Share transfers—corporate joint ventures
Share transfers—corporate joint ventures

The following Corporate practice note provides comprehensive and up to date legal information covering:

  • Share transfers—corporate joint ventures
  • Restrictions on transfer
  • Prohibitions on transfer
  • Prohibitions on transfer of part of a shareholder's interest
  • Permitted transfers
  • Pre-emption rights
  • Identification of third party purchaser
  • Valuation of shares
  • Pre-emption procedures
  • Location of pre-emption provisions
  • More...

Share transfers—corporate joint ventures

When deciding to enter into a joint venture, parties will want to consider carefully the identity of the other proposed parties to the joint venture and the experience and resources that they will bring to the joint venture. They are therefore likely to want to ensure that the parties remain involved in the joint venture (at least for a pre-agreed period of time) and have some controls over who they transfer their shares to. The types of share transfer restrictions that are included will additionally depend upon (among other things) the intended duration of the joint venture, how the parties intend to realise their investments, the cash-flow and fund raising requirements of the parties and any share transfer restrictions contained in other transaction documents, eg financing documents.

Restrictions on transfer

For this reason, most joint venture agreements (JVA) and/or articles of association will contain a number of restrictions on the transfer of shares by the joint venture parties. These restrictions could include:

  1. permanent or temporary prohibitions on transfers of shares

  2. a prohibition on transfers of shares to competitors

  3. a prohibition on any shareholder transferring part of its interest

  4. conditions which must be complied with before intra-group transfers or transfers to family members or a family trust can be effected

  5. pre-emption rights (or rights of first refusal) which may apply before a

  • shareholder can transfer its shares to a third party

  • drag along and/or tag along rights, and

    1. a requirement for any transferee to sign a deed of adherence to the JVA

  • Please note, this Practice Note focuses on private company share transfers. The Listing Rules provide that, except in exceptional circumstances, the articles of association of listed companies must not contain prohibitions on the transfer of fully paid shares.

    Prohibitions on transfer

    The parties could agree to an absolute prohibition on each party of any transfer of shares or any interest in any shares without the prior written consent of the other parties. The articles of association could instead give the directors a complete discretion as to whether to register a transfer, which could be backed up by a provision in the JVA requiring the unanimous consent of the shareholders for such a decision to be taken.

    The parties may be concerned about transfers to competitors; if this is the case, the JVA could include a restriction on transfers to a clearly defined category of competitor.

    Alternatively, the parties could agree to an initial lock-in period during which no share transfers are permitted, in order to enable the business of the joint venture company (JVC) to become more established. When such an initial period comes to an end, it will usually be replaced by other share transfer restrictions, eg pre-emption rights.

    The JVA will usually also contain restrictions on the creation of encumbrances over shares in the JVC, as enforcement of encumbrances over shares could result in the involuntary transfer of the shares in question. Care should be taken to ensure that any such restrictions apply to both legal and beneficial interests in the shares.

    Prohibitions on transfer of part of a shareholder's interest

    The shareholders may be restricted from transferring only part of their interests. This is in order to avoid small, split shareholdings and the creation of minority shareholders who could have an undue influence over the operation of the joint venture. If the transfer of partial interests is permitted, the parties should ensure that they are comfortable with the level of influence that the new shareholder will have. The JVA could permit the transfer of part, subject to the transfer of a specified minimum shareholding percentage.

    The new shareholder's rights could include:

    1. the ability to veto changes to the JVA (where it becomes a party to the JVA by entering into a deed of adherence)

    2. the ability to block shareholder resolutions (particularly in cases where the share capital of the company is divided into different classes and the new shareholder will have a significant proportion of the shares of one class), and

    3. the ability to apply to court for an order that the JVC is being operated in a way which is unfairly prejudicial to its own position as shareholder

    Permitted transfers

    It is common for JVAs to allow parties, where they are corporates, to transfer their shares to other members of their respective groups or, where they are individuals, to transfer their shares to specified members of their immediate family or to a family trust. However, such permitted transfers will usually be subject to certain of the other restrictions on transfer set out in the JVA, such as the prohibition on transferring part only of the shareholder's interest and the requirement for the transferee to enter into a deed of adherence. However, such permitted transfers will generally not be subject to absolute prohibitions on transfer, lock-in periods, pre-emption rights, tag along rights and drag along rights.

    If the transferee does not have the same financial standing or reputation as the transferor, the parties may require the transferor to remain as a party to the JVA and/or to guarantee the transferee's obligations under the JVA. In addition, if the transferee leaves the transferor's group at any time, the JVA (or articles of association) may require the transferee to transfer its shares in the JVC back to the transferor or to the other shareholders of the JVC.

    Pre-emption rights

    It is usual for the JVA and/or the articles of association of the JVC to provide that, before a shareholder can transfer its shares to a third party, it must first offer its shares to the other shareholder or shareholders of the company. There are however a number of variations as to how such pre-emption (or right of first refusal) provisions work, such as:

    1. whether the potential third party purchaser must be identified before the shares are offered to the existing shareholders of the company

    2. how the shares to be offered to existing shareholders should be valued

    3. how the process of offering shares to the existing shareholders will work, and

    4. whether the relevant pre-emption provisions are included in the JVA or the articles

    Identification of third party purchaser

    The pre-emption process may operate in its simplest fashion where the identity of the third party purchaser and the price at which it is willing to buy the shares is known before the shares are offered to the other existing shareholders. In such case, the other shareholders will usually be given a right of first refusal to match the third party's offer for the shares which, if not taken up, will permit the sale to the third party to go ahead. For an example of such a provision, see article 13 (Permitted Share Transfers) of Precedents: Articles of association—joint venture company—deadlock (50:50) and Articles of association—joint venture company—majority/minority. See further, Flowchart: Transfer of shares where right of first refusal (ROFR), drag along and tag along provisions apply—flowchart.

    If, however, the shares are to be offered to other existing shareholders before a third party purchaser is identified, another method will need to be used to determine the price at which the shares should be offered to the other shareholders. If a third party purchaser is identified after the existing shareholders have rejected the offer of shares, the existing shareholders may want another opportunity to match a third party's offer once the details of that third party offer are known.

    The inclusion of pre-emption rights could deter a potential purchaser from expending resources in carrying out due diligence on the potential acquisition, as it knows that the other shareholders have a right of first refusal. Therefore, the inclusion of these rights could make it difficult to test the true market price of the disposal interest, thus potentially reducing the purchase price for the shares. The pre-emption process also inevitably involves delay in disposing of an interest, in that various procedural steps need to be followed before the shares can be transferred to the other shareholders, let alone offered to a third party. See further, Flowchart: Transfer of shares where right of first offer (ROFO), drag along and tag along provisions apply—flowchart.

    Valuation of shares

    If shares are offered to existing shareholders in the absence of a third party offer, the question arises as to how those shares should be valued. Various possibilities for valuation exist, including:

    1. the transferor may state the price it is willing to accept for the shares—in such cases, the transferor will usually not be permitted to sell its shares to a third party for a lower price

    2. the transferor and the JVC board may agree a price as representing the fair value of the shares

    3. the price may be determined in accordance with a pre-agreed formula based on the net assets or earnings of the JVC, or

    4. the parties may require an expert to determine fair value for the shares based on factors set out in the JVA (or articles of association) or on any factors which the expert thinks should be taken into account (which may include the addition of a premium for a majority shareholding or discount for a minority shareholding, unless this possibility is expressly excluded)

    Pre-emption procedures

    In a two-party joint venture, the pre-emption procedure will simply involve offering the shares to the other party. However, the procedure in multi-party joint ventures may be more complicated. The procedure may provide for the shares to be offered:

    1. first to members of the same class of shares

    2. to all shareholders on an equal basis, or

    3. to all shareholders pro-rata to their shareholdings

    If all the shares are not taken up, the unsold shares may be offered again in a second round of offers. If all the shares are not taken up following the second round, the transferor will usually be permitted to complete the sale to a third party. However, in some joint ventures, the directors may still have the power to refuse to register a transfer to a third party who they object to. This could be detrimental to the transferor, particularly if it results in the transferor being able to dispose of some but not all of its shareholding, and the JVA will usually provide that the transferor is not obliged to continue with the sale unless it can sell all of its

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