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?

Typical drivers for joint venture structures are industry practice, regulatory framework and taxation.

For instance, the state has a long-standing practice of joint venture agreements for cooperation in oil and gas owing to certain tax considerations. Certain regulated business activities can only be conducted by legal entities registered in the designated form (eg, the banks can only operate as a public joint-stock company). Owing to possible double taxation, joint venture parties sometimes prefer to cooperate as an unincorporated business in the initial stages before proceeding to a joint corporate entity.

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?

An incorporated joint venture is a taxpayer under the general rules (regarding corporate profit tax, value added tax (VAT), real estate and other taxes). Small undertakings whose annual income does not exceed certain thresholds (currently, 3 to 5 million hryvnyas) and that comply with certain criteria, may enjoy preferential taxation regimes. Some temporary VAT and corporate profit tax exemptions exist in certain industries, such as in cinematography and the space and aircraft industries.

An unincorporated joint venture is subject to separate taxation, for which special tax-accounting regulations apply. The joint venture agreement shall define a (resident) participant responsible for the venture’s tax accounting and payment; such participant and the agreement are registered by the tax office.

In-kind contributions (as opposed to cash contributions) of founders or participants into the (both incorporated and unincorporated) joint venture trigger Ukrainian VAT, subject to further tax credit and refund.

Asset contribution restriction

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

The parties can agree on the contribution of any assets into an unincorporated joint venture. Importantly, the investments of the parties are deemed of equal value if the parties do not state otherwise in their joint venture agreement.

There are restrictions on the contribution of certain assets to the capital of a separate corporate entity. The following cannot be used for formation of the registered capital:

  • budget and loaned funds;
  • bills (promissory notes);
  • state (municipal) property that cannot be privatised; and
  • state property that is under operational management of the state-financed institution.
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?

For incorporated joint venture entities, the constitution takes precedence over joint venture agreements. There is a limited scope that can be regulated in an agreement between participants or shareholders of a company in Ukraine. In most cases, therefore, incorporated joint ventures have only constitutions. Generally, such agreements can only supplement the constitution. Agreements between shareholders should only be regulated under Ukrainian law to be enforceable in Ukraine.

With the enactment of the new Law on Limited Liability Companies (the LLC Law) and the changes to the Law of Joint Stock Companies (the JSC Law) in 2018, it is expected that shareholder agreements will gain significance in the future. Shareholders will be able to govern a broader scope of corporate issues at their discretion (with certain limitations), and determine, in particular, the method of execution of their corporate rights, such as voting at shareholders’ meetings, as well as modalities of the sale and purchase of company shares.

Party interaction

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

In an incorporated joint venture entity, from the corporate-law perspective, the shareholders can participate and vote at general shareholders’ meetings and, therefore, interact with the joint venture by governing it on the most important issues. The shareholders only have access to a limited set of information regarding the entity.

From the competition perspective, information-sharing falls under the scrutiny of the competition authority (see question 13).

Exercising control

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

In an unincorporated joint venture, the parties may agree that all affairs are to be carried out jointly by all shareholders. If all affairs are to be carried out jointly, the consent of all shareholders must be obtained in order to execute each transaction.

In incorporated joint ventures, the parties’ shareholders may exercise their will through participating in general shareholders’ meetings.

In joint-stock companies, all issues on the agenda of the general shareholders’ meetings are resolved by a simple majority vote of all participating shareholders. However, in a private joint-stock company the shareholders can agree a bigger quorum (eg, unanimous consent of all present shareholders) for any issues except (i) the pre-term termination of the powers of the officials of the company’s bodies; (ii) the commencement of a claim against the company’s officials regarding the reimbursement of damages incurred by the company; and (iii) the commencement of a claim regarding the non-compliance with the law in the case of a significant transaction. Therefore, the minority investor can have more power and control over a private joint-stock company.

In a joint-stock company, a qualified majority (more than 75 per cent of the present shareholders) is required to adopt the following decisions:

  • amendment of the company’s charter;
  • cancellation of the bought-out shares;
  • changing the type of company;
  • regarding the placement of shares;
  • changing the registered capital;
  • issue of securities that may be converted into shares; and
  • termination of the company.

With certain exceptions, the charter of a joint-stock company may provide for other issues requiring a qualified majority of votes.

In an LLC, as a general rule, all issues are decided by an absolute majority of votes. However, issues of changing the charter and registered capital, reorganisation or liquidation of the company require a qualified majority (at least 75 per cent of the total number of votes of participants of the company). Unless the company charter sets a lower number of votes (but no less than a majority), unanimous decisions of all participants are required for:

  • the approval of the monetary assessment of a non-pecuniary contribution of a participant;
  • the redistribution of the participants’ shares;
  • the establishment of other corporate bodies; and
  • the purchase of a participant’s share by the company.

The minority investors are also entitled to demand internal and external audits. For instance, minority shareholders holding over 10 per cent in a joint-stock company may request a special review by internal auditing committee or a proper inspection of financial accounts by an independent auditing firm.

Governance issues

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

As to an unincorporated joint venture, the parties are free to establish special procedures relating to adopting decisions and running the business in a practical manner, according to the terms and conditions of a joint venture agreement.

The two most common governance issues that arise for joint venture corporate entities are:

  • presence of a quorum; and
  • adopting decisions on specific issues.

The issues that arise during the joint venture’s operation are handled through negotiation or mediation. In the case of corporate disputes, the parties may resolve them in the courts or arbitration tribunals. As noted above, shareholders will have more freedom and flexibility to handle governance issues through shareholder agreements.

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?

In Ukraine, a majority shareholder (participant) usually nominates a director, but the former must act in the best interests of the joint venture company, as required by law, not the appointing shareholder.

In LLCs, supervision over the board of directors can be exercised by a supervisory board (if foreseen by the charter) or appointed by the general shareholders’ meeting, or both. The latter may delegate certain of its powers to the supervisory board, including the appointment and dismissal or suspension of the board of directors. Moreover, shareholders holding at least 10 per cent of the charter capital may initiate a financial audit of the company by an independent auditor. The board of directors is obliged to provide documents regarding the company at the request of the auditor.

As to a joint-stock company, the executive body is accountable to the general shareholders’ meeting and supervisory board (including its standing auditing committee). The general shareholders’ meeting can elect an auditing commission as a separate corporate body as well. In public joint-stock companies, the annual audit by an independent certified auditor is obligatory. The board of directors is obliged to provide documents regarding the company at the request of the audit commission or an auditor.

Competition law

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

Assuming the turnover thresholds are met, the creation and operation of the joint venture may trigger the need to obtain certain approvals. Depending on whether a joint venture will be full-function or not, there may be a need for clearance of:

  • merger: in the case of a joint venture’s creation, if operating permanently, all the functions of an autonomous economic entity (full-function joint venture) and such creation will not lead to coordination of competitive behaviour between the parent companies of the joint venture themselves or between the joint venture and its parent companies; or
  • concerted actions: if a joint venture is established with an objective of, or results in coordination of, competitive behaviour between the parent companies of the joint venture themselves or between the joint venture and its parent companies.
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?

In an unincorporated joint venture, in the case of a simple partnership, approval of all parties is needed for the execution of every transaction, unless stated otherwise in the simple partnership agreement.

In a joint-stock company, provision of services to the joint venture entity by joint venture parties (ie, its shareholders) may be recognised as an interested-party transaction if the transaction value exceeds 1 per cent of the company’s asset value, unless the company charter sets a lower value. The party interested in the transaction may be a shareholder (or shareholders, their affiliated persons) who alone or jointly owns 25 per cent or more of the company’s shares. Interested-party transactions with a value of up to 10 per cent of the company’s asset value require the approval of the company’s supervisory board, and transactions with a value of more than 10 per cent of the company’s asset value require the approval of a general shareholders’ meeting. During the voting process, the shareholders interested in the transaction do not have the right to vote and a decision on this matter is taken by a majority of votes of non-interested shareholders present at the meeting.

In an LLC, a transaction is considered an interested-party transaction if the other party is, inter alia, a shareholder (or shareholders, their affiliated persons) who alone or jointly owns 20 per cent or more of the company’s shares. However, it is entirely up to the shareholders to provide in the company charter for regulations concerning the need of pre-approval for interested-party transactions. All shareholders shall approve the relevant charter provisions unanimously. If the charter does not contain such provisions, no restrictions as regards interested-party transactions apply, except that such transactions shall be at arm’s length.

Employment rights

What impact do statutory employment rights have in joint ventures?

There are no special employment regulations concerning incorporated joint ventures (the employment conditions in a joint venture are identical to employment in any other company). Under general labour laws, transfer to another job in the same company, as well as transfer to another company or other area (location) requires the consent of the employee.

As to an unincorporated joint venture, the employees are always employed by the joint venture parties.

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 may be transferred for ownership or use (under a licence agreement) under the incorporated joint venture. During termination of the legal-entity ownership, IP rights are dealt with in the same manner as any other property rights; they are either sold to pay off the debts or distributed among the shareholders of the company.

As for an unincorporated joint venture, the parties can provide the right to use IP in a joint venture agreement. The title of the IP object remains with the joint venture party.