The Brunei Economic Development Board. A Framework For A Joint Venture Agreement JULY 2005

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1 THE BRUNEI ECONOMIC DEVELOPMENT BOARD A Framework For A Joint Venture Agreement JULY 2005 IMPORTANT NOTICE All parts of this Framework have been prepared and set out purely for illustrative and educational purposes only. This Framework is not intended to be an exhaustive guide to any or all the issues that may be encountered during the process of forming a business joint venture, or to any purported strategy to manage those issues. Users are strongly advised to seek independent legal and other expert advice before entering into any commercial contracts including joint venture agreements. This Framework is not intended to be a fully usable and legally binding agreement, and shall not be relied upon as such. Users are reminded that the BEDB does not warrant the completeness or the accuracy of any information or representation in this Framework. Nothing in this Framework shall be construed as any legal, financial, technical, insurance or tax advice from the BEDB. No part of this Framework including any clause, omission, guidance notes, lists or examples shall at any time be construed as a position or approach recommended by the BEDB, or to be considered fair and reasonable, or reflecting the BEDB s preferred position in any way. Any act to download and/or acceptance of this document in either softcopy or hardcopy, whether in whole or in parts thereof, by any recipient of this document shall constitute the recipient s agreement to and acceptance of the terms set forth in this Important Notice.

2 INTRODUCTION This Framework has been created by the Brunei Economic Development Board (BEDB) as part of its ongoing efforts to assist Small Medium Enterprises (SMEs) in Brunei Darussalam. This Framework is targeted at SMEs who are contemplating or negotiating to form business joint ventures in Brunei Darussalam. This Framework is intended to illustrate a typical structure for creating a business joint venture and to highlight the common issues and some of the approaches used to deal with those issues. It is hoped that local SMEs will use this Framework as a reference when considering the kind of issues to be aware of in forming joint ventures. However, users should bear in mind that no two joint ventures are the same. Each will have its own unique circumstances, issues and challenges that will require its unique set of solutions, to be achieved only through negotiations and consensus by the parties involved. Enjoy reading and good luck! ASSUMPTIONS A joint venture can have any number of issues, but there are issues that are common to all joint ventures whatever the business, whatever the size and whatever form the joint venture may take. For the sake of consistency and ease of reference, the BEDB has made 2 assumptions in drafting this Framework. Firstly, we have assumed that the joint venture would be an incorporated joint venture; as opposed to being an unincorporated joint venture. This means a separate company would be created specifically for the joint venture, with the parties to the joint venture as shareholders in the joint venture company. Hence, many of the issues in this Framework have been addressed from this stand point. An unincorporated joint venture is one where the parties are bound by contract, but no separate company is formed. This is common when parties come together for a one-off undertaking or for a specific project only. Secondly, the joint venture would be a limited liability company under the Company s Act; as opposed to being a partnership. Many joint ventures operate as partnerships. While that is cheaper and easier to administer, the parties to a partnership will typically be personally liable for the business. It is therefore viewed as more risky. Users contemplating other forms of joint venture can take the cue from how the issues are being highlighted and addressed, and apply similar principle to their situation. At all times, users are advised to seek independent legal and other expert advice as to what would be the best approach for them. 2

3 CONTENTS Para Heading Page 1. PARTIES, DATE AND RECITALS 5 2. FORMATION OF THE JOINT VENTURE COMPANY 5 3. BUSINESS 5 4. NAME 5 5. ROLE/CONTRIBUTIONS TO THE JOINT VENTURE 5 6. SHAREHOLDING 6 7. SHARE OF PROFIT AND LIABILITIES 6 8. THE BOARD OF DIRECTORS/OPERATING COMMITTEE 6 9. BOARD MEETINGS/OPERATING COMMITTEE MEETINGS SHAREHOLDERS MEETING OPERATOR/MANAGEMENT FINANCE AUDITOR ACCOUNTING POLICY BANK ACCOUNTS AND SIGNATORIES DIVIDEND POLICY SALE AND TRANSFER OF SHARES NON-COMPETITION TRADE MARKS AND INTELLECTUAL PROPERTY ORDER OF PRECEDENCE 11 3

4 Para Heading Page 21. DURATION AND TERMINATION CONFIDENTIALITY NO PARTNERSHIP WARRANTIES NOTICES SEVERANCE ENTIRE AGREEMENT AND AMENDMENT ASSIGNMENT DISPUTE RESOLUTION GOVERNING LAW 13 4

5 1. PARTIES, DATE AND RECITAL Parties - The Parties to the Joint Venture Agreement ( JVA ) can be individuals or companies. If the JVA is being entered into by a company, one needs to check whether the signatory to the JVA is properly authorised by the company to sign on the company s behalf. Date The Parties may want to define a Commencement Date in the JVA for when the JVA becomes effective, otherwise JVA would normally be effective on the date of signing. Recital This is the part of the JVA that gives a brief background to the respective parties to the JVA including their business activities and what they will be bringing into the Joint Venture ( JV ). It will also state that the Parties are entering into the JVA to as a record of their respective rights and obligations in respect to the JV. 2. FORMATION OF THE JOINT VENTURE COMPANY ( JVCo ) The JVA should specify that Parties will jointly incorporate a Joint Venture Company [under the Brunei Company s Act (Cap 39)] for the purpose of this business joint venture, in accordance to the terms set out in the JVA. The Parties shall agree that once the JVCo is formed, that they will do everything necessary to ensure that JVCo will be bound by the JVA. 3. BUSINESS The Parties shall define in the JVA the type of business they have agreed for JVCo to carry out. The Parties may also leave open the possibility that the JVCo may enter into other areas of business without invalidating the JVA, if all the shareholders agree. The JVA should also state clearly that the JVCo shall operate in a proper, efficient and ethical manner and to be as profitable as possible for its shareholders. 4. NAME The JVA should specify if the JV will operate using any particular name, trademark, brand name etc. This is a key issue especially when one Party has intellectual property rights and rules for how this can or cannot be applied to the JV. 5. ROLE / CONTRIBUTIONS TO THE JOINT VENTURE Parties should set out clearly in the JVA any important contributions or agreed division of labour to set up the JV. This covers a variety of contributions such as: land, provision of infrastructure, license, concession, intellectual property rights, customers, off-take contract, marketing channel, key personnel etc. Some of these contributions are so critical to the JV that they are viewed as Minimum Obligations of the respective Parties, and the JVA may specify that those obligations are pre-conditions without which the JVA will not be valid. 5

6 6. SHAREHOLDING A Framework for a Joint Venture Agreement The JVA should state the JVCo s authorised share capital and the number of shares to be issued. The JVA should detail the Parties agreed shareholdings, e.g. Number of Shares Percentage of Shareholding Party A X A% Party B Y B% Party C Z C% The Parties may want to agree in advance that if the JVCo issue new shares in the future, every Party shall be entitled to have rights of first refusal to the new shares in proportion to their shareholding. This is meant to maintain their percentage (%) share in the JVCo. 7. SHARE OF PROFIT AND LIABILITIES If Parties to the JV agree to any particular profit sharing formula, [as opposed to the general rule of sharing in accordance with their percentage (%) equity share in the JVCo.], then that is crucial to be included in the JVA. This may be due to special circumstances such as conditions imposed by a licensing arrangement, profit sharing arrangement with certain key personnel, repayment of shareholder s advance, etc. Parties may want to make it clear that their liability shall be limited to their equity contribution to the capital of the JVCo, as such Parties may seek to incorporate indemnities from the JVCo within the JVA. 8. THE BOARD OF DIRECTORS Number of Directors - The Parties should agree on the initial number of Directors in the JVCo. This should comply with the Brunei Companies Act s138 which requires that each company to have at least 2 Directors and that at least half of the Board of Directors should be nationals of Brunei Darussalam. Appointment of Chairman and Secretary - The Parties should agree how the Chairman of the Board should be appointed e.g. if the Chairman should be appointed by any particular shareholder; otherwise the presumption is that it shall be elected by the Board. The Parties should agree the same for the Board Secretary. Changes to the Board Composition - The Parties can specify the rules with regard to the appointment, removal, resignation and replacement of Directors. The Parties may agree for each shareholder to be entitled to appoint and/or remove a certain number of Directors, and that same shareholder shall be entitled to name the replacement upon the death, resignation or removal of any Director it nominated. Changes to the Size of the Board - The Parties should decide how they would agree to changes in the size of the Board and/or changes in the numbers of directors each Party can nominate. For example: the Parties may specify that such changes can only take place if agreed by shareholders who among them hold [e.g.75% or more of the voting shares] in the JVCo. It may not be a good idea to require the agreement of all shareholders because if any shareholder increases its shareholding it would be unfair if a minority shareholder can block it from increasing its presence on the Board. 6

7 Initial Appointments To The Board - The Parties should agree in the JVA the initial line up of Directors and Chairman of the Board. Board Remuneration - The Parties may also decide whether Directors should receive any remuneration for being on the Board, the amounts and any attached conditions e.g. to be eligible for remuneration any Director must attend no less than 80% of Board Meetings. 9. BOARD MEETINGS Function of the Board The Parties should as a priority agree how the Board of Directors should function. The Board of Directors should be responsible for setting the strategy direction for the JVCo and would normally be given wide-ranging powers to make decisions on behalf of the JVCo without having to call a shareholders meeting. However, it should not undertake a day-to-day management role, which should be the responsibility of the management. Calling of Board Meetings - The Parties should specify how often the Board should meet and who can call a Board Meeting. Board Meetings are usually called by the Chairman of the Board and/or the Board Secretary and/or by an agreed minimum number [e.g. two] of Directors. Notice for meetings - There should be set procedures for how Board Meetings are called including the form of notice for the meeting, which should specify date, time and place, and the agenda for the meeting. The Parties should agree on a minimum notice period [usually 14 days]. Quorum - The Parties may specify the minimum number of Directors to be present for the Board Meeting to be valid i.e. achieve a quorum. This requirement is particularly important for the minority shareholder who may want to make sure that other shareholders cannot hold a Board Meeting and make decisions without it being present. Format for Board Meeting - The Parties may decide to allow alternative formats of conducting the Board Meeting e.g. using teleconferencing. This is particularly relevant if one of the Parties to the JV is a foreign party and its representatives on the Board are based abroad. Decision of the Board The Parties (especially the minority shareholder) should decide clearly whether certain [important] decisions require more than a majority i.e. half the Directors present at Board Meetings to be approved. Such decisions may require a supermajority [e.g. at least 75% of Directors] or even unanimity i.e. every Director must approve. The following are some examples of decisions that might need a supermajority or unanimous approval: annual budget, borrowings, guarantees, change in banking or signing authority, major capital commitments, decision to pay dividend, increase in paid-up/issued capital, granting of shares or options, certain related party transactions, employment of key executives, disposal of key assets/business /licenses, incorporation/sale of subsidiary, change of auditors, winding-up, voluntary liquidation. The downside to having such provisions is that it may be prone to abuse by a minority shareholder to hold the JVCo hostage. Decision by circular resolution The Parties may consider allowing decisions of the Board to be valid if in writing and signed by every Director, even if signatures are found on different but identical copies of resolution including faxed copies. This is to enable certain urgent business or procedural matters to be approved quickly without calling for a Board Meeting. Casting vote - Parties may agree that in the event of a tie during Board Meetings, the Chairman shall have a second or casting vote. 7

8 Independent Director Parties may want to appoint person(s) of credibility who are not shareholders or connected to any shareholders to be Directors for the sake of better corporate governance. If so, the JVA should allow a non-shareholder to be appointed Director. 10. SHAREHOLDERS MEETING Parties may reserve certain matters to be decided only at shareholder s meetings (as opposed to being delegated to the Board). This may be relevant if not all shareholders are represented on the Board; or if the issue in question is regarded to be so fundamental that it should be put to shareholders. Some examples are: appointment or removal of Directors, dividend policy, issuance of new shares or interests in the JVCo., appointment of JVCo. s auditors, merger and acquisition, voluntary liquidation, winding-up etc. A shareholders meeting is required annually by law, but Parties should agree on the procedures for convening and conducting any additional shareholder s meetings if urgent business arise. There are certain rules prescribed in the model Article of Association in the Company s Act. 11. OPERATOR / MANAGEMENT Operator - It is essential that Parties identify who should be the operator of the JV; whether that be any one of the Parties or some other person/entity. Authority - The Parties should agree in the JVA the scope of powers to be delegated to the operator/management and the principles to be followed by the operator/management. This shall include setting out the delegated financial authority, authority for entering into commitments on behalf of the JVCo and the scope of administrative authority to be delegated to the operator/management. What should be avoided is a situation where the Board of Directors micro-manages or interferes with the day-to-day operations of the JV; or where every shareholder wants to get involved, or where no one is clearly responsible for the operations/management. Appointment - The Parties may also agree in the JVA to create certain key management positions e.g. CEO or General Manager, and agree on the person(s) to be appointed to key management positions at the onset of the JV [occasionally key terms of employment as well]; and to define the procedures for appointing/removing those key management positions. Budget, business-plan and policies The Parties should agree the control points of which the annual budget, business-plan and policies are key - where the Board will give directions to the operator/management and for the operator/management will be accountable. Parties may want to define in the JVA how the budget and business plan should be formulated, to set procedures for approval or amendment [e.g. giving minority shareholders certain safeguards] and who [usually the operator/management] should be accountable for the implementation. Management reporting Parties (especially if one Party is the operator/management) should agree on what should be included in the CEO/General Manager s report to the Board and how often that should be made. Usually reporting is done monthly and would include profit and loss accounts, cash flow statement, balance sheet, status of key business activities, performance against performance targets, key initiatives, human resource issues, security incidents etc. These will be in addition to any external audit and/or annual reporting to shareholders as required by law or as agreed between the Parties. 8

9 12. FINANCE A Framework for a Joint Venture Agreement Funding Parties must agree on the funding requirements to establish the JV. Agreeing to the initial budget [possibly for more than a year] and business plan is therefore critical. The JVCo needs to be funded by any combination of equity capital by the shareholders, borrowings and/or advances. If the expectation is that every Party pay their own share, the JVA can be structured so that the JV will be terminated [or it will automatically offer the stake to other shareholders] unless such payment is made within a certain time. Subsequent rounds of fund raising Parties should agree that if the JVCo needs to raise additional capital, and any existing shareholders unable to provide additional funding would agree to see its percentage (%) share diluted by allowing others to provide the equity instead. However, Parties sometimes agree to reserve certain special rights for its early investors, e.g. place on the Board, priority in distribution of profits, special voting rights; even after their percentage (%) share had been diluted, by creating different classes of shares. Borrowings If Parties expect the JVCo to borrow to fund its operations, then Parties should agree the procedure for approving the JVCo to take on debt. They should also agree how the JVCo will provide security especially if Directors or shareholders are expected to provide guarantees to secure the loans. This is often an issue for SMEs in Brunei Darussalam, and has to be structured carefully e.g. Parties may limit to provide security only in proportion to their shareholding. Alternatively, the JVCo may borrow from its shareholders in the form of an advance. In this case, the Parties should agree within the JVA the terms for the advance [e.g. Are all shareholders required to provide advance according to their share? Is it interest bearing? Is it secured against any asset? What are the rules on repayment? What happens on default? Can the loans be converted into equity?] Non-monetary contributions If any Party come into the JV not as a paying investor because it brings with it certain assets [e.g. license, existing contract, land, technology, industry experience], Parties to the JV should agree a value for that contribution and reflect that within that shareholder s equity in the JV. Alternatively, the Parties can agree the basis for the JVCo to contract for the use of the asset e.g. by lease, license agreement. Financial Procedures Parties should agree as much and as early as possible, the financial procedures for the JVCo, including budget, levels and limits of delegated financial authority, procedures for approving financial commitments, banking authority, cheque signing authority, procedures for keeping of financial records, audit policy etc. because this is a fertile area for dispute between Parties in a JV. If necessary, Parties should seek independent advice from experts to have a fair, robust and transparent procedure in place. 13. AUDITOR Auditor - Parties should agree in the JVA the Auditor for the JVCo. 14. ACCOUNTING POLICY Accounting policy Parties in a JV, especially when the JV is with a foreign party, should agree on the accounting policies of the JVCo. There may be critical differences in the accounting rules and regulatory compliance between the different Parties to the JV, so this need to be ascertained with expert advice. 9

10 15. BANK ACCOUNTS AND SIGNATORIES Parties should agree [that once the JVCo is incorporated] to do all that is necessary e.g. to pass a Board Resolution to authorise a specific representative to open the Company s bank accounts at a choice of bank agreed by the Parties in accordance to the Parties signing instructions, and arrange for shareholder s funds to be paid into the JVCo. 16. DIVIDEND POLICY The Parties should agree on how much of the JVCo s profits should be returned to shareholders as dividends and not retained within the JVCo. It could be a policy to distribute an agreed percentage (%) of the JVCo s net profits, usually subject to retaining a prudent level of working capital and cash reserve. The Parties will also make sure this policy cannot easily be changed. 17. SALE AND TRANSFER OF SHARES Restriction on Transfer Parties in a JV will often agree on certain process and safeguards for any sale, transfer, assignment of shares by another shareholder; so that the remaining Parties have some control over the emergence of a new shareholder or changes in the shareholding. Often, such transactions will require the consent of existing shareholders, who will also have the first right of refusal to take up the shares. The Parties will usually agree on a formula for agreeing the share price for this transaction e.g. based on the price currently on offer by a third party, to be determined by an independent third party such as an investment bank or auditor,or determined by a pre-set formula. Withdrawal The JVA should specify how any Party can withdraw from the JV and the conditions for doing so. Parties need to determine the rights [e.g. entitlement to share of profits] and obligations [e.g. any penalty, duty on confidentiality, non-competition] of the withdrawing Party; and the procedures by which that Party s shareholding can be disposed off. Often, the Parties may specify a minimum period of time when no Party can withdraw [without penalty] to ensure that all Parties stay committed to the JVCo. Buy-out The Parties may want to plan for circumstances when one shareholder can buyout another shareholder e.g. in event of death, insolvency, bankruptcy, acquisition by a competitor, major disagreement/deadlock in JVCo, termination of JVA. In such circumstances, the Parties should pre-determine in the JVA the procedure and how the price should be calculated. Use of shares as collateral Parties should agree whether any shareholders should be able to pledge or mortgage or use the shares as security for loans; and if that is allowed whether the JVCo or other shareholders need to give written consent and whether that should be subject to any conditions. New shareholders to be bound by JVA - As an additional safeguard, the Parties may insist in the JVA, that any Party transferring its shares must ensure that the new shareholders will be bound in writing to the terms of the JVA, otherwise the JVCo would refuse to approve and register the transfer. 10

11 18. NON-COMPETITION A Framework for a Joint Venture Agreement Parties should agree that no party should be allowed to undertake any activity that competes with the JV either directly or indirectly, for the duration of the JV and usually for a certain time after as well. This is particularly relevant if one Party has certain product, technology, skill, client base critical to the JV s business. 19. TRADE MARKS AND INTELLECTUAL PROPERTY If the JV makes use of any intellectual property rights [e.g. brand name, trademarks, images, patent, processes, trade secrets, licenses] controlled by any of the Parties, the owner of that intellectual property will normally insist that the Parties to the JV take all necessary steps to ensure that the JVCo will enter into certain agreements and/or observe certain conditions for using the intellectual property. Usually, the JVA will also contain terms that are designed to protect such intellectual property prior to the formation of the JVCo or if the JVCo is wound-up to ensure that the Parties to the JV have certain direct legal obligations. 20. ORDER OF PRECEDENCE When JVs are formed, the Parties would enter into a number of agreements amongst them such as the JVA, share subscription agreement, licensing agreement etc. Parties usually agree in the JVA which of their agreements will prevail over other agreements if there is any inconsistency among them. Often Parties would agree that the JVA will take precedence over the Articles of Association. No agreements can take precedence over the law and rarely over the Memorandum of Association. 21. DURATION AND TERMINATION Duration - Parties should agree from the onset whether the JV should be for a specific purpose and/or specific period of time, or whether it should be continuing going concern. Termination events - Parties should agree on the situations when the JVA will automatically be terminated. Some common termination events are: when one party holds all the shares in the JVCo, when a resolution is passed to wind-up the company, when certain licenses to operate cease to be available, etc. The Parties should also agree on the areas where the Parties to the JVA can choose to terminate the JVA if another Party is in breach or default. Procedures for termination - the Parties should agree from the onset the procedures, notice period and the consequences of termination e.g. whether the JVCo will be liquidated, trigger a Buy-Out etc. Usually, the procedure will include an agreed time period and/or steps to allow the Party in default/ in the breach to remedy the situation; before allowing for the JVA to be terminated if the situation persists. 22. CONFIDENTIALITY The Parties should agree (right from the onset, even before the JVA) certain undertakings to keep all confidential information, commercially sensitive information, and deliberations between the Parties in forming the JV confidential. The Parties should also agree in the JVA to ensure that this legal obligation extends to anyone who has access to confidential information e.g. Directors and employees of the JVCo, advisers, business partners. This is essential in order to facilitate the release of information during due diligence, and to impose a confidentiality obligation even if the JV does not go ahead. This part of the JVA should survive for an agreed period of time after termination, or any Party s withdrawal from the JVA. 11

12 23. NO PARTNERSHIP The Parties should make it clear that the JVA should not by itself constitute a partnership between the Parties. A partnership would give a Party the ability to bind, commit or pledge the credit of the other Parties. 24. WARRANTIES Each Party to the JVA should make certain warranties, usually on matters of fundamental concern that are not easily verified by the other Party. For example: if dealing with a company, Parties may require a warranty that the company is duly incorporated, registered and is not subject to certain legal action; and that the persons signing the JVA is duly authorized to contract. When contracting with an individual, the Party should warrant that they are not under any bankruptcy proceedings/receiving order. If any Party is to contribute certain assets to the JVCo, it should give a warranty that it has legal rights to those assets and has the right to contribute it to the JVCo in the agreed manner. 25. NOTICES The Parties should agree what constitutes a valid notice for matters under the JVA. 26. SEVERANCE The Parties should agree that if any clause in the JVA is considered void, illegal or unenforceable, that would not by itself affect the rest of the JVA. 27. ENTIRE AGREEMENT AND AMENDMENT The Parties should agree that the JVA will supersede any previous agreements, and that any amendment or variation of the Agreement shall be effective only if it is in writing and signed and confirmed by the Parties. 28. ASSIGNMENT A Party is usually not allowed to assign its rights and obligations in the JVA to others, unless with certain agreed consent from the other Parties. 29. DISPUTE RESOLUTION This is a key issue for the Parties to have a clear understanding of from the onset. One commonly used route is as follows: (1) At the first sign of a dispute, the Parties would agree to try and settle the dispute through informal consultation between a senior representative from each Party who had not previously been involved with the dispute [e.g. the company Chairman], with a view to having cooler heads to resolve the differences; and (2) if that fails, then the Parties can agree to refer the matter to arbitration or mediation. Occasionally, the JVA will also agree the procedure, format and choice of arbitrators or mediator. If the JVA is silent on this, the Parties can always resort to resolving the dispute in court. 12

13 30. GOVERNING LAW A Framework for a Joint Venture Agreement For a JV operating in Brunei Darussalam, unless the Parties agree otherwise, the JVA should normally be governed by, and construed in accordance with the laws of Brunei Darussalam. 13