Cross-Border M&A: Joint Ventures and Shareholder Agreements

JV Examples

• Banco Santander & Zurich Financial Services Group:

  • Strategic alliance to strengthen insurance distribution in Latin America (Brazil, Chile, Mexico, Argentina, and Uruguay).
  • Santander created a holding company with its Latin American insurance units.
  • Zurich acquired 51% of the company, managing the companies, while Santander retained 49%.
  • Agreement for Santander to distribute the alliance’s insurance products for 25 years.
  • Zurich paid Santander $51\%$ of USD $1.670$ billion at the transaction's close.
  • Earn-out mechanism for achieving specific profit performance targets over 25 years.

• US Private Equity Find (PE) & SASC Renewables (ALFA Power):

  • Joint Venture to co-develop renewable energy projects in Italy.
  • Intends to develop over $1$ GW of renewable energy projects in Italy.
  • ALFA Power benefits from PE’s project financing and SASC Renewables’ regional relationships and development expertise.
  • Initial goal: progress development of over $1$ GW of project capacity to a ready-to-build stage across wind, battery energy storage systems, and photovoltaic solar.
  • Near-term focus: co-development of onshore wind projects in Italy, with PE having a priority right to supply equipment and services.
  • Future exploration of project development opportunities outside Italy.

Shareholders Agreements / Joint Venture Agreements (ABA Joint Venture Agreement Model)

Scope of the Business

• Definition of the scope of the business is critical for ongoing operations.
• It is difficult to predict future business evolution at the outset.

Governance

• Extent of authority given to management vs. shareholders.
• Choice of appointees to the board; proportionate board representation.
• Consider whether representation should cease if ownership falls below a certain level.
• Authority to retain and remove senior officers, including the CEO.
• Scope of protection for each shareholder on fundamental decisions and changes.
• Substantive standards and processes for non-arm’s length transactions and conflicts of interest.
• Process for developing, approving, and updating the business plan and budget.

Other Matters

• Frequency of governing bodies' meetings.
• Notice requirements.
• Quorum for valid meetings and super majorities.
• Who can call meetings.
• Under what circumstances can bodies act without an in-person meeting.

Management, Auditors

• Officers responsible for day-to-day operations and a Chair.
• Nomination Rights.
• Right to remove and replace officers.
• Limits on authority of officers, signing authority, etc.
• Selection and change of auditors.

Reporting and Access to Information

• Frequency of financial statements.
• Nature and frequency of other reporting requirements.
• Permitted access to books, records, and employees—notice, during business hours, etc.
• Consider removing access rights if interest falls below a certain threshold.

Actions Requiring Consent – Either Board or GSM

• Approval of annual business plan and budget or any change.
• Transactions outside ordinary course of business (over a specified $ annual threshold).
• Change of name.
• Change in scope of the business.
• Investments outside the scope of the business in excess of a specified $ threshold unless contemplated in annual business plan and budget.
• Creation of subsidiaries.
• Admission of new shareholders (issuance of stock).
• Any transfer of ownership interests.
• Issue, sale, or transfer of shares or rights to shares of subsidiaries.
• Incurring debt, granting security, or guarantees unless contemplated in annual business plan and budget.
• Payment of dividends or other distribution or return of capital except as contemplated in a distribution policy or annual business plan and budget.
• Change in board, establishment, or change in committees or appointment or removal of officers.
• Insolvency-related actions.
• Certain types of contracts—e.g., those with competitors, not terminable on $x$ days' notice without payment, contain change of control clauses, etc.
• Capital expenditures not contemplated in annual business plan and budget.
• Acquisitions, investments in third parties, strategic alliances, or partnerships—either outright prohibition or subject to financial thresholds. Exclude ordinary course acquisitions of assets if contemplated in business plan and budget.
• Disposals of assets in excess of a specified limit or unless contemplated in business plan and budget.
• Consider whether any approvals required in connection with litigation or other proceedings.
• Change in charter or organizing documents.
• Corporate reorganizations, amalgamations, mergers, issue of shares, and rights to shares in general or to third parties, including public offerings.
• Commencing or making any significant decision relating to litigation, administrative, or investigative proceeding (if not in the ordinary course of business).
• Sunset Provision: consider removing certain veto rights if ownership drops below a threshold or if the shareholder is in material default (define material default and consider a cure period).

Disputes

• Mediation.
• Litigation or arbitration.
• Define the mandate of arbitrators (any dispute vs. specified types/clauses). Ensure arbitrator can order specific performance and/or consider preserving the right to go to court for certain breaches (e.g., breach of confidentiality, non-solicit, or non-compete).
• Location.
• Applicable law.
• Arbitrators—number and how chosen.

Distributions

• Decision on whether profits should be reinvested or distributed.
• Often there is a period where no distributions are made.
• Agree on a formula for distributions, subject to change by the shareholders.

Financing

• Agree on financing philosophy—intent to use mainly third-party debt to the extent available?

Contributions

• Pro rata to interest in the company? Optional or a required capital call?
• What if one shareholder does not have the necessary funds?
• Agreement to specify maximum amount either in actual dollar terms or based on some formula. Ties back into business plan and budget.
• Agreement should also specify who can initiate capital call and who determines what type of capital call it will be; debt or, if applicable, equity.
• Consider fixing in advance all relevant terms of debt, including repayment terms, ranking of obligation to repay, etc.
• What happens if there is a default in providing moneys after a call has been made?
• On a default by one shareholder, can the non-defaulting party withdraw commitment? Or take up defaulting party’s obligation on terms either more favorable as to, for example, interest rate, or causing dilution of defaulting shareholder’s interest. At what point does the failure to provide financing lead to exit rights, liquidation rights, or rights to bring in third-party investors?
• These provisions will always be hotly negotiated—especially if one of the shareholders is not as well established or creditworthy as the other.

Corporate Opportunities

• Requirement to offer opportunities within the scope of the business.
• If the company turns a business opportunity down (whether a new business or an acquisition) permitting the other shareholders to take up on the same (or no more favorable) terms than those offered to the company.

Non-Compete/Non-Solicitation

• Generally a very difficult and sensitive part to negotiate.
• Consider whether the shareholders should be subject to a non-compete and whether there should be any constraints on hiring personnel during some period after one shareholder has exited.

Breaches

• Consider what acts or omissions should be classified as material defaults.
• It may be appropriate to have different classifications of breaches—classified by consequences; e.g., dilution, liquidation, puts, calls, etc.

Share Transfer Restrictions and Related Provisions

• Lock-Ups.
• Transfer to Affiliates.
• Right of First Offer and Right of First Refusal.
• Tag Along.
• Drag Along.
• Pledge of Shares.

Termination/Dissolution

• Under what circumstances the company will be dissolved.