The level of participation a shareholder can have in an incorporated joint venture (“JVCo”) varies based on factors like their contribution and the industry in which the JVCo operates. Consequently, control within a JVCo can be disproportionately distributed, with the controlling shareholder having more control over the joint venture compared to the minority shareholder. In such cases, the decisions made by the controlling shareholder will affect the minority shareholder.
Form of Joint Venture Documents
A JVCo may adopt a constitution to regulate and govern the relationship and activities of the company, its shareholders and directors. However, the Companies Act 2016 has made the adoption of a constitution non-mandatory for companies. In such a case, a minority shareholder may want to push for the execution of a shareholders’ agreement to be entered into by the parties. Such an agreement may be drafted so as to have the same governing effect as that of a constitution.
Basically, provided that the appropriate joint venture vehicle is chosen, it is possible for a minority shareholder to build additional protection in the company’s constitution or a shareholders’ agreement.
Potential Areas of Conflict
To determine the appropriate type and level of protection needed for a minority shareholder, it can be beneficial to initially identify the areas of management within the joint venture where the interests of the parties may diverge. These areas become crucial points where the minority shareholder may seek protection in case of conflicts of interest.
Some of these areas include:
- The business plan
- Distribution of profits
- Future investment requirements
- Financing and indebtedness
- Entering or terminating significant contracts
- Changes in the business direction
- Intellectual property rights and research and development
- Composition of the management body
- Appointment and removal of directors
- Appointment of auditors
- Mergers, demergers, spin-offs, split-offs, or any form of restructuring
- Remuneration of directors and top executives
- Acquisition or sale of critical assets
Identifying these areas of potential divergence can help in formulating appropriate safeguards and protections for the minority shareholder in the joint venture.
Safeguards and Protections
Quorum and Voting Rights
To ensure that minority shareholders have a say in important decisions, they can employ various methods that give their votes more significance. For instance, in a company with a 60:40 ownership split, minority shareholders can raise the voting threshold to 61% for crucial resolutions. This means that both shareholders must agree for such resolutions to be passed.
While it's not possible to disregard statutory voting requirements, minority shareholders can safeguard their interests using the following approaches:
Class rights: Shareholders may hold different classes of shares, each with its own set of rights. Certain corporate actions, like increasing the share capital, can be considered as changes to class rights. Such changes would require the approval of specific class or classes of shareholders;
Weighted voting: The Joint Venture document(s) can specify that each shareholder is granted a designated number of votes per share. This allows a shareholder to potentially block special resolutions by wielding a higher number of votes;
Reserved Matters: Reserved matters are outlined in a shareholders' agreement and are often mirrored in the company's constitution. These matters can only be executed if unanimous approval from shareholders is obtained or if the minority shareholder's approval is secured. The specifics of a shareholders' agreement regarding reserved matters depend on the parties' commercial objectives and relative bargaining power.
Special Rights attached to Shares
Tag-along rights: These rights grant a shareholder the option (but not the obligation) to sell their shares when another shareholder receives an offer for a significant percentage of the joint venture company's share capital.
Drag-along rights: These rights impose an obligation on a shareholder to transfer their shares.
It is common for negotiated shareholders' agreements to include tag-along provisions in favour of minority shareholders and/or drag-along provisions in favour of the majority. These provisions may also be incorporated into the company's constitution.
Right to Appoint Directors
One approach to safeguard a minority interest involves the ability to appoint one or more directors to the JVCo. This can be accomplished by incorporating a provision in the shareholders' agreement that specifies the number of directors to be appointed by the minority shareholder. In a negotiated shareholders' agreement, additional provisions may be included to control the board's size, provide protection against removal, grant rights to be heard, establish veto rights, or even assign weighted voting powers to the appointed director.
Other rights commonly addressed in the shareholders’ agreement include:
- Provisions for dealing with deadlock and default
- Anti-dilution and pre-emption provisions on share transfers
If you would like to schedule a complementary consultation to know more on how you can protect your rights as a minority shareholder in a joint venture, please feel to do so by sending us a Whatsapp text or emailing us at email@example.com