Setting up and operating a joint venture


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

The structure of each joint venture is bespoke in light of the cultural, tax, legal and regulatory concerns of the parties, and to their aims and relative contributions to the venture. Identifying these in the early stages of the negotiation is essential to find the optimal structure for the joint venture. However, certain drivers are common when structuring the joint venture.

Investment and nature of the partners

The participation of each partner and their right to transfer the shares will be crucial when structuring the joint venture: 50:50 incorporated joint ventures are obviously far more complex than non-incorporated, contractual ventures or companies with minority partners. The nature of the partners (ie, whether they are industrial or financial) will also have an impact on the allocation of duties and liabilities, on deadlocks, and on the duration of the venture and its liquidation. Additionally, it may also raise competition issues (eg, vertical and horizontal integration).

Location and operation, and nationality of the partners

The structure of the joint venture will vary depending on whether it will operate on a cross-border or domestic basis, and on the nationality of the joint venture partners. Whereas a domestic joint venture will raise fewer cultural issues and the tax structure should be simpler, the cross-border venture will require a detailed analysis of the structure and far more planning or negotiation (on aspects such as the choice of law and dispute resolution, the location of the joint venture and the tax structure).

Purpose and duration

The goals and scope of the joint venture, the venture or business to be performed, the contributions of the partners and the expected duration will also play a crucial role in determining the structure and the agreements among the partners.

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?

The main tax consideration when establishing a joint venture will be the choice of the type of legal entity to be used for the joint venture (ie, vehicles with legal personality versus vehicles without legal personality).

In this regard, incorporated joint ventures will be subject to corporate income tax. On the other hand, vehicles without legal personality will allocate income and expenses, or their taxable income, in a flow-through mechanism directly to their partners. However, when the partner of a UTE is a non-resident entity, the vehicle is subject to corporate income tax on the taxable income attributable to that member and the subsequent distribution of profit will be treated as a dividend.

The taxation of the contributions of the partners to the incorporated joint venture, and services rendered by the partners, must be considered from the perspectives of capital gains (direct taxation), as well as value added tax and other indirect taxes.

Lastly, the future exit of the partners from the joint venture and the distribution of accumulated earnings (subject, as the case may be, to a certain waterfall) must also be carefully structured from the inception of the matter.

Asset contribution restriction

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

Spanish law establishes certain requirements for capital contributions to Spanish companies. For example, contributions upon incorporation and any subsequent capital increase must be notarised in a public deed establishing the amount of the contribution. Additionally, in the case of an SA, in-kind contributions must be appraised by an independent and qualified expert appointed by the corresponding Commercial Registry. The report must contain a description of the contribution, registry information (as appropriate), valuation of the contribution and whether it coincides with the par value, and, if applicable, the value of the share premium of the shares issued in exchange. In SLs, and in certain cases in SAs (eg, when the in-kind contributions are shares listed on a secondary market), the independent expert report may be replaced with a report issued by the management body.

In the case of in-kind contributions entailing the transfer of a real estate asset or in rem rights to the incorporated joint venture, these transfers must be registered with the corresponding Land Registry. Contributions of intellectual property must also be recorded in the relevant patent or trademark office.

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 company’s articles of association establish the terms and conditions for the operation of the company and its corporate governance. The articles have a minimum mandatory content (eg, regulating the corporate purpose, corporate domicile, fiscal year, management body and share transfer restrictions, if any) but may also include other rules that are bespoke to the venture (regulating preferred shares, reserved matters and veto rights, minority protections and drag-along and tag-along rights). Listed companies must also approve specific regulations regarding the general shareholders’ meetings and the board of directors.

In contrast, shareholders’ agreements are commonly used to develop other corporate matters without the rigidity of statutory corporate law and the limited scope of the articles of association. The content of shareholders’ agreements can vary greatly. They generally regulate issues such as the transfer of interests and restrictions upon these transfers, voting rules, capital calls, deadlocks and dispute resolutions, financing requirements and non-competition. Additionally, in joint ventures, shareholders’ agreements include some additional provisions, such as the purpose of the joint venture, duration, contributions and ancillary agreements among the shareholders.

The articles of association are binding upon all shareholders while the shareholders’ agreement is enforceable only between its parties. In the case of a breach of the agreement, the non-defaulting partners will only have contractual claims against the defaulting shareholder, with no right to challenge corporate resolutions passed in contravention of the agreement. Certain scholars, however, consider that this res inter alios acta rule should be excluded if all the shareholders and the company are parties to the agreement. In this event, the agreement should be enforceable against the company and allow the partners to challenge corporate resolutions that are contrary to the agreement (even if its contents are not reflected in the articles of association). This position has so far not been upheld by the Spanish Supreme Court.

As a consequence, joint venture partners tend to reflect most of the terms of the agreement in the articles of association. Certain provisions of the agreement may, however, not be recorded with the Commercial Registry, given that they contravene corporate law or are drafted with reference to the particular parties (rather than shareholders generally) or when the partners wish to keep certain terms confidential.

Party interaction

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

In the case of contractual joint ventures, the relevant agreement will set out the role and contributions of the parties, including their undertakings and possible restrictions to information sharing, subject to the overriding principle of good faith.

In contrast, in an incorporated joint venture, the main principles of corporate governance will apply. As a consequence, the members and, more importantly, the directors, are bound by the duties of loyalty, the principle of equal treatment of all shareholders (subject to certain exceptions) and, for the directors, the duty of care and loyalty, subject to acting in the best interest of the company.

Information sharing is a matter of particular concern. In accordance with their duty of loyalty, directors must maintain the secrecy of all the confidential information that comes into their possession and avoid acting when a conflict of interest arises. Competition law may also impose restrictions on the information shared with competing joint venture partners.

On the other hand, these restrictions must be balanced with the shareholders’ right to information: any shareholder may request, immediately and free of cost, any document to be submitted to the general shareholders’ meeting for approval and, as appropriate, the management and auditor’s report. Shareholders’ information rights also include other documents and reports when particularly important corporate resolutions are to be passed (eg, the amendment of the articles of association or a merger). In any case, the information may be denied if the management body considers that disclosure would be contrary to the company’s best interest. The refusal to provide information will not be valid when supported by votes representing at least 25 per cent of the share capital (unless the percentage is reduced in the articles of association of the SA).

Exercising control

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

The partners may agree on certain provisions for the exercise of control over the incorporated joint venture (eg, the definition of reserved matters, the appointment of directors and veto rights). These rules may lead to joint control by the partners (this is also the case from a competition law perspective) even if one of the partners holds less than 50 per cent of the shares.

In addition, Spanish law offers some minority protection at different levels.

Information rights

Any shareholder may request the directors to provide information.

Appointment of directors

Shareholders of SAs can pool their shares in order to appoint a number of directors to the board in proportion to the share capital they hold and in accordance with the proportional representation system.

Call and agenda of the general meeting

Shareholders holding at least 5 per cent of the share capital may call a general shareholders’ meeting with a specified agenda. If the directors fail to do so within two months, the shareholders may submit a judicial request for the call of the meeting. In SAs, they may also request the publication of a supplementary notice of a general shareholder meeting that includes additional items on the agenda.

Legal actions

Any shareholder may:

  • challenge a directors’ resolution or a general shareholders’ meeting resolution that is contrary to the law or to the articles of association, or that favours specific shareholders or third parties to the company’s detriment;
  • claim against the directors for breach of their fiduciary duties and if they have harmed the shareholder in particular; and
  • request the removal and replacement of auditors by the courts for justified reasons.
Governance issues

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

The most common issues are related to partner contributions, preferred shares, reserved matters, voting majorities and veto rights, information rights, dividend policy, restrictions on the transfer of shares, exit provisions including drag- and tag-along rights, and deadlocks, termination rights and dispute resolution.

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?

The joint venture partners must agree on the number of directors to be appointed by each party, and, once appointed, the directors must act in the best interest of the company (in accordance with the corporate interest (ie, the interest of all shareholders and, arguably, other stakeholders)), subject to the principle of equal treatment of all shareholders and in compliance with their fiduciary duties (the duty of loyalty and the duty of care), the articles of association and all applicable laws and regulations.

In other words, the fact that some directors are directly appointed by a joint venture partner does not imply that the directors owe any duty to the appointing shareholder or that they may be considered its representative on the board.

Directors are also bound by a duty to notify any conflict of interest and are prohibited from competing with the company or taking advantage of business opportunities.

Competition law

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

The creation of a joint venture may be subject to a merger control review if the relevant agreements and the creation of the joint venture itself is considered an ‘economic concentration’ pursuant to EU merger control regulations or the Spanish Competition Law. In that case, notification of the transaction to the European Commission or the Spanish Competition Authority is compulsory if certain thresholds are met, in which case the joint venture cannot be executed prior to obtaining merger control clearance.

Merger control clearance affords comfort to the partners as regards the creation of the joint venture, but the actions of the joint venture may still be subject to scrutiny by competition authorities.

Additionally, joint ventures that are not considered an economic concentration will receive the same treatment as any other horizontal or vertical agreements under competition rules. Consequently, the assessment of the joint venture agreement will be conducted under the general requirements of article 101 of the Treaty on the Functioning of the European Union and article 1 of the Spanish Competition Law and its implementing regulations.

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?

The services should be set out in the joint venture agreement or in specific service agreements, or both. The services to be performed and the standard of diligence must be well defined in the agreements. Cross-defaults and the consequences of a breach of the service agreements for the joint venture are often negotiated at length.

From a tax point of view, transactions carried out between related parties are subject to transfer pricing rules. As a result, the provision of services to the joint venture must be carried out on an arm’s-length basis.

Employment rights

What impact do statutory employment rights have in joint ventures?

The transfer or secondment of employees to the joint venture may be implemented on a case-by-case basis, or as part of the transfer of a business unit or going concern to the joint venture. Any transfer must respect the statutory employment rights and may lead to joint liabilities of the joint venture and the assignee of the employees. Likewise, the different transfer options must be considered from the perspective of:

  • the registration of the employees with Social Security;
  • the rules on the employment of foreign nationals; and
  • the requirement of prior consent from the relevant employees for the relocation or, as the case may be, any modification of the existing employment relationship.

If, on the contrary, employees of the partners are to render services to the joint venture without a formal transfer, the rules on the illegal assignment of employees and on corporate groups for employment purposes must also be carefully considered.

Lastly, the joint venture agreement should also deal with the situation of the employees upon termination of the venture, including possible re-transfers to one of the joint venture partners in compliance with the law.

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 of the partners (or indeed, those of third parties) may either be licensed or assigned to the joint ventures. Choosing one or the other alternative has significant consequences from the perspective of competition law.

In the case of a licence, the agreement must obviously regulate the scope and duration of the licence and whether the licence is exclusive or may be sub-licensed. The licence or transfer must be registered in the corresponding patent or trademark office.

The joint venture agreement must also set out the consequences of any breach of the IP licence or transfer agreement, as well as the consequences of the termination of the joint venture on the IP rights.