Joint ventures. Protections for minority shareholders in Asia Pacific

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1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Joint ventures Protections for minority shareholders in Asia Pacific

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3 Joint ventures Protections for minority shareholders in Asia Pacific A Norton Rose Fulbright guide

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5 Preface We are pleased to present this revised edition of Joint ventures: protections for minority shareholders in Asia Pacific. This guide forms part of our key Asia Pacific publication series which currently includes M&A law in Asia Pacific, Anti-corruption law in Asia Pacific, Banking Security law in Asia Pacific and Doing Business in Asia Pacific. Although the title of this guide suggests a minority shareholder slant, we hope it will be of general interest not only to international and regional investors interested in joint ventures, but also to actual or prospective majority shareholders of a joint venture. The information contained here is as up-to-date as possible as at 1 July 2012 when the original edition was published. The guide addresses the key issues relevant to joint ventures in the region and is not a substitute for legal advice. If you would like to discuss any of the issues raised here, please get in touch with us.

6 Acknowledgements We gratefully acknowledge the assistance of the law firms who contributed to the chapters on India, Japan, Malaysia, Mongolia, Philippines, South Korea and Vietnam.

7 Contents Overview 06 Australia 12 China 22 Hong Kong 30 India 38 Indonesia 48 Japan 56 Malaysia 62 Mongolia 70 Philippines 78 Singapore 86 South Korea 92 Thailand 100 Vietnam 108 Contacts 114 Contributing law firms 116

8 Joint ventures protections for minority shareholders in Asia Pacific Overview A substantial amount of international investment in Asia Pacific is effected through investors taking minority stakes in either companies with an existing business or in newly incorporated joint venture vehicles. Investment in this way will be driven by either commercial reasons or regulatory requirements or a combination of the two. In the former case, an international investor may initially acquire a minority stake in a joint venture so as to benefit from a partner s greater understanding and experience of local markets but with the ultimate intention of acquiring a majority stake. Alternatively, a minority interest may present a more cost effective means for an international investor to obtain exposure to a particular market. It is a feature of Asia Pacific that a number of jurisdictions operate foreign ownership restrictions in industry sectors considered to be of strategic importance so that a minority stake is all that can be taken. In each case, special consideration must be given as to how best to protect minority interests through agreements which do not emasculate or prevent the development of successful commercial relationships. Many companies in Asia Pacific are conglomerates owned by principal or family shareholders who continue to play an active role in management. In the context of joint ventures with unequal holdings, this can present particular challenges. A principal shareholder may be resistant to perceived minority interference in management decisions. On the other hand, a minority shareholder may be concerned about the risk of domination or abuse by a majority shareholder. As a result, there may be a tendency for international investors to put in place and require comprehensive agreements that focus too much on the downside at the expense of developing a flexible commercial relationship based on trust. Before entering any joint venture agreement or enterprise, it is absolutely vital that an investor carries out effective due diligence about its proposed partner. Even the most sophisticated and comprehensive joint venture agreement may not, in fact, prevent a determined majority shareholder from exploiting its position of dominance. The objective of this guide is: firstly, to highlight those areas that a minority investor in a privately owned company should consider to protect its investment, regardless of the jurisdiction concerned, and, secondly, to identify on a jurisdictional basis particular local law considerations that may need to be taken into account. These considerations might be of equal relevance if the investor is domestic or foreign. However, some will arise only in cases of a partly- foreign owned entity, and it is with these issues that this guide is particularly, though not exclusively, concerned. This guide deals specifically with considerations which will be relevant to the investor in a privately owned company rather than a corporation whose shares are publicly traded. However, there are many common areas of concern for investors about standards of corporate governance in both types of investment. These are areas of focus for regulators (and those, such as the OECD, that seek to influence them) in the context of listed companies, and include transparency and independence of decision making, rights to participate in fundamental decisions and the fair and timely dissemination of information. Considerations when making the investment Foreign ownership control and bilateral investment treaty protection A potential minority shareholder in Asia Pacific must consider whether there are any limitations on foreign ownership. Regulation of foreign ownership can be a fast changing picture. Many jurisdictions are relaxing restrictions in order to encourage greater foreign investment. On the other hand, increased foreign ownership can create pressure to introduce or reintroduce restrictions. For that reason, consideration should be given at the outset to structuring an investment within the scope of a bilateral investment treaty. Such treaties can offer certain guarantees for a foreign investing party and where treaty rights are infringed will provide independent and enforceable international dispute resolution. The extent of foreign ownership restrictions will often depend on the area of business into which the investment is being made, with local law allowing for more significant levels of foreign investment in some areas than others. Such restrictions may not only restrict the extent of the interest, but its form as well. For example, it may not be possible to structure a joint venture using the jurisdiction s standard private corporate vehicle because one of the shareholders is foreign. The alternatives (and their limitations and shortcomings) will have to be considered in such a situation. Protections afforded by the law Many jurisdictions in Asia Pacific (particularly those such as India, Singapore and Hong Kong, with legal systems with their origins in English common law) provide some form of statutory protection for minority shareholders. Whilst it is always important to take advice on and understand the extent of the protections which the law provides, a prudent 8 Norton Rose Fulbright

9 Overview minority shareholder is likely to want to supplement these through a shareholders agreement. At the outset, consideration must be given as to whether the jurisdiction recognises such agreements, whether they are compatible with existing national company law and whether they have to be disclosed to the authorities or otherwise made public. A significant number of non-common law jurisdictions within Asia Pacific afford minority shareholders the right to divest themselves of shares at an independently determined price in certain circumstances which may include fundamental changes to the enterprise or the alteration of certain shareholder rights. This can be a powerful tool for ensuring that the interests and views of minority shareholders are taken into account by both majority shareholders and potential investors alike. Important ancillary issues Once it is established that an appropriate legal framework exists to enable and protect a minority shareholders investment, consideration must be given to wider legal and regulatory requirements, including employment, tax and merger control laws to achieve the optimal structure and form for that investment. Competition law and merger control laws may have a significant impact on the timing of completion of the transaction, and sometimes on the structure of the transaction. Merger control approval processes are now widespread and most of the jurisdictions covered in this guide operate at least some form of competition merger control regime. Many jurisdictions in Asia Pacific treat the taking of a minority stake as a merger where the minority shareholder acquires joint control over the conduct of the target s business (for example through minority protection rights conferring a veto right over key business matters such as budgets and business plans). This is the case, for instance, in China and Singapore. Other jurisdictions, such as Japan and Korea will require merger control approval for the acquisition of minority stakes above a certain voting threshold (which can be as low as 20 per cent) irrespective of the minority protections obtained by the investor. These approval processes usually delay the closing of the transaction and require that a significant amount of information be provided to the regulators. They require careful planning and significant management time. Merger control regulations apply to joint ventures with activities (usually classed as sales, assets or market shares reaching certain statutory thresholds) within the jurisdiction or jurisdictions concerned. In addition, some jurisdictions including the European Union and China have far-reaching merger control regimes which require notification even where the joint venture has no activities within the jurisdiction, but where the shareholders (and their respective groups) have significant sales. Compliance with international and national anti-corruption legislation is now an absolutely key requirement. In an international context, the UK s Bribery Act 2010 has introduced potentially much more draconian provisions than the USA s Foreign Corrupt Practices Act Apart from the substantive bribery offences, the UK Act has introduced a new strict liability offence of failing to prevent bribery subject only to a defence of having adequate procedures to prevent such an offence. The new offence applies to all companies carrying on a business or part of a business in the UK. The UK authorities have published non-statutory guidance on how the legislation should apply to joint ventures. Most countries in Asia Pacific have national anti-corruption legislation but recently there has been a concerted drive to introduce more extra-territorial legislation targeted at international bribery of public officials. China has introduced international offences of bribing foreign officials and officials of international public organisations and India is also in the process of introducing similar anticorruption legislation. Accordingly, it is absolutely vital that proper due diligence is carried out into potential corruption risks of a potential joint venture by reference to its location, the identity of its shareholders and the proposed business model. In some jurisdictions, this may well prove challenging. However, the criminal, commercial and reputational risks of noncompliance now present real and serious challenges that should be addressed at the outset of any joint venture. Another important issue to consider at an early stage will be the likely financing requirements for the venture and whether the minority shareholder will wish to or be in a position to respond to future cash calls. The ability of a majority shareholder to call for further investment by way of a share issue may operate to dilute a minority shareholder s interest and foreign ownership restrictions may impede or prevent the exercise of pre-emption rights. Where bank finance is required, it will be important to determine whether foreign or local lenders should be approached. Again, sector restrictions on foreign ownership will often have an impact on the available source and type of bank finance. Norton Rose Fulbright 9

10 Joint ventures protections for minority shareholders in Asia Pacific Objectives and termination One of the most common causes of dispute is how a joint venture should come to an end. Whilst it may be tempting to avoid discussion on some of the difficult commercial issues which this topic might raise, it is generally sensible to include exit mechanisms in some form. Some jurisdictions recognise the concepts of a quasi partnership, which can be wound up on the achievement of the purpose of the venture but that is not the case with all jurisdictions which can leave an unwilling party locked into the venture. The sort of questions which the parties should consider include: Should the venture be for a finite life if so, what is to happen to the shares in and/or assets of the joint venture company at the end of this period? Should the parties be permitted to transfer their shares to a third party? If yes, only after first offering them to the other shareholder? Should the venture end in circumstances where there is a default, insolvency or even change of control of one party or if the parties are in deadlock over key commercial or strategic matters? Governing law At the outset, it is important to establish what law will apply to the agreement and whether or not a more effective governing law can be chosen to regulate the parties relationship and for the purposes of potential dispute resolution. Complications can often arise by choosing a governing law which is either incompatible or inconsistent with the local law of the joint venture. For instance, some jurisdictions in Asia Pacific will require disputes over land or certain assets to be determined only under local law. Offshore structures Where national legal or tax conditions create an unfavourable environment for a joint venture, the parties may instead consider the use of a shareholders agreement to regulate an offshore ownership structure. In such circumstances, the parties should consider whether a local jurisdiction will recognise such a structure or any offshore judgment or award that may be given in respect of a dispute. Managing the investment Veto rights, reserved matters and weighted voting The extent to which a minority shareholder can control or influence the business of a joint venture will invariably depend on the size of its shareholding. A small shareholder may be able to insist on protection extending to amendments to the Company s constitution, major asset disposals or fundamental changes to the nature of business operations. A large shareholder may seek more extensive control and protection on matters such as quorum rules, the appointment and removal of directors, strategic management decisions, capital calls and share issues as well as major asset acquisitions and disposals. Protection can be provided in the form of director or shareholder veto rights or weighted voting rights in respect of specified reserved matters. It will be vital to consider in any jurisdiction how these restrictions interact with national legislation. Governance When drafting any shareholders agreement, consideration must be given to the existence of any local law rules regarding residency or nationality of directors, and whether a right to appoint or nominate for appointment a director by reason of a party s shareholding is enforceable. Where a shareholder is entitled to board representation, consideration must be given to the nature and extent of any duties that he owes under the law of the jurisdiction in which the joint venture company is incorporated. In some jurisdictions, there may be a requirement for a board of commissioners, a supervisory board or a control committee tasked with monitoring the operating board and its executives. Although the composition of such boards often reflects the size of the parties shareholdings, the existence of these structures may complicate the operation of a shareholders agreement. The provision of regular and transparent information about operations and decision making is vital. The lack of such information is often the major cause of difficulty for a minority shareholder, since without a contractual entitlement to key business and financial information, its legal entitlement to information may be limited. 10 Norton Rose Fulbright

11 Overview In most jurisdictions, the directors will owe duties to act in good faith in the interests of the company. In the case of joint ventures this can cause difficulty where directors have been appointed by the respective parties to a shareholders agreement. Where directors find themselves in conflict on account of divergent interests, recourse may be had to the shareholders to resolve the issue but in some jurisdictions such recourse may itself be problematic or not available. Capital calls and pre-emption rights During the life of the joint venture company, there may well be a need for additional equity. It will of course be important to look at whether the local law provides for any statutory right of participation in such issues. However, ownership restrictions may affect a minority shareholder s ability to exercise pre-emption rights leading either to dilution or to the introduction of a third party investor. Accordingly, it is important that any shareholders agreement addresses what should happen in such an event. Non-compete undertakings Where a foreign minority shareholder is looking to go into business with a local partner, it is likely to be important for the foreign investor to know that its partner will be putting all of its efforts into the joint venture and will not compete with the Company. It is here that the effectiveness of noncompete provisions are particularly important. For example, different jurisdictions will have different views on the validity of such clauses and the length of time that they can operate and their geographic reach before they are regarded as an unfair restraint on trade or are otherwise incompatible with local laws. Realising the investment Realising capital If the minority shareholder anticipates that it may wish to exit the investment by way of a sale of its holding, it must consider any restrictions at law on persons to whom the holding can be offered. Additionally, it is important to establish whether the continuing shareholder has to be given a right of first refusal, and if so, whether this would be at any pre-determined price. Options over shares As part of the joint venture arrangements, put and call options may be used as mechanisms for resolving deadlock or achieving an exit. The legal validity and enforceability of such options is something that needs to be established in the relevant jurisdiction. Deadlock and termination provisions Precisely how the parties should behave when a deadlock situation arises is something that will need to be considered in detail and outlined in any shareholders agreement. There will, in some situations, be local law considerations to take into account when considering key elements of such procedures such as valuation of shares in the absence of agreement between the parties. A majority shareholder may expect to have a right to drag a reluctant minority shareholder into a sale of his shares so that the Company can be sold in its entirety. Similarly, a minority shareholder will want to ensure that it is not left behind in the event that a third party purchaser is secured. Accordingly it will require the ability to tag with the majority shareholders ie, require its shares to be sold on the same terms as a condition of the majority shareholder s exit. The compatibility of these rights with local laws should be considered. Deriving income It is vital that there is a full appreciation of any jurisdictional tax, and exchange control issues that could be relevant when receiving income, interest or capital receipts. Further, when it comes to extracting value from the Company by way of income, the minority shareholder needs to be aware of what classes of equity are permitted in the jurisdiction to achieve this since some jurisdictions do not recognise different classes of shares. Norton Rose Fulbright 11

12 Joint ventures protections for minority shareholders in Asia Pacific 12 Norton Rose Fulbright

13 Australia

14 Joint ventures protections for minority shareholders in Asia Pacific Australia Making the investment Foreign ownership and control The Australian government has, for many years, publicly stated that it welcomes foreign investment and recognises the contribution that foreign investment is able to bring to the development of Australia s industries and resources. Australia s Foreign Investment Policy Framework (January 2012) (Policy) provides the framework for Government scrutiny of proposed foreign purchases of Australian businesses and real estate. The Government has the power under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) to block those proposals determined to be contrary to the national interest. The FATA and the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) provide monetary thresholds below which the relevant provisions do not apply, and separate thresholds for acquisitions by US investors. The FATA is administered by the Federal Treasurer, who is assisted by the Foreign Investment Review Board (FIRB), a division of the Commonwealth Government Treasury. Generally speaking, all foreign investments in Australian urban land require notification. Investment in companies whose Australian urban land assets make up over 50 per cent of their total assets are classed as an investment in Australian urban land and therefore must generally be notified. Under the Policy, all direct investments in Australia by foreign governments including state owned enterprises and other associated entities of foreign governments must also be notified to FIRB, and are required to be approved by the Federal Treasurer, regardless of the value of that investment. For US investors which are not foreign governments (or associated entities of foreign governments) FIRB notification is required for acquisitions of 15 per cent or more in an Australian corporation which is valued at over A$1,062 million (indexed annually). Non-US investors must notify FIRB of intended acquisitions of 15 per cent or more in an Australian corporation valued at over A$244 million (indexed annually). Investments in certain sensitive sectors of the Australian economy (such as media) attract different thresholds under the FATA and the Policy. Bilateral investment treaties Australia has a number of bilateral investment treaties in place. Generally, bilateral investment treaties involving Australia provide mechanisms for foreign investors to make claims directly against the host state (usually by way of arbitration proceedings) for actions in breach of the treaty. However, the provisions of the FATA and the Policy still apply to all foreign investment in Australia. Where preferential treatment is accorded to foreign investors from particular jurisdictions under bilateral investment treaties, such protections are required to be implemented through domestic legislation. Currently only US investors have been accorded such preferential treatment in Australia. However, in 2011, Australia signed the Investment Protocol to the Australia- New Zealand Closer Economic Relations Trade Agreement. Once implemented, this will result in New Zealand investors being essentially accorded the same preferential treatment as US investors. Statutory minority protection and conflicts with shareholder agreements It is a fundamental tenet of Australian corporations law that companies operate on the majority rules principle and persons who acquire shares in a company voluntarily agree to abide by the internal rules of that company. The Corporations Act 2001 (Cth) (Corporations Act) adopts a replaceable rules approach to the internal management of a company. A company s internal management may be governed by provisions of the Corporations Act that apply as replaceable rules, by a constitution or by a combination of both. Because of this, protections for minority shareholders are generally negotiated prior to the formation of the company or the acquisition of the shares by way of adoption of, or amendment to, the company s constitution or entering into a shareholders agreement. A shareholders agreement may be drafted so as to prevail over the company s constitution in the event of any conflict. Importantly, unless a shareholder agrees in writing to be bound, that shareholder may not be bound by any modification to the constitution made after the date on which they became a shareholder so far as the modification requires them to take up additional shares, increases their liability to contribute to the share capital of, or otherwise to pay money to, the company or imposes or increases restrictions on the right to transfer the shares already held by the shareholder. 14 Norton Rose Fulbright

15 Australia Where no constitution is adopted or shareholders agreement is entered into, the replaceable rules include the following rights designed to protect a minority shareholder: the directors of a company must call and arrange to hold a general meeting on the request of members with at least five per cent of the votes that may be cast at the general meeting or at least 100 members who are entitled to vote at the general meeting written notice of a meeting of the company s members must be given individually to each member entitled to vote at the meeting before issuing shares of a particular class, the directors of a proprietary company must offer them to the existing holders of the shares of that class and variation of class rights may only be by way of special resolution or with the written consent of members with at least 75 per cent of the votes in the class. The Corporations Act also includes the following general statutory protections designed to protect minority shareholders: Directors and other officers duties of care and diligence, good faith, use of position and use of information. The requirement for certain matters to be passed by special resolution (ie,, a 75 per cent majority of the votes cast at a general meeting). These matters include modification or repeal of the company s constitution, selective reduction in the company s share capital, selective buy-back of the company s share capital and changing the company s name. The court may make a number of orders if the conduct of the company s affairs or a resolution of members is either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members. A member may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings. A member may make an application to the court to inspect the books of the company. As most of the management decisions of a company in Australia will be made by simple majority resolution of the directors or the members, a minority shareholder will be better protected under a shareholders agreement or an amended constitution than it would be under the statutory regime alone. Issues commonly encountered by a foreign or domestic minority shareholder Employment The workplace relations climate in Australia is, generally speaking, favourable for foreign investors. However, there has been a recent increase in industrial activity and industrial disputes in certain sectors, specifically mining, manufacturing, transport and construction. From 1 January 2010, minimum employment conditions for all Australian employees are contained in the National Employment Standards. By law, no workplace agreement can provide conditions which are less than those in the National Employment Standards which includes: a 38 hour working week for full time employees (plus reasonable additional hours ) four weeks paid annual holiday for full time employees (pro-rated for part-time employees but not extended to casual workers) paid personal/carer s leave and compassionate leave for full-time and part-time employees right to request flexible working hours long service leave. Most employees in Australia also have the benefit of an industrial award which applies to either an occupation or an industry in which the employee is employed. These industrial awards operate nationally and apply in respect of the type of work performed. They contain terms and conditions in addition to the National Employment Standards which are specific to the relevant occupation or industry and have the force of statute. Australian immigration policy requires all non-citizens wishing to enter to work in Australia to hold a visa. Applications can be made for visas for business visits, temporary and permanent visas for business development and temporary and permanent visas for skilled workers. Norton Rose Fulbright 15

16 Joint ventures protections for minority shareholders in Asia Pacific Under the transfer of business rules in the Fair Work Act 2009 (Cth), enterprise agreements (collective agreements made at an enterprise level between employers and employees about terms and conditions of employment), and enterprise awards if applicable, follow transferring employees to a new employer and continue to apply to the transferred employees until such time as the transferred agreement/award is replaced or terminated in accordance with applicable legislation. In some circumstances, transferred agreements/awards can also apply to new employees performing the same work that the transferring employees are performing. This means that where a joint venture partner transfers a business to a joint venture company, any transferring employees will be covered by the old employer s enterprise agreements or awards until the enterprise agreements or awards are terminated or replaced in accordance with their terms and the appropriate legislation. This raises the difficult situation of the joint venture company potentially being bound by different enterprise agreements in relation to employees performing the same work. If the new employer does not want to be bound by a transferring enterprise agreement/award, then they can make application to the Fair Work Australia tribunal for an order avoiding the transfer. Such orders will only be given if the new employer can demonstrate that the terms and conditions of employment that would apply to the transferring employees if the transferring instrument were avoided would not cause any detriment to the transferring employees. Finally, it is important to note that some sectors of the Australian workforce are highly unionised, and accordingly negotiations with Unions and costs of Union involvement in joint venture projects, including in terms of higher pay rates acquired through collective bargaining, need to be taken into account, particularly in any proposed construction and manufacturing projects. Tax Australia has a comprehensive and complex taxation system. At the Federal level, Australia imposes income taxation (including capital gains tax and fringe benefits tax), goods and services tax and customs duties. In addition, each of Australia s six States and two Territories has its own stamp duties, payroll tax and land tax system. Generally, non-residents of Australia are subject to taxation in Australia only in respect of income sourced in Australia. Dividends payable by an Australian resident company to a non-resident will generally be subject to 30 per cent withholding tax, unless a double tax agreement applies to reduce the rate or the dividends are fully franked. Non-residents are not liable for capital gains tax in Australia except in respect of taxable Australian property. Taxable Australian property includes land in Australia (whether owned or leased) and mining rights where the minerals are located in Australia. Taxable Australian property also includes interests in an entity (such as shares in a company) where more than 50 per cent of the market value of that entity s assets is attributable to Australian real property. The transfer of shares in an Australian company can attract stamp duty, depending on the State or Territory of incorporation of the company. In addition, land rich or landholder duty may be payable depending on the extent of the company s landholdings in the relevant State or Territory. The Australian Taxation Office (ATO) has recently taken an aggressive stance in respect of foreign private equity investments into Australia, where the investment is structured to take advantage of the provisions of double tax agreements. The ATO has demonstrated its willingness to apply Australia s general anti-avoidance provisions where it considers that treaty shopping has occurred to obtain tax advantages. The ATO has expressed the view that foreign private equity investments in Australia are generally on revenue account, and not on capital account, because the intention is generally to sell the investment at a later date at a profit. Competition law and merger control It is necessary to consider whether the establishment of the joint venture gives rise to any Australian antitrust issues and, in particular, whether it risks offending the prohibition under the Competition and Consumer Act 2010 (Cth) (CCA) in respect of anti-competitive mergers. The Australian competition regulator, the Australian Competition and Consumer Commission (ACCC), has the power to seek to injunct a merger (or seek a divestiture order in relation to a merger which has already occurred) which is likely to substantially lessen competition in any relevant Australian market. 16 Norton Rose Fulbright

17 Australia The ACCC has issued merger guidelines which, broadly, encourage notification to it of a merger for its clearance where: the products of the merger parties are either substitutes or complements and the post-merger firm will have a market share of greater than 20 per cent of the relevant market. The guidelines do not operate so as to provide any financial safe harbour and, ultimately, it is necessary for the parties establishing the joint venture to make their own determination as to the need for merger clearance. As a result, it is usual practice in Australia for parties to seek to have their transaction cleared by the ACCC if they cannot definitively satisfy themselves that there will not be a substantial lessening of competition. Clearance by the ACCC may be sought either on an informal basis, or in a formal application. If the proposed joint venture is likely to substantially lessen competition in the relevant market but there are overriding public benefits likely to flow from its establishment, it is possible to seek authorisation of the joint venture by an application to the Australian Competition Tribunal. Joint venture exception to cartels and exclusionary provisions If a joint venture involves competitors or potential competitors, care must be taken to ensure that the creation and giving effect to the joint venture does not infringe any of the cartel or exclusionary provisions in the CCA. Cartel provisions refer to price fixing, bid rigging, market sharing and competitors coordinating their production or output. These provisions now potentially attract both civil and criminal consequences, including very high maximum penalties, and jail terms for individuals. Exclusionary provisions to some extent overlap with cartel provisions, and essentially are directed at prohibiting boycotts by two or more competitors of suppliers or customers. Infringement of exclusionary provisions attracts high civil penalties, but not criminal penalties. As these provisions are per se illegal, it is essential that any joint venture involving competitors is documented so as to attract the joint venture defences which are available to both cartel provisions and exclusionary provisions. Cartel provisions To satisfy the joint venture exception in relation to that in respect of cartel provisions, it is necessary to establish that: There is a legally binding contract in place between the joint venture parties, which contains any relevant cartel provisions. Practically, this means that joint ventures between competitors must be documented in a legally binding manner up front. It is not acceptable to commence to engage in the joint venture conduct without a legally binding joint venture agreement being in place. The cartel provision must be for the purpose of the joint venture. The joint venture must be for the production and/or supply of goods and services. The joint venture must be a true joint venture, either incorporated or unincorporated. In addition to satisfying the above exception for cartel provisions, in respect of any joint venture between competitors it is necessary to also be satisfied that the joint venture will not breach the general prohibition in the CCA in relation to anticompetitive contracts or arrangements. Therefore, the parties need to be satisfied that the joint venture is not likely to give rise to a substantial lessening of competition in any market. This is more likely to be an issue if a joint venture involves two large competitors. Exclusionary provisions The joint venture defence in relation to exclusionary provisions is different to cartel provisions. It is less technical, and requires that: there is a contract, arrangement or understanding containing the exclusionary provisions (c.f. the cartel provision exception, which requires a legally binding contract) the exclusionary provision must be for the purpose of a joint venture and the provision must not otherwise substantially lessen competition. As joint ventures will generally attract the potential application of both the cartel provisions and exclusionary provisions, both the exceptions must be satisfied. It is vitally Norton Rose Fulbright 17

18 Joint ventures protections for minority shareholders in Asia Pacific important to document joint ventures with competitors up front, and before giving effect to any provisions in them. Otherwise, the cartel provision exception will not apply. To the extent that the potential joint venture parties wish to enter into a Memorandum of Understanding (MoU) ahead of implementing a joint venture, it is desirable to include a paragraph in the MoU to the effect that there is no understanding between the parties in connection with the creation or giving effect to a cartel provision unless and until the parties have entered into a formal joint venture agreement. Financing issues Most joint ventures in Australia are initially financed by the shareholders equity. The required contributions of each shareholder are generally dealt with in the shareholders agreement or the joint venture agreement. Some prefer to continue to finance the joint venture through continued contributions of the shareholders, generally in proportion to each shareholder s capital while others prefer to finance the joint venture through loans or other financial arrangements. Objectives and termination It is not uncommon for joint venture documentation to expressly limit a joint venture to only carry out certain objectives. This is particularly the case where there are any trade practices concerns where the shareholders may otherwise be in competition with each other and are relying on the joint venture exception. Unless the joint venture has been formed for a particular project with a defined lifespan, generally joint ventures in Australia will not contain an express term. However, most shareholders agreements will deal with circumstances where a shareholder wishes to exit the joint venture. This may include put and call options or drag-along and tag-along rights. Most shareholders agreements will also provide specific termination regimes which will enable a non-defaulting party to exercise its termination rights in circumstances where the other party has committed a material breach and not remedied that breach within a certain period of time, or is the subject of an insolvency event or a change in control event. Rather than providing termination rights, such events could also give rise to a call option, giving the non-defaulting party the right to acquire the defaulting party s shares. Governing law The Australian courts will uphold the parties choice of governing law and the parties are free to specify whichever law they wish, even if that law has no connection with the joint venture or its business. However, an Australian court will not give effect to a choice of law made in order to evade the application of a law which would have applied in the absence of such choice, if that is a law of the appropriate forum. There are also certain circumstances where the law specified as the governing law of the joint venture will not determine all issues which arise in connection with it. For instance, the occupational health and safety regulations of the jurisdiction where the work is being carried out will apply and Australian employment law will govern all employees working in Australia. Obligations to pay tax in Australia will also not be affected by the choice of governing law but will rather depend on other characteristics such as residency of the relevant parties and the source of income. Offshore structures It is possible to utilise offshore structures for a joint venture in Australia and this most commonly occurs in the case of infrastructure projects. Offshore structures are often utilised for tax purposes. For instance, a Bermudan joint venture company may be used as a holding company for a business operation or infrastructure project in Australia. If the Bermudan joint venture company is able to provide sufficient evidence to the ATO that it is not obliged to pay tax in Australia, only the more generous taxation regime in Bermuda will apply. If using an offshore structure, parties should be aware that the enforcement of foreign judgments in Australia is statutorily provided for under the Foreign Judgments Enforcement Act 1991 (Cth). However, this act is restricted to specified countries and courts, so common law rules will apply to the enforcement of a judgment falling outside of the act. Managing the investment Veto rights, reserved matters and weighted voting Veto rights, reserved matters and weighted voting rights are commonly included in shareholders agreements in Australia. These mechanisms are used to provide minority shareholders control over certain matters relating to the company. For instance, the decision to wind up the company or substantially change the nature of the business of the 18 Norton Rose Fulbright

19 Australia company may be reserved for the members and require a 75 per cent majority decision. Governance A proprietary company in Australia must have at least one director and that director must ordinarily reside in Australia. A proprietary company in Australia is not required to have a secretary but, if it does have one or more secretaries, at least one of them must ordinarily reside in Australia. Directors of Australian companies are subject to duties imposed by the Corporations Act and also by the general law. As the statutory duties are based on the general law duties, there is considerable overlap between the two sources of law. The duties under the Corporations Act are: duty of loyalty and good faith duty of confidentiality duty to exercise due care, diligence and skill duty not to misuse information or position and duty to prevent insolvent trading. The duties under the general law include the obligation to: act in good faith use their powers and knowledge as directors for a proper purpose (only for the benefit of the company and not for their own benefit) avoid conflicts of interest and exercise due care, diligence and skill. Australian proprietary companies generally operate under a simple management structure. The shareholders agreement of a joint venture company will usually stipulate how directors are to be appointed, with board control usually resting with the majority shareholder. Certain matters are often reserved and decisions relating to these matters will generally require a higher majority or minority shareholders may have a veto right. The Corporations Act requires large Australian proprietary companies and small proprietary companies controlled by foreign companies if they are not consolidated in a foreign registered company s accounts lodged with the Australian Securities and Investments Commission (ASIC) to prepare a financial report and a directors report for each financial year. If at least two of the criteria below are satisfied, then the company will be classified as a large proprietary company. If less than 2 of the criteria are satisfied, the company will be a small proprietary company. The criteria are: the consolidated revenue for the financial year of the company and the entities it controls (if any) is A$25 million or more the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is A$12.5 million or more and the company and the entities it controls (if any), at the end of the financial year, have 50 employees or more. While a proprietary company in Australia is not required to hold an annual general meeting, if a general meeting is to be held, shareholders are entitled to receive notice of the meeting. A notice of a meeting of a company s members must set out the place, date and time for the meeting, state the general nature of the meeting s business and, if a special resolution is to be proposed at the meeting, set out an intention to propose the special resolution and state the resolution. Members are also entitled to access the minute books for the meetings of its members. The members of an Australian proprietary company may apply to a court to make an order to inspect the books of the company. Also, the directors of a company, or the company by a resolution passed at a general meeting, may authorise a member to inspect books of the company. This right could also be included in a shareholders agreement. The directors of an Australian joint venture company are bound by their statutory and general law duties to act in good faith and to avoid conflicts of interest in respect of the joint venture company, regardless of who appointed them. While there is provision in the Corporations Act to allow directors of a wholly-owned subsidiary appointed by the parent company to take into account the interests of the parent company, no such provision applies for joint venture companies. Therefore, potential conflicts of interest may arise between a director s duty to the joint venture company and his or her duty to his employer. This issue may be mitigated by ensuring that a director of the shareholder is not also appointed a director of the joint venture company or by including provisions in the shareholders agreement which requires certain key matters to be approved at the shareholder level. Norton Rose Fulbright 19

20 Joint ventures protections for minority shareholders in Asia Pacific Capital calls and pre-emption rights The company s constitution or the shareholders agreement usually includes provisions which deal with capital calls and the circumstances in which the company may seek further funding. Generally, these provisions will be drafted so as not to dilute each of the shareholders interests, normally by requiring any capital contributions to be made in proportion to the number of shares held by each shareholder. The Corporations Act requires that before issuing shares of a particular class, the directors of a proprietary company must offer them to the existing holders of the shares of that class. This statutory requirement is commonly waived in a proprietary company s constitution and replaced with a contractual pre-emptive rights regime agreed by the parties. Non-compete undertakings Non-compete undertakings or restraint of trade covenants are only enforceable in Australia to the extent that they protect a legitimate identifiable interest of the person or company seeking to enforce the restraint and the restraint or covenant is no broader than is required to protect that interest. In particular, this means that the duration and geographical area in respect of which the non-compete undertakings are to apply should be considered and be no more extensive than is required and is appropriate to protect such legitimate identifiable interest. Realising the investment Deriving income There are no restrictions on Australian and foreign currencies being brought into or sent out of Australia. Restrictions may sometimes be imposed for foreign policy reasons, but not normally for economic reasons. Some international transfers of funds must be reported to the Australian Transaction Reports and Analysis Centre under the Financial Transaction Reports Act 1988 (Cth) but this is aimed at detecting tax evasion and identifying the proceeds of crime, rather than at exchange control. The Corporations Act imposes a solvency test for the declaration of dividends. A company may only pay a dividend if: the company s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend the payment of the dividend is fair and reasonable to the company s shareholders as a whole and the payment of the dividend does not materially prejudice the company s ability to pay its creditors. There are no restrictions on the creation of classes of shares in Australia but a company may issue preference shares only if the rights attached to the preference shares with respect to repayment of capital, participation in surplus assets and profits, cumulative and non-cumulative dividends, voting and priority of payment of capital and dividends in relation to other shares or classes of preference shares are set out in the company s constitution (if any) or have otherwise been approved by special resolution of the company (requiring a 75 per cent shareholder majority). Realising capital (transfer restrictions) Transfers of shares are not perfected until the transferee s name is entered on the register of members. The directors of the company are not required to register a transfer of shares in the company unless the transfer and any share certificate have been lodged at the company s registered office, any fee payable on registration of the transfer has been paid and the directors have been given any further information they reasonably require to establish the right of the person transferring the shares to make the transfer. Other than these conditions, so long as the transfer is made under a proper instrument of transfer, there are no other statutory restrictions on the transfer of shares in a company in Australia. If a party is contemplating purchasing shares in an existing company, it should take into consideration the provisions of the Corporations Act which cover unsolicited offers. Any unsolicited offers where the offeror is not in a personal or business relationship with the offeree prior to the making of the offer to purchase shares or other financial products must comply with the Corporations Act. In particular, the offer must include the price at which the offeror wishes to purchase the shares or other financial products and a fair estimate of the value of the shares or product as at the date of the offer, and an explanation of the basis on which that estimate was made. These provisions are aimed at protecting minority shareholders who may be the target of unsolicited low ball offers. 20 Norton Rose Fulbright