Types of joint venture
What are the key types of joint venture in your jurisdiction? Is the ‘joint venture’ recognised as a distinct legal concept?
There is no specific legal concept of ‘joint venture’ under French law.
There are effectively two types of joint venture structures in France: contractual joint ventures, which must comply with the general rules of French contractual civil law; and corporate joint ventures, which are by far the most common. Joint ventures can take any existing corporate form, although some are more common than others. Commercial companies are commonly used for corporate joint ventures when tax transparency is not required.
The simplified joint-stock company (SAS) is the most common corporate form used for joint ventures because of its flexibility, which enables its shareholders to reflect their agreement in the articles of association regarding corporate governance and restrictions on share transfers. Companies without legal personality (in particular, partnership agreements) are sometimes used where the purpose of the joint venture is a one-time project and where an incorporated entity (whether civil or commercial) is not appropriate (for example, because the joint venture partners intend to share profits without creating a company structure or establishing a capital).
In what sectors are joint ventures most commonly used in your jurisdiction?
Joint ventures are used in all sectors but are most common in the real estate sector (in particular, in relation to real estate development projects), in infrastructure and transport projects, in the retail business and in the financial sector.
Rules for foreign parties
Are there rules that relate specifically to foreign joint venture parties?
As a general rule, there are no French corporate-law restrictions on a foreign entity holding a stake (either minority or majority) in a joint venture; however, there are certain restrictions in France on the ability of foreign entities to invest in certain French sectors.
In particular, the prior approval of the Minister of Economy is required in the case of foreign investments in sectors that are considered to be sensitive (ie, likely to jeopardise public policy, public safety or national defence interests). The relevant sensitive sectors are listed under the law. The current legal dispositions are under careful scrutiny in the context of the discussions around the new draft legislation referred to as the ‘Action Plan for Business Growth and Transformation’ (Loi Pacte), which may broaden the scope of the activities or situations requiring prior approval from the Minister and, more generally, reinforce the control and sanctions of foreign investments in sensitive activities. The draft legislation is currently being discussed at the French parliament.
These restrictions apply to both non-EU investors and EU investors when the purpose of the transaction is for the investor to obtain the control of a French company, and only to a non-EU investor when the purpose of the transaction is to obtain a shareholding in a French company exceeding one-third of the share capital or voting rights.
The approval of the transaction by the Minister may be conditional upon the undertaking of certain commitments, such as the carve-out of certain sensitive activities or assets.
Ultimate beneficial ownership
What requirements are there to disclose the ultimate beneficial ownership of a joint venture entity?
In the context of growing concerns around the fight against money laundering and financing of terrorism, a new French regulation is currently being put in place, pursuant to which the ‘beneficial owners’ of entities registered with the French trade and companies register will have to be identified. The term ‘beneficial owner’ is currently defined as an individual who either directly or indirectly holds more than 25 per cent of the share capital or voting rights of a company, or who, by any other means, exercises a power of control over the management or governance bodies of the entity or the shareholders’ meetings.
Setting up and operating a joint venture
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Contractual joint ventures are sometimes used because of their flexibility, tax and accounting transparency, and in absence of a transfer of assets to the joint venture. Contractual joint ventures can be drafted in a foreign language.
The most common form of corporate joint ventures is the SAS as it offers more flexibility while ensuring limited liability to its partners (see question 1).
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?
Parties sometimes opt for specific corporate forms of joint ventures that enable tax transparency (such as a commercial partnership or civil partnership). Under the tax transparency regime, the profits of joint ventures are taxed at the level of each shareholder pro rata their share in the joint venture.
Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
In most cases, the contribution of assets to a corporate joint venture implies that a contribution appraiser be appointed to assess the valuation of the assets retained by the parties.
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?
No issues arise in contractual joint ventures since the parties are only bound by the joint venture agreement itself.
In the case of a corporate joint venture, the parties may decide to include a number of clauses (in particular, those relating to governance and liquidity) either in the articles of association of the company or in a shareholders’ agreement. The main difference between them is that the articles will be public and, therefore, also binding against third parties, whereas the shareholders’ agreement will remain confidential. In addition, French law provides that any transfer of shares within certain forms of corporates (such as an SAS) that are made in breach of the provisions contained in the articles of association shall be declared null and void; this would not be the case if such provisions were only contained in a shareholders’ agreement.
Usually, the parties state that, in case of discrepancy with the articles of association, the terms of the shareholders’ agreement shall prevail.
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
Board members (when legally mandatory) and legal representatives of a joint venture have fiduciary duties and must act in the best interests of the joint venture company, whereas shareholders can act in their own best interest.
Generally, legal representatives or board members cannot disclose confidential information to shareholders (even in the case of their appointor), but joint venture agreements often provide otherwise. Joint venture agreements often provide for reinforced monthly, quarterly or semi-annual reporting obligations to the shareholders. This is particularly true in France for real estate joint ventures where a shareholder is structured as a regulated real estate investment fund, eligible to the SIIC regime (OPCI), which need, pursuant to applicable regulations, to be provided with extensive information. Specific information-sharing agreements may be negotiated in addition to the joint venture agreement.
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
Certain categories of decisions or actions are reserved for approval by a qualified majority of the shareholders. Such decisions usually include:
- business-reserved matters, including:
- material changes to the business:
- a sale or acquisition of a substantial subsidiary or asset (outside certain thresholds or provisions of the business plan);
- alternation to the general nature of the business; or
- an initial public offering;
- joint venture commitments:
- the approval of a business plan and budget;
- capital expenditures in excess of certain thresholds;
- entry into material or unusual contracts, or agreements;
- substantial borrowing or lending, refinancing and giving guarantees or securities; and
- entering into agreements with shareholders; and
- joint venture commitments:
- initiation of a settlement or litigation; and
- minority-protection decisions, including:
- the amendment of constitutional documents;
- variation to the share capital; or
- changes to the structure of the joint venture.
- minority-protection decisions, including:
- material changes to the business:
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
The most common governance issues relate to the composition of the board, decision-making and relevant majority rules of the board; the appointment of the CEO or other top managers of the joint venture; and the determination of the list of reserved matters.
In most joint venture agreements, provisions concerning escalation or negotiation are included as preliminary measures to ensure that more radical deadlock provisions are only used as a last resort. For example, some joint ventures do not contain any final deadlock-breakers outside of escalation, while others provide for a large spectrum of remedies, ranging from put and call options over the shares of the party that refuses to consent to the decision, which would result in deadlock to buy or sell provisions (also known as Russian roulette), to issues around the chairman casting vote (when there is a majority holder) or expert determination.
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?
Under French law, the existence of a board is, in most structures, and particularly in joint venture structures, not mandatory. The board will, therefore, in most cases, be contractually agreed in the joint venture agreement and included as such in the articles. In this context, the directors appointed by shareholders do not have fiduciary duties concerning the company (contrary to the legal representative of the joint venture). Most joint venture agreements, therefore, provide for a specific conflict-of-interest procedure, pursuant to which (i) the conflicted members are not allowed to vote; or (ii) the other members may not have a casting vote. The difficulty often lies with the definition of conflict.
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
Under French competition law, the creation of a joint venture can be subject to the prior control and authorisation of the French Competition Authority or the European Commission where two cumulative conditions are met: the joint venture constitutes a concentration; and the turnover thresholds set out by either French regulations (article L430-2 of the French Commercial Code) or European regulations are met.
A joint venture constitutes a concentration if it is a ‘full-function’ joint venture (that is, when it performs ‘on a lasting basis all the functions of an autonomous economic entity’). This means that the joint venture, when operating in the market, must perform all the functions usually carried out by other undertakings in this market. It must hold sufficient initial resources to work independently from its parent companies (for example, human resources, finance, staff, assets (tangible and intangible), commercial responsibility and so on), and be sufficiently autonomous from them. For example, a joint venture whose exclusive purpose is to realise a specific function on behalf of its parent companies, or a joint venture whose only clients are its parent companies, are not considered to be full-function joint ventures.
If the joint venture is full-function and exceeds the turnover thresholds set forth by the law, prior clearance by the French Competition Authority or the European Commission is mandatory.
When a joint venture is created, the undertakings concerned are the companies creating the joint venture. In the case of a joint takeover of an existing business, the undertakings concerned are the companies taking control and the existing acquired business. However, when the pre-existing company was under the exclusive control of a company and one or several new shareholders acquire joint control while the initial parent company remains, the undertakings concerned are each of the companies exercising joint control (including the initial shareholder). In this case, the target company is not an undertaking concerned, and its turnover is part of the initial parent company’s turnover. For the acquiring company or companies, or the companies that create or participate in a joint venture, the calculation of the turnover must take into account the entirety of the group’s activities, and not only the activities of the subsidiaries that directly acquire control of the joint venture. In contrast, for the seller (if any), only the turnover of the sold assets must be taken into account.
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?
From a legal point of view, a regulated agreement for the provision of services between related entities may require the prior approval of the corporate governing body of the interested entities. This is usually a way for the shareholders of a joint venture to ensure that all agreements concluded by the joint venture with joint venture parties are conducted at arm’s length.
From a tax standpoint, the provision of services to the joint venture is subject to transfer pricing rules. As a result, French tax authorities can adjust prices related to intragroup services, which are not charged at arm’s length.
What impact do statutory employment rights have in joint ventures?
When an employee of a joint venture party is seconded or transferred to the joint venture itself, the statutory employment rights applicable to all employees of such joint venture will apply to the concerned employee and could, therefore, result in a change of employment rights (including collective agreement rights, profit-sharing arrangements, etc) applicable to him or her.
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 required for the operation of the joint venture can be contributed by one of the parties, but this solution may raise difficulties upon termination of the joint venture.
Another option is for the partner to grant a licence agreement to the joint venture for the use of the concerned IP rights. Usual negotiation issues between the parties include whether the licence should be exclusive or not and whether they should be limited in geographical scope and duration.
Funding the joint venture
How are joint ventures generally funded in your jurisdiction? Are there any particular requirements relating to funding and security packages?
Funding is usually made available to the joint venture by the shareholders through debt (shareholders’ loans) or equity (shares or other securities) - or, more commonly, through a combination of the two. Taxation considerations are often key in determining the joint venture’s debt-to-equity capital structure. Debt funding can also be obtained from external sources; although, recourse to the shareholders will commonly be required by lenders, particularly in the context of a start-up joint venture.
Shareholders of a joint venture often subscribe to a combination of share capital and debt (usually shareholders’ loans), with the debt being subordinated to any external bank debt and (possibly) even to other third-party creditors. This subordinated debt is technically ‘quasi-equity’ but it is easier to pay interest on it than it is to pay dividends because, even if the business is doing well, there may not be sufficient distributable reserves to pay dividends; it is also easier to repay debt because the capital-maintenance rules will not apply. Often, the share capital and shareholders’ debt are ‘stapled’ together so that they may only be transferred as a single unit; this is because, economically, they are regarded as part of the same investment. Where both shareholders provide debt, each will be keen to ensure they are repaid pro rata and at the same time.
Ensuring that adequate funding is made available to the joint venture on an ongoing basis may be key to its success. However, a shareholder is often reluctant at the outset to commit to providing (or guaranteeing) future funding in circumstances where, at the relevant point in time, it knows it may not consider further funding appropriate or it may not have sufficient resources (or may wish to use its resources in other ways). As a result, negotiations in this regard can become intense, and solutions may be relatively complex and convoluted.
When future funding commitments are included in the joint venture agreement, the parties usually ensure that some flexibility is retained.
It is common to specify in the joint venture agreement the consequences of failure to comply with any future funding obligations. These vary significantly from deal to deal, with the least severe being an interest charge on late payment, and range from the funding party being given the ability to dilute the joint venture interest of the non-funding party, or the suspension of the non-funding party’s rights under the joint venture agreement (such as board representation, rights on reserved matters, etc), to the most severe sanction: a put option (or call option) over the share in the joint venture at a premium over (or discount to) market value.
Capital injection restrictions
Are any restrictions on the injection of capital into, or the distribution of profits or the extraction of cash by other means from, the joint venture entity imposed by law or regulation?
There are no specific limitations of injection of capital into a French joint venture. As regards the distribution of profits, a French company may distribute:
- with respect to any financial year, an amount equal to the sum of:
- the profit made during that financial year;
- minus the amount that must be allocated to statutory legal reserves accounts, as required by law (5 per cent of the yearly profit until the total amount of this specific reserved account corresponds with 10 per cent of the company’s share capital);
- plus the amount of any profit carried forward; and
- the amount of any existing reserves (including share or issuance premium but excluding the statutory legal reserves).
In addition to the above conditions, a French company may only distribute dividends if the shareholders’ equity of the company is not less than, and the contemplated distribution does not result in the shareholders’ equity being less than, the aggregate amount of the share capital and the amount of the mandatory reserves account.
A distribution of dividends is also subject at any given time to other constraints, including, without limitation:
- the corporate interest of the company (meaning, in particular, that a distribution must neither exceed the company’s financial capabilities at the time the distribution is made nor jeopardise its long-term financial situation or future development);
- the cash requirements and cash availability of the company;
- its financial needs and the cost of incurring additional indebtedness if required as a result of the distribution (as compared to meeting such needs through internal resources); and
- other requirements or covenants, such as the requirement to maintain a certain level of shareholders’ equity in order to maintain a certain rating or costs of borrowings.
What tax considerations should be taken into account in the operation of the joint venture?
French tax regulation contains thin capitalisation rules limiting the deductibility of interest. The thin capitalisation rules apply to entities subject to corporate income tax and to loans granted by the related entity. Thin capitalisation limitations are based on the following conditions: the debt-to-equity ratio, the interest-to-coverage ratio and the ‘level of interest received’ test.
Accounting and reporting issues
Are there any noteworthy accounting or reporting issues for the joint venture partners regarding their investment in the joint venture?
From an accounting standpoint, consolidation issues (eg, governance rules) are usually an important topic when structuring joint ventures.
Under French accounting law, a company is required to prepare consolidated accounts when it has ‘exclusive control’, ‘joint control’ or a ‘significant influence’ over a company or companies (ie, corporate joint ventures). Depending on these situations of control, the accounts shall be consolidated following three different consolidation methods.
Exclusive control is characterised either through:
- de jure control: the direct or indirect owning of the majority of a company’s voting rights or the power to appoint, during two consecutive financial years, the majority of the members of administrative, managing and supervisory bodies of another company;
- de facto control: the direct or indirect holding, during the considered period, of more than 40 per cent of the voting rights of another company while no other shareholder of such a company holds, directly or indirectly, a larger percentage of voting rights); or
- contractual control: when a company has the right to exert a dominant influence over a company, pursuant to an agreement or the articles of association of such a company (contractual control). Companies over which an exclusive control is exercised must be fully consolidated by the controlling company.
Joint control implies the sharing of the control of a company jointly run by a limited number of shareholders, so that decisions within the company result from their agreement. Companies over which joint control is exercised must be proportionally consolidated.
The significant influence results from the power to take part in determining the financial and operational policies of a company, without exercising control. A significant influence over a company is presumed when another company owns, directly or indirectly, 20 per cent of the voting rights of such a company. Companies over which a significant influence is exercised must be accounted for by the equity method.
Deadlock, exit and termination
What deadlock provisions are commonly included in joint venture agreements in your jurisdiction?
A deadlock generally occurs as a result of a disagreement between the parties in relation to a decision that requires the agreement of all, or at least most, of the parties. For instance, these may include decisions relating to a strategic or business matter, the acquisition or the sale of strategic assets or an investment exceeding certain amounts.
It is common to include a deadlock provision and a resolution mechanism in the joint venture agreement. However, omission of this clause is a valid option, which could be used to try to encourage the parties to reach an agreement.
It is possible to include a variety of provisions (frequently described as ‘escalation provisions’) for potential disagreements that parties may regard as potential deadlock issues to be escalated (eg, to the shareholders or CEOs of ultimate holding companies) in the hope that this escalation will lead to a resolution of the disagreement before it becomes a deadlock event. Contractual deadlock provisions are usually no more than a background to discussions at the relevant time as to the fate of a joint venture company where its shareholders’ interests are no longer aligned.
Under French law, and in the absence of a specific deadlock provision included in the joint venture agreement, the majority shareholder could claim for undue use of minority powers. Undue use of minority powers implies that one or more minority shareholders have prevented the adoption of a decision requiring a certain majority by either a hostile vote or an abstention.
The following cumulative conditions must be met in order to qualify for an undue use of minority:
- the behaviour of the minority shareholder compromises the company’s interest;
- the minority shareholder is preventing the implementation of an operation on which the survival of the company depends (the adoption of the resolution at stake must be not only useful but also essential to the proper functioning of the company); and
- the minority shareholder’s aim is to favour its own interests to the detriment of the majority shareholders.
It could also be noticed that the tort is not characterised if the disputed decision is regularly adopted. For instance, a misuse of voting rights has been characterised by the French Supreme Court as being where a minority shareholder has refused to make a capital increase necessary to the survival of the company that would not, in any way, harm the minority shareholders.
In addition to the allocation of possible damages, French courts have decided that a proxy must be appointed for the purpose of representing the defaulting minority shareholder at a new general meeting and votes for decisions that are in accordance with the company’s interest but that do not affect the minority shareholders’ interests.
What exit provisions are commonly included? Does the law restrict any forms of mandatory transfer provision or any basis of calculation?
There is a wide variety of exit provisions that can be seen in France in case of deadlock.
Put or call options are frequent. In majority-minority joint ventures, there is often a call option for the majority shareholder and a put option for the minority shareholder. This solution assumes that it is possible for one party to continue the business of the joint venture without the other. In most cases, the price of the option is based on the market value of the joint venture assets; this requires an independent third party to conduct a valuation in order to ensure that the price is determinable, as required under French law.
An alternative is the buy or sell provision (Russian roulette), which has been recognised as legally valid by French courts. In essence, one shareholder can specify a price for the shares in the joint venture and, if it does so, the other must decide whether to buy or to sell his or her stake at that price. The aim of this clause is to ensure that a fair price is suggested for the shares. The downsides are that it favours a financially stronger party, and the party initiating the process will not, at that point, know whether it will end up buying or selling the shares.
Another possibility could be to provide, as an exit provision, for the 100 per cent sale of the joint venture to a third party (either through the sale of the joint venture shares or the sale of the joint venture business (followed by a winding up)). In such case, the joint venture partners will decide on the appointment of an investment bank mandated to sell the shares or the business at the best price available, and the shareholders must transfer their shares or agree that the joint venture transfers its business to any purchaser who is found, upon receipt of the price achieved in such sale, minus the costs of sale. If no purchaser is found within a specified period, the shareholders usually arrange for the joint venture to be wound up.
Tax considerations following termination
What are the tax considerations on termination of the joint venture?
The winding up of a corporate joint venture is considered, from a tax standpoint, as a cessation of activity and as such, triggers the taxation of all profits and capital gains that have not yet been taxed.
When a joint venture is terminated, it also results in the transfer of assets to the partners, which can sometimes generate transfer taxes and value added tax liabilities.
Choice of law and resolution methods
In your jurisdiction are there constraints on the choice of law or the method of dispute resolution provided for in joint venture agreements?
Parties can freely decide to set up a contractual joint venture under foreign law. However, joint venture parties cannot decide to enter into their agreement under foreign law if it is only a way to avoid the application of mandatory French law rules.
Mandatorily applicable local law
What mandatory provisions of local law will apply irrespective of the choice of governing law?
In the case of a corporate joint venture, all rules applicable to such form of corporate (as set forth by French corporate laws) will apply.
Are there any restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes? Are there any restrictions on the arbitration of shareholder claims?
None are specifically applicable to joint ventures.
Minority investor protection
Are there any statutory protections for minority investors that would apply to joint ventures?
In most corporate joint ventures, minority shareholders are provided with a wide range of information rights. For instance, prior to any shareholders’ meeting, information shall be provided by the management. Minority shareholders can also request that the directors answer any questions or requests they may have during shareholders’ meetings.
Minority shareholders can also file, in specific cases, a petition for the appointment of a judicial representative or for a management appraisal.
In principle, on the basis of misuse of majority right, minority shareholders can seek the annulment of a decision taken by the majority shareholders if it is taken in their own interest, against the minority shareholders’ interest and if it is detrimental to the company’s interests. Damages may also be awarded.
How can joint venture parties have liabilities to each other beyond what is expressly agreed in the joint venture agreement?
Joint venture parties can be held liable to each other in the case of breach or non-performance of the joint venture agreement on the basis of the general French civil contractual liability regime.
Disclosure of evidence
Are there any particular issues that can arise in joint venture disputes in your jurisdiction concerning disclosure of evidence?
There is no disclosure of evidence procedure in France.
The concept of legal privilege itself does not exist in France. However, there are some specific rules enabling a party to refuse to disclose some information or documentation. For instance, exchanges between a party and his or her lawyer are protected by professional secrecy. French case law has also admitted that some information may be protected by business confidentiality.
What advantages does your jurisdiction offer for parties wishing to set up and operate joint ventures?
As mentioned above, there is no formal concept of ‘joint venture’ in France but there are different forms of corporate structures available for joint ventures that meet the expectations and requirements of the different parties. Even concerning the most flexible structures (for instance, the simplified joint-stock company), French corporate law also contains a set of rules ensuring a minimum level of protection to minority shareholders (in terms of governance, liquidity, funding, etc).
Requirements and restrictions
Are there any particular requirements or restrictions relating to joint ventures in your jurisdiction that could deter international investors?
Except for certain restrictions on the ability of foreign entities to invest in certain French sectors (see question 3), there are no particular restrictions that could deter international investors.