Monday, 13 May 2013

Should I Use HoldCo or Directly Own my Joint Venture?

I was presented this question some time ago, i.e., when it is beneficial for the owner to use a holding company "as a middle company" in joint venture context. Just to illustrate this idea I drafted a slide on both of these structures in connection with one of my forthcoming M&A lectures and I thought that I could share this with you as well.

Those "circles" on top illustrate owners and their share ownership in the company participating in the JV. Then the key issue is whether the JV partners directly own the target or whether there is a holding company in the middle which then owns the target. Taxation is naturally one crucial driver behind these corporate structures including debt push-down considerations and similar, but from the corporate governance point of view what the main questions for a lawyer or CFO responsible for the planning of this new venture would be?

  • As a starting point, one should take into account what is the relevant jurisdiction and what is the maturity of its company and contract law regime?
  • How can you generally enforce the agreements, e.g., can you use specific performance?
  • Is it possible to limit directors' liability?
  • Is 100% foreign ownership even possible under the applicable law?
  • Have you considered investment control regulations, authorizations and permits?
  • Finally, can a company operating in a target's jurisdiction own foreign HoldCo?

While joint ventures are somewhat more popular nowadays, e.g., as in many cases one needs local partnerships not only to meet local legal requirements but perhaps to establish the very business case in the target's jurisdiction or to secure funding. At the same time, these structures are also becoming much more complex in many fields, e.g., due to convergence. This is also very much true in IP-rich joint venture exercises where after the deal is done the licensing matrix is typically a map full of different arrows from one direction to another with an aim to ensure for all parties their own space or freedom to operate if you want to call it that, and at the same time, providing a commercially rational scope for the JV itself. While IP rights are not the core consideration in many JV exercises, it should also be noted that if there are disagreements between the owners or one of the parties wishes to create an exit, then the discussion often turns to ownership of intellectual assets and their valuation (of which the parties may at that point have very different views).

Hopefully this helps in your JV efforts and until next time!