Reed Smith Client Alerts

We are seeing an increasing number of our clients in the energy and natural resources sector entering into joint ventures (JVs) rather than acquiring assets or companies outright. Below, we consider a number of key issues which parties should consider before embarking on a JV.
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1. Shareholdings and foreign ownership restrictions

One of the key decisions which parties need to make prior to entering into a JV is the percentage shareholding which each party will hold. Often, in order to ensure an equal division of power, where there are only two parties, they will elect to have a 50/50 JV. However, before such a decision is taken, the parties need to consider, in conjunction with local counsel, whether there are any foreign ownership restrictions (Restrictions) in the jurisdiction in which the JV will be incorporated. For example, foreign ownership restrictions might be applicable in Bermuda, Canada, India, Indonesia, the People’s Republic of China and Vietnam, depending on the type and size of the JV and the sector which it will participate in. Where such Restrictions apply, a foreign investor will need to partner with a local party in order to be able to operate within the relevant jurisdiction.

We are increasingly seeing jurisdictions amend their Restrictions in order to address prevailing economic and/or political conditions. For example, in Vietnam, legislation has been proposed that could see the 49 per cent cap on foreign ownership removed in certain sectors later this year. In light of the potential for legal or regulatory changes affecting Restrictions, parties should always consider inserting a mechanism which allows the flexibility to modify the JV structure without the need to renegotiate. For example, the use of a put/call option mechanism in a shareholders’ agreement (the Agreement) which is triggered by a change in Restrictions can allow for a rebalancing of the parties’ shareholdings in a manner that both (a) ensures ongoing compliance with the law and (b) enables the foreign party to increase its holding when the Restrictions become more permissive with respect to foreign investment. In the event that the Restrictions are abolished altogether, this will allow the relevant party to either acquire the entirety of the JV company or to sell its entire shareholding in the JV company.