Control Issues of International Joint Ventures
By John J. Beardsworth, Jr.*
Cross-border power project financings often involve several parties entering a joint venture to develop a power project through contributions of assets, technology or management skills. These joint ventures can take various legal structures depending on the specifics of the transaction, the objectives and interests of the investors, and the legal requirements of the host country. One of the major issues in joint ventures of any structure is control of the development and operation of the project. Through effective drafting of joint venture agreements, parties can effectively provide for control mechanisms that promote effective management and protect the parties' varied interests.
Many international power project joint ventures involve a multinational project developer and a local investor. The parties typically negotiate a shareholders' agreement providing for the organization of a corporation (or some separate entity) to own the project assets and control and manage the project (the "project company"). With the existence of "two or more masters" whose "objectives and business philosophies may . . . be sharply at variance" the joint venture has the inherent potential for control problems. The parties can effectively resolve these control issues, in part, through the use of carefully formulated contractual language in the joint venture agreement or shareholders' agreement to affect the relative influence of each of the parties in the management of the venture.
Common Control Issues.
While control issues are as diverse as the types of projects involved, certain control issues commonly arise. Often a party with only a minority financial interest in the project will want or be promised control over the management of the project. Many privatizations of power generation facilities, for example, have been structured to give a minority strategic investor management control over the power generation facility. Determination of which party or parties will manage the joint venture usually depends upon which party holds the operational skills necessary for the venture's success. Often a minority shareholder, the project developer or an experienced project operator, holds these development or operational skills due to its expertise in the power project sector and is, therefore, vested with control. But even where an investor is agreed to be given operational control of the project, there must be well defined limits to this control to protect the legitimate interests of the other investors/owners of the project.
Other major control issues between the joint venture parties are risk and timing of return. These are always difficult issues and it is preferable that the parties have similar views on them. The additional return that would justify accepting incrementally more risk may be much greater for one investor than for another. The perceived level of risk and return, the required investment to develop the project and the share from each party should be agreed in advance and changes in the risk profile of the project or additional investment in the project should thereafter require unanimous approval unless the continuation of revenues from the project depends upon that additional investment.
Another major control issue arises when, as is typical in many power project joint ventures, the project company enters into an agreement with the controlling party or an affiliate - an affiliated transaction. When the controlling party has a vested interest in the affiliated transaction it has the potential to unduly influence project company decisions. These problems can be resolved, in part, through provisions in the joint venture agreement or shareholders' agreement limiting affiliated transactions. Further, the host country law may provide limitations on the ability of directors that represent an affiliated interest to be involved in decisions regarding an affiliated transaction.
Mechanisms for Dealing with Control Issues.
Especially in the case of a separate entity joint venture, many control issues will be governed by the host country's corporate law addressing shareholders' rights. An extensive legal framework may govern the control and management of the project company. This structure will have to be considered carefully and the relevant agreements drafted to derive the benefits of and to avoid to the extent possible any undesirable aspects of the governing legal framework. The choice of jurisdiction for incorporation of the project company may be a desired method to establish the intended control between the parties. This option may be limited, however, if the host country has a requirement that the project company be organized under the laws of the host country. If the law of the jurisdiction of incorporation of the project company does not provide adequate shareholder protection, the shareholders' agreement will have to provide additional protections.
In negotiating the joint venture agreement or shareholders' agreement, the noncontrolling party must protect itself from imprudent or self-motivated decisions by the controlling party and assure that its interests are effectively protected. The joint venture agreement or shareholders' agreement should contain special provisions for fundamental changes in the project company requiring the consent of the noncontrolling party. Such fundamental changes include: amendment of the articles of incorporation; sale of substantially all of the project company assets; merger or consolidation; voluntary dissolution; changes in the number of project company shares; sale of any interest in the project company; entry into any agreement or contract with the controlling party or an affiliate thereof; and material amendments to the project agreements.
In drafting joint venture agreements or shareholders' agreements, the parties must balance the protection of their respective interests with efficient, effective management. The shareholders' agreement should not require unanimous or super-majority consent for so many decisions that management of the project company becomes cumbersome and yet it should effectively protect the noncontrolling party from imprudent or self-interested decisions by the controlling party.
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