquidated at a certain point in time, for example when the cooperation objectives have been achieved and economies of scale no longer arise from the joint venture. A share transfer will then have to take place. The difficult aspect of a share transfer is the valuation of the shares. Discussions about the valuation of shares can already be curtailed at the time the joint venture agreement is drawn up. There are a number of techniques (blown over from the US) with which such discussions can be resolved:
- Russian roulette: if the joint venture agreement states that the Russian roulette technique will be used, one of the shareholders makes an offer. The other shareholder can then choose (i) to buy the bidding shareholder's shares at the bid price or (ii) to sell his own shares at the bid price. According to literature, this technique provides a reasonable price because a bidder does not know whether to buy or sell. As a result, he will not bet too low but certainly not too high.
- Texas shoot-out: the Texas shoot-out is a bidding procedure in which one shareholder makes a bid and the other shareholder (i) accepts this bid or (ii) rejects it and makes a counter-bid. This process continues until one of the shareholders accepts a bid. The risk of this technique is that the shares will eventually be sold for too low or too high a valuation. This has to do with the fact that some shareholders will soon accept a certain bid because they are afraid that otherwise they will have to pay a very high price or precisely because you are dealing with stubborn shareholders who repeatedly refuse the bid because they want the highest possible price.
- Mexican shoot-out: at the Dutch auction, bids are made with a 'closed envelope'. Both shareholders make a bid for the shares of the other at an independent third party; the shareholder who bids the highest is ultimately entitled to the share package. He will pay the price he has bid himself. A variant of this technique is the Dutch-auction in which the shares are sold to the highest bidder at the price offered by the other. The Dutch-auction prevents the situation in which one shareholder deliberately (disproportionately) bets low.
In short, a joint venture or cooperation can lead to large (scale) advantages but also to major conflicts because conflicts can arise between the (selfish) shareholders. At the start of the cooperation, worst-case scenarios will often not be considered, whereas it is wise to think about this at the start of the cooperation. This makes the final settlement of future conflicts easier.
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