Joint ventures | In Principle

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Joint ventures

The term “joint venture” covers a broad range of different forms of cooperation between individuals or other entities, aimed at achieving the purposes defined by the participants—typically profit-making or organisational. All the participants in a joint venture need not have the same purposes in mind. A joint venture may be aimed at achieving an end result, or pursuing a process of continuing cooperation. In the first variant, the joint venture typically has a fixed end date, after which the parties will end their cooperation or change it into a different form of cooperation. In the second variant, the joint venture may have no fixed term, but may be terminated by either of the parties under certain agreed conditions. Polish law does not contain specific regulations governing joint ventures as such. Thus any agreement for pursuing projects as a joint venture may be concluded as an unclassified type of agreement, governed by the Civil Code. Additionally, if upon conclusion of a joint-venture agreement a company is established in which the parties to the joint venture become shareholders, the joint-venture agreement is governed by the Commercial Companies Code with respect to the corporate relations between the shareholders.

Consideration provided by the parties to a joint venture to carry out the project

The basis for carrying out a joint-venture project or transaction is for each of the participants to provide specific consideration for the project. More specifically, this may involve provision of certain assets for use in the project, labour, capital, knowhow and the like. It is assumed that through joint action, the consideration provided for the joint venture by its participants will release synergies and enable achievement of their common goal.

A joint-venture transaction may take the form of a greenfield project, i.e. implementing the project from the ground up by providing the consideration indicated above, defining the legal, organisational and asset structure, and further cooperation in the joint investment. A joint venture may also involve further pursuit of a project using an existing legal and organisational structure. When new partners join an existing venture, together they may develop the project more quickly, based on the existing asset structure.

Transaction structure — creation of SPV and options

Most joint ventures include two main elements that are the basis for carrying out the project: the knowhow, innovative solution or market position of one participant, and the capital or fixed assets of the other participant. A concession or licence to conduct a specific type of business may be an additional element. In order to carry out a joint venture, in practice, the parties may commit other components at their disposal or obtained from external sources. These elements are typically combined through establishment of an enterprise based on them, which may take the form of a company or a partnership. Thus an SPV company is a frequent instrument for carrying out a joint venture.

But before establishing an SPV, the parties will usually enter into one or more agreements generally governing their cooperation and implementation of the project. A principal agreement serving as the basis for further agreements is also a characteristic feature of a joint-venture project or transaction. It will cover such terms as the grounds for the parties’ cooperation, the assets to be devoted to realisation of the project, the necessary organisational instruments (including the SPV), the duration of the project, the rules for financing, decision-making authority, and the plans for winding up the cooperation.

This last element may involve another aspect typical for joint ventures, namely bilateral or unilateral options for transferring the shares in the joint-venture structure and clauses for exiting the project. Such options are essentially agreements for purchase or sale of specific rights, creating rights or obligations connected with taking over or changing the control over the project, or increasing or reducing the level of participation in the project by specific parties, or a party’s withdrawal from the project altogether. Withdrawal may also be tied to introduction of a new participant to take the place of the party exiting the joint venture, in which case the project will continue with a new team. The options are most often established with respect to the shares in the SPV conducting the venture. Nonetheless, other approaches to framing the rights and obligations of the participants, also in the nature of an option, may also be used.

Transaction stages

The overall picture of a joint-venture transaction is generally as follows:

  • Organising a group of investors and agreeing on a preliminary plan for carrying out the transaction, including identification of the assets needed to carry out the project
  • Drafting a business plan
  • Conducting legal, economic, technical and other analyses of the assets earmarked for carrying out the project, a legal analysis of the administrative requirements to be met before starting the project and during implementation, and an analysis of the sources of financing
  • Conclusion of the joint-venture agreement (this may be done at an earlier stage and include conditions for carrying out subsequent actions)
  • Establishment of the special-purpose company or transaction vehicle (SPV) to carry out the project
  • Main project implementation phase
  • Completion of the project or converting it into another form of operation or cooperation by the parties

Legal aspects

Although joint-venture agreements have been used in Poland since the start of the economic transformation in the late 1980s, they are not governed by specific regulations in the Civil Code or other legal acts. Nonetheless, their permissibility is undoubted, based on the principle of freedom of contract. Commercial entities established for the purpose of implementing joint-venture projects are governed by the applicable regulations of the Commercial Companies Code and other acts.

A fundamental and fairly common issue is the correlation between the main joint-venture agreement and the articles of association or statute of the SPV. The joint-venture agreement tends to be a multi-faceted agreement. The corporate charter of the SPV, on the other hand, generally deals with a narrower set of issues, with the main purpose of establishing the SPV that will carry out the venture and the rules for functioning of the SPV, reflecting the general rules for the project set forth in the joint-venture agreement.

The charter of the SPV contains provisions governing the rights and obligations of the founders and shareholders or partners of the SPV, who are typically the parties to the joint-venture agreement, but the scope of regulation of their cooperation in the corporate charter is typically narrower than in the case of the joint-venture agreement because of the limitations imposed by corporate law.

An additional issue often arising with respect to the rules governing a joint-venture project, and increasing the degree of complication in its structure, may be the desire to choose foreign law to govern the joint-venture agreement, while the charter of a Polish SPV must be governed by Polish law; likewise with the transfer of ownership of its shares, even if provided for in a joint-venture agreement governed by foreign law.