In the second of three articles on corporate real estate joint ventures, Paul Chases takes a look at minority JV rights
Very often, the balance of power in a joint venture (JV) is dictated by the economic interest the parties have in it. Under a 50:50 JV, economic exposure, financial reward and control are shared equally (as there is no minority party). However, once the economic scales are tipped (such that one party owns a greater economic portion of the JV than the other), then often so too is the balance of power, in favour of the party with the larger economic holding.
In the current UK property market, certain parties are increasingly looking at exiting their JV only in part, thereby retaining a smaller economic interest (for example, in line with their longer-term investment strategy). It is not uncommon to see a 50:50 JV turn into a 20:40:40 JV. In such circumstances, the question arises as to what protections the minority party can realistically expect to secure.
For the purposes of this article, it is assumed that the JV is a private limited company (incorporated under English law) with shareholders and a board of directors.
Contractual protection
It is crucial that the minority party carefully considers upfront:
- what aspects of the JV are most important to it (from a strategic perspective);
- what degree of control it expects to exert over JV matters; and
- how it intends to exert such control.
The lawyers acting for the minority can then include the appropriate protective contractual rights in the JV agreement (and the constitutional documents relating to the JV) in readiness for negotiation on these points. Broadly, contractual minority protections may include the following:
- Specific matters over which the minority has a veto right at shareholder and/or board level (which prevents the majority proceeding if the minority objects) such as:
- material changes to the JV business plan, the nature of the JV’s business or the JV’s tax status;
- increased project expenditure and capital commitments (above pre-agreed limits);
- procuring third-party debt;
- acquisition or disposal of property;
- changes to the JV distribution policy;
- changes to the JV’s bankers, auditors or principal professional advisers; and
- changes to the JV’s constitutional documents.
- The right to appoint a director to the JV board that is not able to vote on all matters but is required to make up the quorum for board meetings and is entitled to receive all board papers.
- An absolute right to:
- monthly management accounts, budgets and all documents discussed by the JV board (such as business plans and supporting documentation);
- inspect the books and accounts of the JV and to take copies; and
- be informed of material issues or events relating to the JV or the property.
- Protection against the dilution of the minority’s corporate interests in the JV by restricting the issue of additional interests which would have a diluting effect.
- A tag-along right that prohibits the sale of JV corporate interests to a third party unless the JV interests of the minority party are included in the sale on the
same terms.
Statutory protection
Regardless of the contractual rights benefiting a minority shareholder, UK legislation does contain certain provisions that give the minority party recourse against the majority in certain circumstances. Such legislation may deter the majority from acting without due regard to the impact of their actions on the minority shareholder but, in reality, the minority party must apply to the court to seek the requisite protection and relief under such legislation. The options open to the minority are as follows:
Unfair prejudice
A minority shareholder could petition the court for an order under the Companies Act 2006 if it is demonstrable that the affairs of the JV are being conducted by the majority in a way that is “unfairly prejudicial” to the interests of certain shareholders (such as the minority) due to a breach of the JV agreement or JV constitutional documents. One remedy that can be sought is that the majority, or the JV itself, purchase the minority’s JV holding at fair value. However, the court has discretion to make certain other orders in the circumstances (such as by regulating the JV’s affairs or requiring that it acts, or refrains from acting, in a certain way).
Personal claims
JV shareholders have certain personal rights that can be enforced against both the JV and the majority. The JV articles of association constitute a statutory agreement between the shareholders and the JV itself that sets out how the JV is to be operated. A minority party can issue a court claim to enforce a breach of such articles (for example, if the majority has not acted in good faith or where existing minority rights are affected by amendments to the articles). Other personal claims may arise in relation to a variation of class rights (attaching to shares), the enforcement of directors’ duties or to prevent the completion of an ultra vires transaction.
Just and equitable winding-up
A court may order a JV to be wound up on “just and equitable grounds” under the Insolvency Act 1986 if a minority shareholder is excluded from management of a JV. A minority applicant must prove to the court that there is an adequate surplus for distribution to the JV’s shareholder after a winding-up and demonstrate (to the satisfaction of the court) that the minority is not itself responsible for the issues that the minority is complaining of.
Paul Chases is a senior associate and head of corporate real estate at Herbert Smith Freehills LLP
