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?

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).

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?

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.

Party interaction

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.

Exercising control

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
    • 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.
Governance issues

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.

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?

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.

Competition law

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.

Employment rights

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.