Setting up and operating a joint venture

Structure

Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

The choice between a corporate or contractual joint venture would be based mainly on the need to establish an effective, separate legal entity (with all the additional costs that this implies) or not, as well as the possibility of assuring limited liability to the joint venture parties.

In a corporate joint venture, the choice between the available kinds of companies - mainly, corporations (joint-stock companies) and limited liability companies (LLCs) - would depend mostly on governance objectives and the ability to implement them.

Tax considerations

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

A joint venture entity would be generally considered as tax-resident in Italy, provided it has its registered office, place of effective management or carries out its principal business activities in Italy for the majority of the relevant tax year. As such, it would generally be subject to 24 per cent Italian corporate income tax and 3.9 per cent Italian regional turnover tax. The taxable base of the corporate income tax would equal revenues minus tax-deductible costs, as resulting from the annual profit and loss account after specific add-backs pursuant to applicable tax rules. Italian regional turnover tax would apply on a regional basis; however, unlike corporate income tax, major costs (eg, interest payments and some employees’ costs) would not be deductible from the taxable base. The regional turnover tax could, therefore, show a positive taxable basis even if the company is realising a tax loss.

A joint venture entity would be generally subject to interest-deductibility limitation rules. According to these rules, interest payments would be deductible up to the amount of interest income. The exceeding amount of interest payment would be deductible up to 30 per cent of the entity’s corporation earnings before interest, tax, depreciation and amortisation. The interest-deductibility limitation rule will be aligned to the European Anti Tax Avoidance Directive (EU) 2016/1164 provisions by the end of 2018.

Should a foreign entity control a joint venture entity that resides in Italy and either (i) the former is controlled, even indirectly, by an Italian resident; or (ii) its board of directors is composed primarily of Italian residents, the foreign-controlling company would be deemed as tax-resident in Italy, unless evidence to the contrary is provided to the Italian tax authorities.

The following are some of the aspects to be closely monitored to reduce tax risks:

  • transactions between the joint venture entity and the joint venture parties and affiliates should take place at arm’s length and be subject to a dedicated transfer pricing analysis;
  • the possible application of the Italian ‘shell companies’ regime if the joint venture entity does not show an appreciable degree of economic substance, which would imply a 10.5 per cent surcharge on Italian corporate income tax rate based on a fictitious income, computed by applying predetermined ratios on the value of the company’s assets;
  • re-characterisation by the Italian tax authorities (in some circumstances) of a shareholder loan as a capital contribution. Interest payments would consequently be re-characterised as non-deductible dividends;
  • re-characterisation by the Italian tax authorities of the joint venture entity’s transactions if they are considered as lacking economic substance and effected solely for obtaining undue tax benefits; and
  • if the joint venture entity controls an entity resident in a low-tax country, income produced by the controlled entity would be directly attributed to the controlling Italian entity.
Asset contribution restriction

Are there any restrictions on the contribution of assets to a joint venture entity?

There are no substantial restrictions that apply to the contribution of assets to a joint venture entity, especially if it is an LLC. In such case, any assets or receivables that can be subject to economic valuation may be contributed. Shareholders may also contribute services or work activity, subject to providing a collateral (insurance policy, bank guarantee or cash). In a joint-stock company, only assets and receivables can be contributed in kind.

Contributions in kind are subject to specific procedures and requirements. Typically, the party contributing assets in kind is required to submit a sworn appraisal of such assets prepared by a qualified expert (appointed by the contributing party or the court, depending on the kind of joint venture entity), attesting to the value of the assets being contributed. The corporate capital issued in exchange for the contributed assets cannot exceed (including possible share premium) the value set forth in the sworn appraisal. The appraisal may only be avoided in specific circumstances if the joint venture entity is a joint-stock company.

If the assets being contributed qualify as a business or line of business, additional requirements may apply (such as trade union consultation if employees in excess of a certain number are included in the perimeter of the contribution). The provisions of the Civil Code relating to the transfer of a business (in relation to joint liability for debts, automatic transfer of contracts without the assigned party’s consent, etc) would apply to such contribution.

Interaction between constitution and agreement

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

The governance of a joint venture entity is officially regulated by its articles of association. The shareholders may agree to specific governance regulations in the joint venture agreement (or in any ancillary shareholders’ agreement) to derogate or add to the provisions of the articles of association. The articles of association of an LLC are very flexible and can substantially include most, if not all, of the provisions that are normally set forth in a shareholders’ agreement. This is not fully the case for joint-stock companies, owing to the added complication that a shareholders’ agreement for such companies (or for entities that control such companies) cannot last a term in excess of five years. This time limitation does not apply, however, to a shareholders’ agreement that is instrumental to the cooperation arrangement underlying a joint venture entity, the whole corporate capital of which is owned by the same parties to the shareholders’ agreement.

In the case of a conflict between the provisions of a shareholders’ agreement and those of the articles of association, the parties usually provide that, among themselves, the shareholders’ agreement will prevail. The provisions of the articles of association, however, are enforceable and prevail with regard to third parties, who rely on the ‘official’ document and are not privy to the shareholders’ agreement. This means that a violation of the articles of association can generally be opposed by effectively blocking the violating transaction, where a violation of the related shareholders’ agreement - which is enforceable only among the parties - would entitle the non-violating party primarily to compensation for damages, if the breached provision is not capable of being specifically enforced or cured (eg, the transfer of a shareholding to a third party in violation of any transfer limitation only contained in the shareholders’ agreement would generally not be voidable with regard to the third party, but would entitle the non-breaching party to compensation for damages against the breaching party).

Articles of association, being the official constitutional document of an Italian entity, must be in Italian (if in two languages, as sometimes accepted, the Italian version will prevail). This is not the case for shareholders’ agreements, which can be in any language the parties may choose to adopt.

Party interaction

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

Joint venture parties may interact with the joint venture entity either based on their corporate relationship or as parties to the underlying business relationship. In both instances, if such interaction entails an exchange of information, it may be limited, based on competition laws.

Absent competition limitations, as shareholders of an LLC, joint venture parties are entitled to request and obtain from the directors information on the conduct of corporate affairs and access to corporate books, and other documents pertaining to the management of the company. Corporate rights to access information are more limited where the joint venture entity is a joint-stock company, in which case shareholders can only request access to the corporate books.

Joint venture parties can also interact with the joint venture entity through their designated directors, subject to the confidentiality duty owed by directors. Directors have the right to be informed on the conduct of the business even if they are non-executive, considering their duty to supervise the management of the company by executive directors. In a joint-stock company, the managing director has to report to the board of directors at least twice a year on the joint venture entity’s business and structure.

As parties to a commercial agreement, joint venture parties and the joint venture entity can exchange any and all information required to perform their respective obligations, subject to competition-law limitations.

Exercising control

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

Control in a joint venture entity is exercised at the shareholders’ or at the management body’s level, depending on the matter to be decided upon. Generally speaking, Italian law requires resolutions to be passed in any corporate body with a majority vote of the capital represented at the meeting (at the shareholders’ level) or the members present at the meeting (at the board level). This means that, to control a joint venture entity, it could suffice to own the majority of the corporate capital and appoint the majority of the board members. Minority investors would have limited ‘control’ through their general ‘administrative’ rights (eg, mainly, voting and information rights, and the right to dispute decisions that are in violation of the law or the articles of association) or any additional special right accorded by the articles of association, especially in an LLC (eg, the right to designate a certain number of members of the management body or veto rights (at the board or shareholders’ level) in respect of decisions on specific key matters, giving them a degree of control by way of preventing the passing of certain resolutions without giving them the power to pass them by themselves).

Finally, minority investors may also be entitled to designate an executive member of the management body with pre-agreed powers. In this limited area, they would exercise control of the company through the executive director.

Governance issues

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

A first set of typical issues relate to the decision-making process (ie, who would decide, and on what terms?) on matters that are key to the conduct of the joint venture business, including:

  • capital increases;
  • incurring indebtedness;
  • capital expenditures;
  • the disposition of key assets;
  • the adoption of business plans and budgets;
  • the approval of financial statements;
  • key contracts; and
  • the hire or dismissal of executives and key personnel.

The manner in which such issues are dealt with varies significantly depending on the rights accorded to minority investors, which would be more significant the higher the percentage of corporate capital they own, reaching a level akin to joint control in the event of a 51:49 per cent split (in a 50:50 per cent scenario, absent specific deadlock provisions in the joint venture agreement or in the articles of association, by the mere application of statutory provisions, neither joint venture party would be able to pass decisions on its own).

Another set of relevant issues relates to the ‘stabilisation’ of the entity’s ownership and termination of the joint venture, which involve issues of limitations on the transfer of equity interests, and the determination of appropriate exit and divestment events and strategy.

Funding and the related dilution issues affecting joint venture parties are strongly debated, given the conflicting interests between providing the joint venture entity with the cash necessary to achieve its goals, using the appropriate mix of debt and equity, and avoiding unnecessary dilution of a party and reduction of its governance rights.

Nominee directors

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

Directors of an Italian company have a duty to operate within the powers delegated to them and in compliance with the articles of association and the law. They owe a fiduciary duty to the company and its shareholders to act in their best interests (which may not necessarily coincide with the interests of their nominating shareholder). The violation of such duties makes them liable to the company and its shareholders and creditors for damages. In case of bankruptcy, the receiver of the bankruptcy may assert such rights. Directors are required, therefore, to strike a difficult balance between the representation at the board level of the interests of the nominating shareholder and the best interest of the joint venture entity, including in determining which information can or cannot be provided to the shareholder.

A corollary of the above are the rules governing conflicts of interest in the management body, where directors must declare when they bear a third-party interest in a specific transaction, and the management body must adequately motivate any resolution passed whenever such conflict is disclosed (in the case of executive directors, they must refrain from taking the conflicted action). If such formalities are not complied with, any decision taken with the vote of the director in conflict (and that would not have been passed absent such vote) can be challenged if prejudicial to the company, with the relevant director also being liable for damages caused by the resulting actions or omissions. The above rules apply to joint-stock companies and, similarly, to LLCs, where the law, however, does not specifically require the disclosure of the conflict.

Competition law

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

Based on Law No. 287 of 1990, as recently modified by Law No. 124 of 2017, the formation of a joint venture, whether by creating a new company or through the acquisition of joint control by two or more undertakings over a pre-existing company, may constitute a concentration susceptible to trigger a merger control procedure with the Italian Antitrust Authority (IAA), if certain additional conditions are met.

In particular, if the joint venture can be regarded as a full-function undertaking (ie, it carries out all the functions of an autonomous economic entity on an ongoing basis), the transaction constitutes a concentration. A further requirement is the absence of a coordination between the undertakings involved.

In order to assess whether a joint venture is ‘full-function’, the IAA would take into account the following:

  • whether the joint venture has sufficient resources to operate independently on the market;
  • whether it performs activities beyond one specific function included in the parent companies’ business;
  • whether it is engaged in substantial market relationships with the parent companies - in terms of sales or purchases - for a period not exceeding the initial start-up period or, at a maximum, three years; and
  • whether it is intended to operate on a long-term basis.

The formation of a full-function joint venture must be notified to the IAA prior to its completion provided the following conditions are cumulatively satisfied:

  • the aggregate turnover realised in Italy by all the undertakings concerned exceeds &##8364;495 million; and
  • the aggregate turnover realised in Italy by each of at least two of the undertakings concerned exceeds &##8364;30 million.

Transactions involving the creation of a joint venture falling outside the scope of merger control regime should, in any case, be assessed under the rules on anticompetitive agreements and concerted practices.

Provision of services

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

Key considerations concern back-office and support or administrative services and derive from the assessment, from a competition-law perspective, as to whether the joint venture should be full-function or not. One must also consider the costs and complexity of the joint venture entity structure. Transfer pricing issues may also be relevant.

Employment rights

What impact do statutory employment rights have in joint ventures?

Employment relationships with joint venture entities are not treated differently than other employment relationships. Nonetheless, frequently, employees of one of the joint venture parties are seconded to the other party or to the joint venture entity itself. Under this scheme, the employer makes the employee available to another company, while the employment relationship continues to be managed by the employer even if the employee is providing his or her services to another company. Secondments are subject to certain restrictions. In particular, pursuant to section 30 of Legislative Decree No. 276/2003, for a secondment to be considered lawful, the following must occur:

  • the secondment must satisfy a specific interest and be for the benefit of the seconding company, not of the host company, as, in the latter case, the transfer of the employee from one company to another would be regarded as an unlawful supply of manpower;
  • the secondment must be temporary; the maximum duration is not set by law but it should be linked to the reason of the secondment itself;
  • the consent of the employee is not required, unless the secondment entails a change of the employee’s duties; and
  • the employer must explain in writing the existence of technical and organisational reasons if the secondment requires the employee to move to a place of work more than 50km away from his or her original place of work.

A lack of the above requirements may expose the seconding company and the host company to various risks. In particular:

  • The employee may claim to be considered an employee of the host company. This also means that, if the employee is dismissed - for whatever reason - by the seconding company, he or she could challenge the dismissal on the assumption that the real employer is the host company.
  • An administrative fine is applicable to both the seconding company and the host company, equivalent to €50 per day per each employee unlawfully seconded (for the entire duration of the secondment). The maximum amount of the penalty cannot be higher than €50,000 for each company.
Intellectual property rights

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

Intellectual property (IP) rights are typically licensed to the joint venture entity, so that, in the event of termination of the joint venture (or the licensor’s ceasing to be a party to the joint venture), they can be easily terminated, with licensed rights reverting to the licensor. This may pose, however, certain limitations when the joint venture parties have long-term goals, given that perpetual licences would entitle either party to withdraw simply by giving adequate notice. Similarly, the fact that licensed rights can revert to the licensor, means that the goodwill created by the use of the IP by the joint venture entity would benefit the licensor. The parties should be mindful to issues related to ‘connected’ or ‘derived’ IP developed by the joint venture entity itself.

These issues may typically be resolved by a transfer of ownership, whose value could be included in the contribution made by the relevant joint venture party. The consequences of the joint venture’s termination would, in this case, be more complex and involve the resolution of the same issues as above (ie, value of the IP and rights to IP that is connected to or derived from it) if the transferor reserved a repurchase right on the IP.