Joint Ventures

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Jt ventures – part of intl business. Most of the time, marriage of convenience. Otherwise no reason for business entities to come tog to share profits But problems may also arise if jt venture not set out properly Lawyer to advise on jt venture – mitigate these risks to greatest extent possib Nature and characteristics of a Joint Venture (JV) Combination of certain interests of 2 or more parties; profit is not a necessary ingredient of a JV. Definition in United Dominions Corporation v Brian Pty Ltd [1985] 60 ALR 741  Mason Brennan and Deane JJ: “The term ‘joint venture’ is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes and association of persons for the purpose of a particular trading, commercial, mining or other financial undertaking with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.” A concept – no settled legal meaning, rather it is an all-encompassing concept. o Association of persons – an association of persons with 1 or more partners. o For Mutual Profits – not necessarily in a monetary sense. o Pooling of Assets – contribution of some asset of some form. In the case of a corporate joint venture, the following branches of the law may also be embraced: • Company law; • Property law; • Tax; • Welfare; • Labour; • Intellectual property Reasons behind JV (impt) Commercial reasons A party has some asset of value to offer to the other and vice versa. Asset may be cash, trademark, skilled personnel or technical/marketing expertise. Good commercial sense to combine their assets for a mutual purpose. Commercial – asset may be cash, a trademark or tradename, skilled personnel or technical/marketing expertise

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2. 2.1    

2.2 Local Equity Requirement  Political/Legal – “local participation” or “local equity” is generally required  Government policies imposing local equity requirement so that foreigners wishing to set up certain businesses in the jurisdictions have to comply with such policies.  In Singapore, specific fields such as in the ship agency business, engineering imposes local equity requirement.  Requirement of ‘Bumiputra partners’ or often called “Ali Baba” arrangements in Malaysia is another example. 2.3 Monopolisation of resources or know-how 2.4 Other benefits (a) Cost-savings and risk-sharing – if entering unkown territory eg Vietnam/china where not sure about operational risk, may want to tie up with local party. Saves costs in starting up. Risk sharing –local party there to advise (b) Access to technology – local party wld want to enter jt venture with eg lucas films. Virgin mobile came to sg some yrs back, tied up with singtel. Because of existing infrastructure and customer base (c) Expansion of customer base

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(d) Penetrating emerging markets –serious considerations when entering market where even seasoned player unsure of. Budget airlines jt venture between SIA and another company 3.     4. Required Mindset Willingness to sacrifice control and flexibility Think win-win In search of Synergy Have the end in mind yet must be prepared for the tension which might occur. JV vehicle (impt) The choice of one vehicle over another will impact the documentation required to establish the JV. For Corporation, the coy will need to be incorporated, or a purchase of shares will have to be effected. Consideration of the CA and Companies regulations needed For partnership, a Partnership Agreement will have to be entered into. For the last category, the underlying contractual relationship would define the rights and obligations of the parties. The general law of contract and agency will have an impact on the JV. likely vehicles: (a) Limited Liability Partnerships • ability to create a corporate body with limited liability which at the same time will be taxed (and largely organized) as if it were a partnership is a strong combination for the right circumstances (b) Consortium or other joint venture enterprise/vehicle not falling within partnership, company joint venture, or limited liability partnerships • more flexible legal structure • doubtful that this fits into any recognized legal theory as such on the law as it stands

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• short of going for a company, the parties will run the risk of being deemed to be partners choice of one particular vehicle over another would have an impact on the documentation required, and would also carry other legal or administrative implications, usually connected with regulatory requirements jt venture company – usual. Neater because comp has shares, rights vested in shares and percentages are as constituted by shareholdings. dual headed jt venture ie contractual jt venture – parties agree to their contractual entitlements in the jt venture. Shareholdings expressed as contractual right (right to profits etc). but a lot open to interpretation as to wher to draw line. Without comp in palce, very often contractual ventures do well when making money but once losses, parties will imply all kinds of terms into the contract LLP/ LP – similar to jt venture comp but have adv inherent in corp structure
Require company JV to be incorporated or purchase of shares in the intended vehicle will have to be effected Consideration must be given to CA and Comp Regulations Advantages: (a) Separate legal entity: will not affect JV partners. Disadvantages: (a) Strict adherence to Companies Act and Companies Regulations (which means have to file Annual Return pursuant to s157)

4.1 Corporation / Company JV – most common


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4.2 Partnership


Require Partnership Agreement with collateral documentation supporting Partnership Agreement if necessary. Advantages: (a) Partners in JV could use any losses incurred in the JV to offset the profits earned by the partners in their other business. (b) Not as rigid a structure as a Company JV – .ie. do not have to file accounts, appoint Directors etc… Disadvantages: (a) Risk of unlimited joint and several liabilities.

4.3 LLPs

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4.4 Contractual Consortium / Co-operative Agreement  Flexible legal structure  Contractual joint ventures or sometimes referred to as ‘non-equity joint ventures”. Usually created for a temporary purpose .ie. to secure a particular contract which has been offered for tender.  No sep legal entity created  Usually between the parties they have distinct liabilities and tasks.  Advantages: (a) No sharing or profits or losses. (b) Underlying contractual relationship would define the right and obligations of the party – general law of contract and agency may have impact on jt venture  Disadvantages: (a) Disputes in indemnity provisions? - Eg: if you are the wall-paper man and the person who was supposed to put up the wall was delayed therefore you are not unable to put up the wall-paper in time. Do you have to pay liquidated damages? Indemnity should include losses suffered as a result of not being able to put up wall paper due to the policy of delegated responsibility. (b) Parties run the risk of being deemed to be partners. 5. Miscellaneous Considerations before entering into JV

5.1 Operation Structure  Who runs the daily operations?  Dictation of the hire/fire policy, selection to the key position etc… 5.2 Financial Contribution  What happens when 1 party contributes in kind while the other contributes in cash. Prepare for such scenarios in JV agreement.  Capital and funding: o dependent on nature of jt venture and financial objectives of participants. o One shr may ontrib more, etc o Or may be taken fr external sources o Whether funding might be through shrs through subsciprtin/ shrs loans./ banks and loaning instn/ public through issue of bonds and notes and IPO


Impt because upfront, where money is needed, diff shrs may have diff views as“Shareholders’ Agreement” o  to how money to be raised. deadlock might be encountered. while is common to find a provision stipulating that the professional costs of a party in connection with its negotiation, preparation and implementation are to be borne by the JV company … great care should be taken with such a provision as it could constitute the giving of financial assistance within the meaning of s. 76 Companies Act Company financing dealings in its shares, etc. 76. —(1) Except as otherwise expressly provided by this Act, a company shall not — (a) whether directly or indirectly, give any financial assistance for the purpose of, or in connection with — (i) the acquisition by any person, whether before or at the same time as the giving of financial assistance, of — (A) shares or units of shares in the company; or (B) shares or units of shares in a holding company of the company; or (ii) the proposed acquisition by any person of — (A) shares or units of shares in the company; or (B) shares or units of shares in a holding company of the company; (b) whether directly or indirectly, in any way — (i) acquire shares or units of shares in the company; or (ii) purport to acquire shares or units of shares in a holding company of the company; or (c) whether directly or indirectly, in any way, lend money on the security of — (i) shares or units of shares in the company; or

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(ii) shares or units of shares in a holding company of the company. (2) A reference in this section to the giving of financial assistance includes a reference to the giving of financial assistance by means of the making of a loan, the giving of a guarantee, the provision of security, the release of an obligation or the release of a debt or otherwise. (3) For the purposes of this section, a company shall be taken to have given financial assistance for the purpose of an acquisition or proposed acquisition referred to in subsection (1) (a) (referred to in this subsection as the relevant purpose) if — (a) the company gave the financial assistance for purposes that included the relevant purpose; and (b) the relevant purpose was a substantial purpose of the giving of the financial assistance. (4) For the purposes of this section, a company shall be taken to have given financial assistance in connection with an acquisition or proposed acquisition referred to in subsection (1) (a) if, when the financial assistance was given to a person, the company was aware that the financial assistance would financially assist — (a) the acquisition by a person of shares or units of shares in the company; or (b) where shares in the company had already been acquired — the payment by a person of any unpaid amount of the subscription payable for the shares, or the payment of any calls on the shares. (5) If a company contravenes subsection (1), the company shall not be guilty of an offence, notwithstanding section 407, but each officer of the company who is in default shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $20,000 or to imprisonment for a term not exceeding 3 years or to both. (6) Where a person is convicted of an offence under subsection (5) and the Court by which he is convicted is satisfied that the company or another person has suffered loss or damage as a result of the contravention that constituted the offence, that Court may, in addition to imposing a penalty under that subsection, order the convicted person to pay compensation to the company or other person, as the case may be, of such amount as the Court specifies, and any such order may be enforced as if it were a judgment of the Court. (7) The power of a Court under section 391 to relieve a person to whom that section applies, wholly or partly and on such terms as the Court thinks fit, from a liability referred to in that section extends to relieving a person against whom an order may be made under subsection (6) from the liability to have such an order made against him. (8) Nothing in subsection (1) prohibits — (a) the payment of a dividend by a company in good faith and in the ordinary course of commercial dealing; (b) a payment made by a company pursuant to a reduction of capital in accordance with Division 3A of this Part; (c) the discharge by a company of a liability of the company that was incurred in good faith as a result of a transaction entered into on ordinary commercial terms; (d) anything done in pursuance of an order of Court made under section 210; (e) anything done under an arrangement made in pursuance of section 306; (f) anything done under an arrangement made between a company and its creditors which is binding on the creditors by virtue of section 309; (g) where a corporation is a borrowing corporation by reason that it is or will be under a liability to repay moneys received or to be received by it — (i) the giving, in good faith and in the ordinary course of commercial dealing, by a company that is a subsidiary of the borrowing corporation, of a guarantee in relation to the repayment of those moneys, whether or not the guarantee is secured by any charge over the property of that company; or (ii) the provision, in good faith and in the ordinary course of commercial dealing, by a company that is a subsidiary of the borrowing corporation, of security in relation to the repayment of those moneys; (ga) the giving by a company in good faith and in the ordinary course of commercial dealing of any representation, warranty or indemnity in relation to an offer to the public of, or an invitation to the public to subscribe for or purchase, shares or units of shares in that company; (h) the purchase by a company of shares in the company pursuant to an order of a Court; (i) the creation or acquisition, in good faith and in the ordinary course of commercial dealing, by a company of a lien on shares in the company (other than fully-paid shares) for any amount payable to the company in respect of the shares; or (j) the entering into, in good faith and in the ordinary course of commercial dealing, of an agreement by a company with a subscriber for shares in the company permitting the subscriber to make payments for the shares by instalments, but nothing in this subsection —

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(i) shall be construed as implying that a particular act of a company would, but for this subsection, be prohibited by subsection (1); or (ii) shall be construed as limiting the operation of any rule of law permitting the giving of financial assistance by a company, the acquisition of shares or units of shares by a company or the lending of money by a company on the or units of shares. (9) Nothing in subsection (1) prohibits — (a) the making of a loan, or the giving of a guarantee or the provision of security in connection with one or more loans made by one or more other persons, by a company in the ordinary course of its business where the activities of that company are regulated by any written law relating to banking, finance companies or insurance or are subject to supervision by the Monetary Authority of Singapore and where — (i) the lending of money, or the giving of guarantees or the provision of security in connection with loans made by other persons, is done in the course of such activities; and (ii) the loan that is made by the company, or, where the guarantee is given or the security is provided in respect of a loan, that loan, is made on ordinary commercial terms as to the rate of interest, the terms of repayment of principal and payment of interest, the security to be provided and otherwise; (b) the giving by a company of financial assistance for the purpose of, or in connection with, the acquisition or proposed acquisition of shares or units of shares in the company or in a holding company of the company to be held by or for the benefit of employees of the company or of a corporation that is related to the company, including any director holding a salaried employment or office in the company or in the corporation; or (c) the purchase or acquisition or proposed purchase or acquisition by a company of its own shares in accordance with sections 76B to 76G. (9A) Nothing in subsection (1) prohibits the giving by a company of financial assistance for the purpose of, or in connection with, an acquisition or proposed acquisition by a person of shares or units of shares in the company or in a holding company of the company if — (a) the amount of the financial assistance, together with any other financial assistance given by the company under this subsection repayment of which remains outstanding, would not exceed 10% of the aggregate of — (i) the total paid-up capital of the company; and (ii) the reserves of the company, as disclosed in the most recent financial statements of the company that comply with section 201; (b) the company receives fair value in connection with the financial assistance; (c) the board of directors of the company passes a resolution that — (i) the company should give the assistance; (ii) giving the assistance is in the best interests of the company; and (iii) the terms and conditions under which the assistance is given are fair and reasonable to the company; (d) the resolution sets out in full the grounds for the directors’ conclusions; (e) all the directors of the company make a solvency statement in relation to the giving of the financial assistance; (f) within 10 business days of providing the financial assistance, the company sends to each member a notice containing particulars of — (i) the class and number of shares or units of shares in respect of which the financial assistance was or is to be given; (ii) the consideration paid or payable for those shares or units of shares; (iii) the identity of the person receiving the financial assistance and, if that person is not the beneficial owner of those shares or units of shares, the identity of the beneficial owner; and (iv) the nature and, if quantifiable, the amount of the financial assistance; and (g) not later than the business day next following the day when the notice referred to in paragraph (f) is sent to members of the company, the company lodges with the Registrar a copy of that notice and a copy of the solvency statement referred to in paragraph (e). (9B) Nothing in subsection (1) prohibits the giving by a company of financial assistance for the purpose of, or in connection with, an acquisition or proposed acquisition by a person of shares or units of shares in the company or in a holding company of the company if — (a) the board of directors of the company passes a resolution that — (i) the company should give the assistance; (ii) giving the assistance is in the best interests of the company; and (iii) the terms and conditions under which the assistance is given are fair and reasonable to the company; (b) the resolution sets out in full the grounds for the directors’ conclusions;

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(c) all the directors of the company make a solvency statement in relation to the giving of the financial assistance; (d) not later than the business day next following the day when the resolution referred to in paragraph (a) is passed, the company sends to each member having the right to vote on the resolution referred to in paragraph (e) a notice containing particulars of — (i) the directors’ resolution referred to in paragraph (a); (ii) the class and number of shares or units of shares in respect of which the financial assistance is to be given; (iii) the consideration payable for those shares or units of shares; (iv) the identity of the person receiving the financial assistance and, if that person is not the beneficial owner of those shares or units of shares, the identity of the beneficial owner; (v) the nature and, if quantifiable, the amount of the financial assistance; and (vi) such further information and explanation as may be necessary to enable a reasonable member to understand the nature and implications for the company and its members of the proposed transaction; (e) a resolution is passed — (i) by all the members of the company present and voting either in person or by proxy at the relevant meeting; or (ii) if the resolution is proposed to be passed by written means under section 184A, by all the members of the company, to give that assistance; (f) not later than the business day next following the day when the resolution referred to in paragraph (e) is passed, the company lodges with the Registrar a copy of that resolution and a copy of the solvency statement referred to in paragraph (c); and (g) the financial assistance is given not more than 12 months after the resolution referred to in paragraph (e) is passed. (9C) A company shall not give financial assistance under subsection (9A) or (9B) if, before the assistance is given — (a) any of the directors who voted in favour of the resolution under subsection (9A) (c) or (9B) (a), respectively — (i) ceases to be satisfied that the giving of the assistance is in the best interests of the company; or (ii) ceases to be satisfied that the terms and conditions under which the assistance is proposed are fair and reasonable to the company; or (b) any of the directors no longer has reasonable grounds for any of the opinions expressed in the solvency statement. (9D) A director of a company is not relieved of any duty to the company under section 157 or otherwise, and whether of a fiduciary nature or not, in connection with the giving of financial assistance by the company for the purpose of, or in connection with, an acquisition or proposed acquisition of shares or units of shares in the company or in a holding company of the company, by — (a) the passing of a resolution by the board of directors of the company under subsection (9A) for the giving of the financial assistance; or (b) the passing of a resolution by the board of directors of the company, and the passing of a resolution by the members of the company, under subsection (9B) for the giving of the financial assistance. (10) Nothing in subsection (1) prohibits the giving by a company of financial assistance for the purpose of, or in connection with, an acquisition or proposed acquisition by a person of shares or units of shares in the company or in a holding company of the company if — (a) the company, by special resolution, resolves to give financial assistance for the purpose of or in connection with, that acquisition; (b) where — (i) the company is a subsidiary of a listed corporation; or (ii) the company is not a subsidiary of a listed corporation but is a subsidiary whose ultimate holding company is incorporated in Singapore, the listed corporation or the ultimate holding company, as the case may be, has, by special resolution, approved the giving of the financial assistance; (c) the notice specifying the intention to propose the resolution referred to in paragraph (a) as a special resolution sets out — (i) particulars of the financial assistance proposed to be given and the reasons for the proposal to give that assistance; and (ii) the effect that the giving of the financial assistance would have on the financial position of the company and, where the company is included in a group of corporations consisting of a holding company

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and a subsidiary or subsidiaries, the effect that the giving of the financial assistance would have on the financial position of the group of corporations, and is accompanied by a copy of a statement made in accordance with a resolution of the directors, setting out the names of any directors who voted against the resolution and the reasons why they so voted, and signed by not less than two directors, stating whether, in the opinion of the directors who voted in favour of the resolution, after taking into account the financial position of the company (including future liabilities and contingent liabilities of the company), the giving of the financial assistance would be likely to prejudice materially the interests of the creditors or members of the company or any class of those creditors or members; (d) the notice specifying the intention to propose the resolution referred to in paragraph (b) as a special resolution is accompanied by a copy of the notice, and a copy of the statement, referred to in paragraph (c); (e) not later than the day next following the day when the notice referred to in paragraph (c) is despatched to members of the company there is lodged with the Registrar a copy of that notice and a copy of the statement that accompanied that notice; (f) the notice referred to in paragraph (c) and a copy of the statement referred to in that paragraph are sent to — (i) all members of the company; (ii) all trustees for debenture holders of the company; and (iii) if there are no trustees for, or for a particular class of, debenture holders of the company — all debentures holders, or all debenture holders of that class, as the case may be, of the company whose names are, at the time when the notice is despatched, known to the company; (g) the notice referred to in paragraph (d) and the accompanying documents are sent to — (i) all members of the listed corporation or of the ultimate holding company; (ii) all trustees for debenture holders of the listed corporation or of the ultimate holding company; and (iii) if there are no trustees for, or for a particular class of, debenture holders of the listed corporation or of the ultimate holding company — all debenture holders or debenture holders of that class, as the case may be, of the listed corporation or of the ultimate holding company whose names are, at the time when the notice is despatched, known to the listed corporation or the ultimate holding company; (h) within 21 days after the date on which the resolution referred to in paragraph (a) is passed or, in a case to which paragraph (b) applies, the date on which the resolution referred to in that paragraph is passed, whichever is the later, a notice — (i) setting out the terms of the resolution referred to in paragraph (a); and (ii) stating that any of the persons referred to in subsection (12) may, within the period referred to in that subsection, make an application to the Court opposing the giving of the financial assistance, is published in a daily newspaper circulating generally in Singapore; (i) no application opposing the giving of the financial assistance is made within the period referred to in subsection (12) or, if such an application or applications has or have been made, the application or each of the applications has been withdrawn or the Court has approved the giving of the financial assistance; and (j) the financial assistance is given in accordance with the terms of the resolution referred to in paragraph (a) and not earlier than — (i) in a case to which sub-paragraph (ii) does not apply — the expiration of the period referred to in subsection (12); or (ii) if an application or applications has or have been made to the Court within that period — (A) where the application or each of the applications has been withdrawn — the withdrawal of the application or of the last of the applications to be withdrawn; or (B) in any other case — the decision of the Court on the application or applications. (10A) If the resolution referred to in subsection (10) (a) or (b) is proposed to be passed by written means under section 184A, subsection (10) (f) or (g), as the case may be, shall be complied with at or before the time — (a) agreement to the resolution is sought in accordance with section 184C; or (b) documents referred to in section 183 (3A) in respect of the resolution are served on or made accessible to members of the company in accordance with section 183 (3A), as the case may be. (11) Where, on application to the Court by a company, the Court is satisfied that the provisions of subsection (10) have been substantially complied with in relation to a proposed giving by the company of financial assistance of a kind mentioned in that subsection, the Court may, by order, declare that the provisions of that subsection have been complied with in relation to the proposed giving by the company of financial assistance.

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(12) Where a special resolution referred to in subsection (10) (a) is passed by a company, an application to the Court opposing the giving of the financial assistance to which the special resolution relates may be made, within the period of 21 days after the publication of the notice referred to in subsection (10) (h) — (a) by a member of the company; (b) by a trustee for debenture holders of the company; (c) by a debenture holder of the company; (d) by a creditor of the company; (e) if subsection (10) (b) applies by — (i) a member of the listed corporation or ultimate holding company that passed a special resolution referred to in that subsection; (ii) a trustee for debenture holders of that listed corporation or ultimate holding company; (iii) a debenture holder of that listed corporation or ultimate holding company; or (iv) a creditor of that listed corporation or ultimate holding company; or (f) by the Registrar. (13) Where an application or applications opposing the giving of financial assistance by a company in accordance with a special resolution passed by the company is or are made to the Court under subsection (12), the Court — (a) shall, in determining what order or orders to make in relation to the application or applications, have regard to the rights and interests of the members of the company or of any class of them as well as to the rights and interests of the creditors of the company or of any class of them; and (b) shall not make an order approving the giving of the financial assistance unless the Court is satisfied that — (i) the company has disclosed to the members of the company all material matters relating to the proposed financial assistance; and (ii) the proposed financial assistance would not, after taking into account the financial position of the company (including any future or contingent liabilities), be likely to prejudice materially the interests of the creditors or members of the company or of any class of those creditors or members, and may do all or any of the following: (A) if it thinks fit, make an order for the purchase by the company of the interests of dissentient members of the company and for the reduction accordingly of the capital of the company; (B) if it thinks fit, adjourn the proceedings in order that an arrangement may be made to the satisfaction of the Court for the purchase (otherwise than by the company or by a subsidiary of the company) of the interests of dissentient members; (C) give such ancillary or consequential directions and make such ancillary or consequential orders as it thinks expedient; (D) make an order disapproving the giving of the financial assistance or, subject to paragraph (b), an order approving the giving of the financial assistance. (14) Where the Court makes an order under this section in relation to the giving of financial assistance by a company, the company shall, within 14 days after the order is made, lodge with the Registrar a copy of the order. (15) The passing of a special resolution by a company for the giving of financial assistance by the company for the purpose of, or in connection with, an acquisition or proposed acquisition of shares or units of shares in the company, and the approval by the Court of the giving of the financial assistance, do not relieve a director of the company of any duty to the company under section 157 or otherwise, and whether of a fiduciary nature or not, in connection with the giving of the financial assistance. (16) A reference in this section to an acquisition or proposed acquisition of shares or units of shares is a reference to any acquisition or proposed acquisition whether by way of purchase, subscription or otherwise. (17) This section does not apply in relation to the doing of any act or thing pursuant to a contract entered into before 15th May 1987 if the doing of that act or thing would have been lawful if this Act had not been enacted.

5.3 Technical Know-how  Technical Licensing – use of ancillary agreements such as the technology transfer and licensing agreement 5.4 Accounting

Financial year-end should be the same otherwise requiretod to do special audits.

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Corporate position: consolidation ‘knock-on effect’, impact on the profitability of the parent company. If entity us a JV entity, sufficient to do equity accounting.

5.5 Regulatory  Shareholding interest: domestic laws would dictate the maximum legal of foreign equity allowed. 5.6 Legal   Domestic Foreign (eg anti-trust laws – Boeing/McDonnel Douglas merger)

5.7 Employment considerations s18A Employment Act – whether JV was bought as a ‘going concern’; if it was there is no need for the assignment of employees 5.8 “Emerging market JVs” – Issues 1. What to talk to client about if want to enter emerging market: emerging market – eg market both lawyer and client not familiar with structure – what kind of legal structure is available for jt venture vehicle? a. Earlier – fr sg perspective b. For foreign jt ventures, sg party may ask you what they shd do in order to invest in certain country c. In this case, not able to say that cannot advise. Need to add value. Ask the foreign counsel the right qns with client. tax – basic tax structures operable a. shld not advise substantively on tax unless tax lawyer b. in sg given up tax too easily to auditors, in other countries lawyers more robust abt advising on tax law. shd give more holistic experience c. rules permitting deduction or set off of expenditure d. whether free tax holidays or enterprise zones (eg china and middke east – income earned within those zones are tax free) offered to encourage investments e. in sg, there are tax incentives available. In foreign country, ask. restriction on foreign participation a. % size of any shrholding b. in sg - most policed is newsppr industry – newsppr printing act has shr prescriptions for foreign shareholding c. but foreign jt ventures – certain govts req participation by locals. Cannot set up company 100% held by foreigner. Must be some local involvement d. also to ask what partr industries these apply to – whether all industries or onlypartr industry. ASK client WHAT INDUSTRY he is entering! licensing reqts for foreign investment a. who shld make application b. documentation reqd c. how long is approval process going to take d. exchange control restrictions – on foreign acquisition of shares e. whether there are restriction on conversion of local currency into hard foreign currency f. if advising sg party on investments in another country, they will look to you to ask qns of foreign party. real property and land rights a. may be signif diff fr juris to juris b. whether land rights can be vested in jt venture comp with foreign shr or whether they can only be tenant

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c. 6.

some law – foreign party cannot own land. If client has purchased land, then value of property may be less than what client imagines it to be because jt venture company was never allowed to hold land

environmental laws a. usually in sg – nth much b. in others this is quite a sig consideration. c. Govt may also have powers to req clean up by foreing parties d. Whether environmental approval reqd to operate the business client thinking of e. Often become prob yrs down the road when next occupier discovers tt land not in state of compliance with local environmental laws. Cannot exit any old how. Might find himelf with hefty claim capital reqts a. any minmal K reqt b. in sg – no par value. Can set up $1 company and it can do business. c. But govt may require comp to be adequately capitalized. d. May even req that any non cash K attributable to you to be valued by them management structure a. whether there is partr management post tt must be occupied by national of local juris technology transfer a. is foreign aprty reqd to contrib. technology or knowhow b. can restrictions on use be imposed by foreign party after termination on jt venture

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8. 9.

10. employment laws a. any material employment laws eg minimum wages b. consultations before making redundacies or dismissals c. reqts for employing local stuff d. compul pension e. immig laws affecting secondments f. in sg – emplyt law kind to investor. Redundancies can be carried out for no reason other than tt comp feels that retrenchment ex is nec and unless stipulated in the contract or for employees unde EA where prxted, nth to prtvent pple fr being made obsolete g. but in some countries, diff to fire/make redundant someone h. corp/litig lawyers – need to ask detailed qns of foreign lawyers 11. IP rights a. whether capable of enforcement in local juris b. one of reasons for jt venture is sharing of technology c. if client goes into territory injecting IPR into jt venture comp, this can be taken out of company. Enforcement may be poor even if illegal => value of jt venture and lcient’s inherent value outside of the market may therfore be compromised. 12. liability a. will jt benture parent have liab unde local laws for oblig of jt venture comp b. NO, instinctively unless parent gives guarantee c. But for some foreign laws, may req tt parent steps in 13. governing law a. what wld be the governing law b. in many cases, wld be law other than law of the juris of the parties or the market c. because when parties anticipate dispute, always better to have neutral law eg English law often used. d. Sg encouraging sg law as arbitration law => more work for local lawyers e. Very impt – may have deals fall aprt over this. f. Don’t assume that sg law or lw of that country will be used!! 14. dispute resolution a. not the same as deadlock

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b.

whether u go to court/use arbitration

15. exit strategies a. restrictions on foreing party ability to exit and transfer equity freely 6. The Role of the Lawyer in the JV  Consider the following: (i) When legal obligations are to arise (ii) Which vehicle is most suitable for giving legal effect to the commercial intent of the parties (iii) Need for “letters of intent” or “memorandum of understanding” and whether they set out the parties; good faith understanding or are they intended to define legal obligations. (iv) To what extent are the parties’ agreements, rights or obligations ‘subject to contract’. (v) Role of lawyer in negotiations (see chapter) - a lawyer in negotiations is a deal maker, not a deal breaker - reciprocity is the key word, because the client is not giving up something for nothing but rather is securing something better in return 7. Implied rights and obligations arising from JVA especially if parties negotiating towards a JV may be deemed as fiduciaries. care should be taken to note the development in the law of the concept that parties negotiating towards a joint venture may be deemed fiduciaries for one another: in a continuing venture, relationship was founded on the mutual trust and confidence of each other; to state everything with strict and scrupulous accuracy and not only to abstain from stating as a fact that which was not so, but also to omit no one fact within one’s knowledge, the existence of which might in any degree affect a decision to be taken by the other participant a successful plea of fiduciary breach affords him more attractive remedies than a contractual breach traditionally the question of whether there is a fiduciary breach is determined by asking whether there exists a fiduciary relationship between the parties Mr Alexandra Loke suggests that the fiduciary inquiry is more meaningfully pursued by focusing on the obligation sought to be imposed and the interest which the obligation seeks to protect this avoids the definitional debate of what constitutes a fiduciary relationship and what should properly be termed fiduciary duties the application of the conflict and profit rules depend on identification of a legitimate expectation that one party subordinates the pursuit of his self interest to the interest of another there is a need to identify when one is entitled to the loyalty of another good faith expectations can shade into fiduciary obligations it is important that an obligation found to exist between the parties is consistent with the legitimate expectations of both the obligor and the obligee good faith expectations may be addressed without necessarily invoking fiduciary duties

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Haw Par Brothers International Ltd & Anor v Chiarapurk Jack & Ors [1991] - Facts: In October 1971, a joint venture agreement (JVA) was entered into between the first plaintiff, C, and the first defendant with a view to reorganizing and expanding the Tiger Balm trade marks business of the first plaintiff. Under this agreement, two companies were formed: HPEAT (in Singapore) and HPTBI (in Hong Kong) (together referred to as the joint companies). The first plaintiff and Chia Holdings (HK) Ltd were equal shareholders in the joint companies. The first defendant was also appointed managing director and chief executive of the joint companies, and at the date of judgment still held that appointment. The first plaintiff later transferred its shares in the joint companies to the second plaintiff. C similarly transferred its shares in the joint companies to the second and third defendants. All the transferees agreed to be bound by the JVA as if they were the original parties thereto. The first defendant had a substantial shareholding in the second defendant. The third defendant is a subsidiary of the second defendant.

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Under the JVA, the first plaintiff agreed to grant licences to the joint companies to use the Tiger Balm brand trademarks and to manufacture, market and distribute the Tiger Balm products in the ASEAN countries, Hong Kong, Macau, Burma, Japan, Korea, the Pacific islands and in the Middle East. Pursuant to the JVA, certain companies controlled by the first defendant were also engaged to manufacture the Tiger Balm products of the joint companies. The JVA expired on 31 December 1991. In February 1990, the plaintiffs heard from market sources that the first defendant and the companies which he controlled would be launching a new balm product in Singapore and Malaysia. In early March 1990, the general manager of the joint companies informed the first and second plaintiffs that the first defendant and his companies would be launching a new balm product. On 19 June 1990, the plaintiffs issued the present writ against the defendants, claiming injunctions and damages. The plaintiffs alleged that the defendants had breached their fiduciary duties as regards certain confidential information, had breached their contractual obligations and had engaged in passing-off. On 22 June 1990, on an ex parte application, the High Court granted interim injunctions against the defendants. These injunctions restrained the first defendant from `doing or causing, procuring or permitting the second to sixth defendants` to do certain acts. These acts were dealing in any way with the Golden Lion Shield Balm products, passing off the Golden Lion Balm products as Tiger Balm products, acting in breach of fiduciary or contractual obligations under the JVA, and making unlawful use of confidential information relating to the business and production of Tiger Balm products acquired by the first defendant as managing director of the joint companies. The defendants then applied to vary or discharge the various injunctions Held: Fiduciary duty/confidential information I will now deal with the claim based on a breach of fiduciary duty as regards certain confidential information. In the light of the brief facts set out above it is quite clear that the plaintiffs and the first three defendants are in a joint venture, a venture to manufacture, promote, sell and develop the Tiger Brand products, including the Tiger Balm products, for mutual advantage and profit. The confidential information which would be furnished by the plaintiffs to the joint companies should only be used for the purpose of manufacturing the Tiger Brand products by the joint companies and not for any other purpose. Looking at the terms of the JVA, I am inclined to think that there is a fiduciary relationship between the participants to the joint venture arrangements or there is at least an arguable case for it. The establishment of such a relationship was put in this way by Dawson J in United Dominions Corp Pty v Brian Pty Ltd (1985) 59 ALJR 676 at p 681: Although the relationship between participants in a joint venture which is to a partnership will be governed by the particular contract rather than extrinsic principles of law, the relationship may nevertheless be a fiduciary one if the necessary confidence is reposed by the participants in one another. Of course, in a partnership the parties are agents for each other and this may constitute a separate reason for the fiduciary character of a partnership. There may be no such agency between participants in a joint venture but, as Dixon J pointed out in Birtchnell v Equity Trustees ... even in a partnership it is really the mutual confidence between partners which imposes fiduciary duties upon them and the same confidence may, in appropriate circumstances, be found to exist between participants in a joint venture. In any event where information provided is to be considered as confidential, its use and disclosure under general law is to be limited to the purpose for which the information is given: see Torrington Manufacturing v Smith & Sons Ltd [1966] RPC 285 at p 301. It is next argued by the defendants that the plaintiffs have not shown that they have imparted confidential information to the first three defendants or the joint companies. The defendants say that the plaintiffs have not been able to identify with necessary precision any information which is confidential. In further elaboration, the defendants aver that there is nothing confidential about the `manufacturing pro` which they identified to consist of the following five stages: The plaintiffs` answer is that that is not all. Those are the basic steps. What are confidential are the details relating to each step, eg at what temperature the equipment used should be set; at which stage each of the ingredients should be added; and the duration the ingredients are to be kept in that state (see para 43 of the affidavit of Tan Hee Chai affirmed on 16 November 1990). In so far as the ingredients that are needed to manufacture the Tiger Balm products are concerned, the defendants submitted that there is nothing confidential about that because the ingredients are shown and printed on the product itself; they are matters of public knowledge. While that is true, it seems to me that is not all. The ingredients that go into making a product is one thing; the process another. In this regard I need not go into a discussion about the judgment of Roxburgh J in Terrapin Ltd v Builders Supply Co (Hayes) Ltd [1967] RPC 375 where the springboard doctrine was referred to and where he said ` ... springboard it remains even when all the features have been published or can be ascertained by actual inspection by any member of the

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public.` Perhaps this statement could be reconciled on the premise that information will not necessarily lose its confidentiality by the marketing of a product which embodies the information but which does not embody all the features of the information. That is precisely the situation here. The fact that the ingredients that go into the making of the product are disclosed on the packaging of the product does not mean that all the technical information/know-how needed to manufacture the prohas become public knowledge. In any event having regard to the express provisions in the JVA and the licence agreements which specifically refer to confidential information being imparted by the plaintiffs to the joint companies, I do not think it is possible for the court at this interlocutory stage, without hearing oral evidence, to rule that the first plaintiff has not imparted any confidential information. Putting it at the lowest, it is an issue to be tried. Before moving to the second ground, I should say this for completeness. Another aspect of confidential information referred to by the plaintiffs relates to pricing formula. I do not think there is anything very much in this aspect. I note that this information is made known to all sub-distributors and retailers.

Newacres Sdn Bhd v Sri Alam Sdn Bhd [2000] 2 MLJ 353 - Facts: - The respondent (`Sri Alam`) concluded a joint venture agreement (`the JVA`) with the appellant (`Newacres`) whereby Newacres agreed to develop a piece of land owned by Sri Alam. Disputes arose between the parties and Sri Alam filed an action praying for a declaration that Newacres was in breach of its fiduciary duties and Sri Alam was entitled to a sum of not less than RM189,341,378.88 and other reliefs. The High Court found that Newacres had not acted in breach of fiduciary duties and Sri Alam was not entitled to receive the sum claimed. Sri Alam appealed to the Supreme Court. The Supreme Court allowed the appeal and ordered that judgment be entered for Sri Alam on the issue of liability as claimed in prayer (1) of the re-amended statement of claim, ie a declaration that Newacres had acted in breach of its fiduciary duties. The Supreme Court further ordered that the case be remitted for trial for assessment by another High Court judge to determine the extent of the fiduciary duties and any breach thereof and to assess what sum of money or other entitlement Sri Alam was entitled to receive. The case was brought for hearing before the High Court whereby the High Court judge found that there was inconsistency in the Supreme Court order. The judge found that there was fiduciary relationship between the parties but concluded that Newacres was not in breach of its fiduciary duties and dismissed Sri Alam`s claim. Sri Alam appealed to the Court of Appeal. The Court of Appeal agreed with the High Court that there was a contradiction in the Supreme Court order but said that the judge should have complied with the remaining directions of the Supreme Court order and identified Sri Alam`s entitlement under the JVA. The Court of Appeal allowed Sri Alam`s appeal and entered judgment against Newacres for various sums of money (see Sri Alam Sdn Bhd v Newacres Sdn Bhd [1997] 1 MLJ 297). Newacres appealed. Held - (12).(Per Zakaria Yatim FCJ ) From the clauses of the agreement, it was clear that the agreement was a joint venture agreement. The court was also satisfied that the agreement established fiduciary relationship between Sri Alam and Newacres. Accordingly, Newacres owed fiduciary duties to Sri Alam. The Supreme Court had rightly declared that Newacres was in breach of its fiduciary duties (see p 403C-D, F). On the question of the jurisdiction of the Court of Appeal it must be borne in mind that the Supreme Court had entered judgment against the developer for breaches of fiduciary duties and ordered, inter alia, assessment of the landowner`s entitlements. These, to my mind, are salient features in this case. The entry of judgment is an authoritative affirmation of the finding by the Supreme Court of the existence of fiduciary relations between the parties, at least in some aspects of the parties` dealings under the JVA. - To digress a little, it was argued that the JVA was strictly a commercial contract and did not import fiduciary relationship. It seems to me that the judicial trend in modern times, particularly in Canada, New Zealand and Australia leans towards greater readiness of accepting the presence of fiduciary relationship in commercial transactions or arrangements even where the parties were at arm`s length and stood on a relatively equal footing. Nocton v Lord Ashburton [1914] AC 932 (HL) and Robinson v National Bank of Scotland [1916] SC (HL) 154 showed that fiduciary relationship might arise even though the parties` (solicitors and clients) relationships were founded in contract. In Day v Mead [1987] 2 NZLR 443 the defendant-solicitor gave the plaintiff financial advice which later proved disastrous as the company in which the plaintiff invested on the defendant`s advice went into receivership not long after the plaintiff`s investment. The defendant-solicitor at all material time was a director and shareholder of the company. The Court of Appeal in New Zealand found that the defendant`s failure to give proper financial advice was not only a breach of duty arising out of their contractual relationship as solicitor-and-client but also a breach of fiduciary duty in that the defendant should have referred the plaintiff to an independent solicitor and adviser who would have been able to make inquiries into the financial affairs of the now defunct company. See also Liggett Kensington [1993] 1 NZLR 257 (trader selling non-allocated bullion, held trader a fiduciary); United Dominions Corp Ltd v Brian Pty Ltd

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[1984-85] 157 CLR 1 (Joint-Venture agreement - partnership - relationship fiduciary); Woods v Martins Bank Ltd & Anor [1959] 1 QB 55 (Bank by its manager advising potential customer on investment - Held fiduciary relationship existed). In United Dominions Corp Ltd v Brian Pty Ltd , Dawson J made the following observation which is of interest at p 16: Although the relationship between participants in a joint venture which is not a partnership will be governed by the particular contract rather than extrinsic principles of law, the relationship may nevertheless be a fiduciary one if the necessary confidence is reposed by the participants in one another. In our instant case the developer was solely entrusted and authorized to carry out the construction project on the land and, in connection thereto, to do whatever necessary respecting subsequent amendments, plannings and physical development of the land. In any event, by reason of the Supreme Court judgment on breaches of liability, it cannot, in my view, be argued that there is no evidence of breaches of fiduciary or that the Court of Appeal had improperly disturbed the learned trial judge`s finding that the developer had not committed any breach of fiduciary duties. In my view, the learned trial judge had misconstrued the Supreme Court order when he ignored the judgment entered by the Supreme Court and proceeded to determine the issues of fiduciary duties, disregarding the judgment. Furthermore, an appeal to the Court of Appeal was by way of re-hearing and the Court of Appeal had all the powers and duties of the High Court and was entitled to `draw inferences of facts, give any judgment, and make any order which ought to have been given or made, and make such further or other orders as the case requires`. (Section 69(1) and (4) of the Courts of Judicature Act 1964.) In Multar v Lim Kim Chet & Anor [1982] 1 MLJ 184 (FC) the trial court did not assess the damages. Delivering the judgment of the Federal Court, Syed Othman J said: `Section 69(1) of the Courts of Judicature Act gives us all the powers and duties of the High Court in relation to appeals`. Of course, Multar `s case, was decided before the creation of the Court of Appeal, but the law applied to that court at the time it made the decision now appealed against. I would add that the Court of Appeal was admirably entitled and proper in proceeding to assessment to save time and costs. As to the contention for the developer that disgorgement of profits is the only remedy for breach of fiduciary duty, I am in agreement with counsel for the landowner that this is not so. In Nocton v Lord Ashburton , Viscount Haldane LJ spoke of `the old bill in Chancery to enforce compensation for breach of a fiduciary obligation` (p 946). Whether JV would involve disposal or acquisition of a business or undertaking prev owned by one of jt venture parties solely or third party attracting operation of s18A EA

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Transfer of employment. 18A. —(1) If an undertaking (whether or not it is an undertaking established by or under any written law) or part thereof is transferred from one person to another — (a) such transfer shall not operate to terminate the contract of service of any person employed by the transferor in the undertaking or part transferred but such contract of service shall have effect after the transfer as if originally made between the person so employed and the transferee; and (b) the period of employment of an employee in the undertaking or part transferred at the time of transfer shall count as a period of employment with the transferee, and the transfer shall not break the continuity of the period of employment. (2) Without prejudice to subsection (1), on completion of a transfer referred to in that subsection — (a) all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract of service shall be transferred by virtue of this section to the transferee; (b) any act or omission done before the transfer by the transferor in respect of that contract of service shall be deemed to have been done by the transferee; and (c) any act or omission done before the transfer by an employee employed in the undertaking or part transferred in relation to the transferor shall be deemed to have been done in relation to the transferee. (3) On the completion of a transfer referred to in subsection (1), it is hereby declared for the avoidance of doubt that the terms and conditions of service of an employee whose contract of service is preserved under that subsection shall be the same as those enjoyed by him immediately prior to the transfer. (4) Subsections (1) and (2) shall not transfer or otherwise effect the liability of any person to be prosecuted for, convicted of and sentenced for any offence. (5) As soon as it is reasonable and before a transfer under subsection (1) takes place, to enable consultations to take place between the transferor and the affected employees and between the transferor and a trade union of affected employees (if any), the transferor shall notify the affected employees and the trade union of affected employees (if any) of — (a) the fact that the transfer is to take place, the approximate date on which it is to take place and the reasons for it;

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(b) the implications of the transfer and the measures that the transferor envisages he will, in connection with the transfer, take in relation to the affected employees or, if he envisages that no measures will be so taken, that fact; and (c) the measures that the transferee envisages he will, in connection with the transfer, take in relation to such of those employees as, by virtue of subsection (1), become employees of the transferee after the transfer or, if he envisages that no measures will be so taken, that fact. (6) As soon as it is reasonable, the transferee shall give the transferor such information so as to enable the transferor to perform the duty imposed on him by virtue of subsection (5) (c). (7) Where the Commissioner considers that there has been an inordinate delay — (a) by the transferor in notifying the affected employees or a trade union of affected employees of the matters set out in subsection (5); or (b) by the transferee in notifying the transferor of the information set out in subsection (6), the Commissioner may, by notice in writing, direct the transferor to comply with subsection (5) or the transferee to comply with subsection (6), as the case may be, within such time as may be specified in the notice. (8) Where, immediately before a transfer referred to in subsection (1), a trade union is recognised by the transferor for the purposes of the Industrial Relations Act in respect of any employee who in consequence of the transfer becomes the employee of the transferee, the trade union shall, after the transfer — Cap. 136. (a) be deemed to be recognised by the transferee for the purposes of the Industrial Relations Act if, after the transfer, the majority of employees employed by the transferee are members of the trade union; or (b) in any other case, be deemed to be recognised by the transferee only for the purpose of representing the employee on any dispute arising — (i) from any collective agreement that was entered into between the transferor and the trade union while the collective agreement remains in force; or (ii) from the transfer of the employee’s employment from the transferor to the transferee under this section. (9) A dispute or disagreement between the transferor and an employee or the transferee and an employee arising from a transfer under subsection (1), whether before or after the transfer, may be referred by a party to the dispute or disagreement to the Commissioner under section 115 and shall be deemed to be a dispute to which that section applies. (10) Where a dispute or disagreement has been referred to the Commissioner pursuant to subsection (9), the Commissioner shall, in addition to the powers conferred under section 115, have the powers — (a) to delay or prohibit the transfer of employment of the employee to the dispute from the transferor to the tranferee under subsection (1); and (b) to order that the transfer of employment of the employee to the dispute from the transferor to the transferee under subsection (1) be subject to such terms as the Commissioner considers just. (11) The Minister may make such regulations as he considers necessary or expedient to give effect to the provisions of this section and, in particular, may make regulations — (a) to provide for the form and manner of consultations between the transferor and the affected employees and between the transferor and a trade union of affected employees under subsection (5); (b) for the type of information that must be communicated by the transferor to the affected employees and to a trade union of affected employees under subsection (5), or by the transferee to the transferor under subsection (6); and (c) to provide for a mechanism for conciliation of disputes arising out of or relating to a transfer referred to in subsection (1) between any employer and employee. (12) Nothing in this section shall prevent a tranferee of an undertaking referred to in subsection (1) and an employee whose contract of service is preserved under that subsection or a trade union representing such an employee from negotiating for and agreeing to terms of service different from those contained in the contract of service that is preserved under that subsection. (13) In this section — "affected employee" means any employee of the transferor who may be affected by a transfer under subsection (1) or may be affected by the measures taken in connection with such a transfer; "trade union" means a trade union which has been — (a) registered under any written law for the time being in force relating to the registration of trade unions; and (b) accorded recognition by the employer pursuant to section 16 (1) of the Industrial Relations Act; "transfer" includes the disposition of a business as a going concern and a transfer effected by sale, amalgamation, merger, reconstruction or operation of law; "undertaking" includes any trade or business. Methods/techniques involved in joint venture

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1.  

Ali-Baba arrangements (impt) How to obtain control when foreign laws require majority local representation? Steps to by-pass local equity requirements

Possibilities: (a) Trust instrument: Ali holding the shares on trust for client. (b) Creation of preference shares in favour of client (c) Forcing Ali to enter into franchise agreement. Franchasier runs the company. Using Intellectual Property Rights to assert eg. requiring licence fee to use trademarks etc… therefore reducing the profits which Ali may obtain but increasing client’s profits.

(d) Management agreement Management personnel should be handpicked by client such that he controls how the JV company is being run. (e) Charge and Option Provision of Loan Agreements together with the imposition of a charge and provision of an option to buy shares at par value. The option right must be worded such that Ali is compelled only to sell to a party nominated by the client. Should Ali default in his obligations, client may enforce option right and force Ali to sell shares to another local selected by you client. Company Joint Venture with Ali and Microsoft Steps to take to conclude a Company JV (“JVC”)

2. -

(1) The Prelude – Preliminary Agreements  Memorandum of understanding  Letter of intent – refer to handout for checklist of its contents. (2) Exchange of information and materials under cloak of confidentiality  The preparatory Confidential Agreement: (i) Obligation/discretion to disclose · Recognition of the proprietary nature of Ali’s idea in order to prevent Microsoft from abusing or exploiting it.

(ii)

Obligation/discretion to consider – lock-in or lock-out provisions (more than mere confidentiality agreements, attached more rights and obligations) · Lock-in provisions: requires Microsoft to review and consider the idea and at the same time confer exclusivity to Ali; ensure that Microsoft can only develop the idea with Ali and not with anyone else. · Lock-out provisions: stay away from the idea from a period of time stated in the contract should Microsoft refuse to develop the idea.

Need for a confidentiality and non exploitation agreement or should there be any ‘lock-in’ or ‘lock-out’ provisions. bear in mnind balance bet need ot know of potentital asses on offer to eliecit informed response fr potential jt venture partner AND irretrievable loss of element of surprise or commerciakl opportunity if condif and prop info exploited. Counter party shld bear in mind tt it shld not be used as stalking horse Ter Kah Leng, Lock-In And Lock-Out Agreements

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Walford v. Miles Introduction A vendor in the course of negotiations with a purchaser agrees not to negotiate with any third party in relation to the sale of his property. In what circumstances is that lock-out agreement binding? The answer to this commercially relevant question emerges from the House of Lords’ recent decision in Walford v. Miles.1 Good commercial reasons were cited why a purchaser should desire to obtain such an agreement from the vendor. The purchaser may have to expend considerable time and money before he can be in a position to assess whether to make an offer and if so, what he is prepared to offer. But before incurring such expenditure, the purchaser would certainly wish to guard against the possibility of the vendor either not owning the property or not being prepared to consider his offer by the time he decides to make an offer to the vendor. Lord Ackner, in his leading judgement, saw no reason in English contract law why the purchaser should not achieve a legally enforceable exclusive opportunity, for a fixed period, to come to terms with the vendor, provided he gives good consideration or makes his agreement under seal. That, however, was not the result achieved by the lock-out agreement in Walford. Neither was the implied lock-in agreement to negotiate only with the purchasers effective. The Facts In Walford, the respondent vendors agreed in principle with the appellant purchasers to sell their business and premises for £2m and warranted that minimum profits in the 12 months following completion would be £300,000. The respondents further agreed that if the appellants could furnish a letter of comfort from their bank confirming the provision of loan facilities for the purchase of the property, the respondents “would terminate negotiations with any third party or consideration of any alternative with a view to concluding agreements” with the appellants and even if a satisfactory proposal was obtained from a third party by a certain date, they “would not deal with that third party. . . nor give further consideration to any alternative.” On receiving the comfort letter, the respondents confirmed that, subject to contract, they agreed to sell their roperty to the appellants for £2m. Subsequently, the respondents began to fear that staff incompatibility with the appellants might cause a turnover and put the warranted profits in jeopardy. They therefore broke off negotiations with the appellants and decided to sell to a third party from whom they had received an offer prior to negotiating with the appellants. The appellants sued the respondents for breach of the lock-out agreement which they alleged was collateral to the “subject to contract” negotiationto purchase whereby the appellants were given an exclusive opportunity to come to terms with the respondents but for an unspecified time. The consideration for the lock-out agreement was stated to be the appellants’ agreement to continue negotiations and the provision of the comfort letter. By an amendment to the pleadings, the appellants further alleged that in order to give business efficacy to the collateral lock-out agreement, a term must be implied to the effect that so long as the respondents continued to desire to sell their property, they would continue to negotiate in good faith with the appellants. The effect of the pleadings was that the respondents were not only locked-out for an unspecified time from dealing with any third party but were locked-in to dealing with the appellants, also for an unspecified period. The appellants further claimed damages for misrepresentation by the respondents in continuing to deal with third parties. Decision at First Instance At the trial it was contended that the alleged lock-out agreement was no more than an agreement to negotiate and as such was unenforceable. The judge did not deal with this contention. He found that there was a collateral agreement by the respondents not to deal with any party other than the appellants and not to entertain any alternative proposal and that the agreement had been breached by the respondents. The trial judge accordingly upheld the collateral lock-out agreement (with whom Bingham LJ (dissenting) in the Court of Appeal held a similar view) and ordered that damages for loss of opportunity be assessed. He further held that the promises under the collateral agreement amounted to misrepresentations and awarded the appellants £700 being agreed damages for wasted expenditure. Decision of the Court of Appeal By a majority, the Court of Appeal overruled the judgment at first instance (save for the award of damages for misrepresentation)2 on the ground that the collateral agreement was no more than an agreement to negotiate and was therefore unenforceable. Decision of the House of Lords The appellants appealed to the House of Lords who unanimously dismissed the appeal. A. The lock-out agreement as originally pleaded

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As originally pleaded, the effect of the lock-out agreement was to provide the appellants with an exclusive opportunity to try and come to terms with the respondents. It did not in any legal sense lock the vendors into negotiating with the purchasers. The House of Lords found that although the lock-out agreement contained the essential characteristics of a valid agreement, it lacked one essential element in that it did not specify for how long it was to last. To imply that it was to last “for such time as is reasonable in all the circumstances” would indirectly impose upon the respondents an obligation to negotiate in good faith which, for reasons which will become apparent below, cannot be imposed. On the other hand, without the implied term, the agreement would be uncertain because there was no way of determining for how long the respondents were locked-out from negotiating with a third party. The lock-out agreement as originally pleaded was therefore unenforceable as it lacked the necessary element of certainty. B. The lock-in agreement as alleged in the amended pleadings As seen above, the lock-out agreement did not expressly lock-in the vendors to negotiate with the purchasers. The appellants therefore amended the pleadings to further allege that in order to give the collateral agreement business efficacy or to make it “workable” it was to be implied that so long as the respondents continued to desire to sell their property, they would continue to negotiate in good faith with the appellants. However, no period was specified for the obligation to negotiate. Neither was there any provision for the respondents to determine the negotiations. In reply, the appellants contended that it was to be implied that the respondents could terminate only if they had a “proper reason,” the test of whether the respondents honestly believed in the reason they gave being subjective. The House of Lords held that the lock-in agreement was in essence a contract to negotiate which the law, for almost 20 year, has recognised as being unenforceable, becouse it is too uncertain to have any binding force. This was first decided in Courtney & Fairbairn Ltd v. Tolaini Bros (Hotels) Ltd,3 where Lord Denning stated as follows, in rejecting the dictum of Lord Wright in Hillas & Co Ltd v. Arcos Ltd4 that in strict theory a contract to negotiate is a contract if there is good consideration: “If the law does not recognise a contract to enter into a contract (when there is a fundamental term yet to be agreed) it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force. . . It seems to me that a contract to negotiate, like a contract to enter into a contract, is not a contract known to the law. . . I think we must apply the general principle that when there is a fundamental matter left undecided and to be the subject of negotiation there is no contract.”5 The decision that an agreement to negotiate is not legally binding was followed by the Court of Appeal in Mallozzi v. Carapelli SpA6 and at first instance by a number of recent cases.7 However, the appellants sought to argue that the decision in Courtney was wrong and that although the American cases did not speak with one voice, the case of Channel Home Centers Division of Grace Retail Corp v. Grossman8 was in their favour. The American Court of Appeal had equated an agreement to negotiate with an agreement to use best endeavours and since the latter was enforceable, so was the former. Lord Ackner viewed the proposition as unsustainable and dismissed the case as being of no assistance. His Lordship emphasised that the reason why an agreement to negotiate, like an agreement to agree, was unenforceable was because it lacked the necessary certainty. This uncertainly did not apply to an agreement to use best endeavours. The lack of certainty in Walford is demonstrated by the need to imply an obligation to continue to negotiate until there is a “proper reason to withdraw.” How is a court to decide when it is proper? The suggested answer would depend on whether the negotiations had been determined in good faith. However, a duty to negotiate in good faith is unworkable since it is inherently inconsistent with the adverserial position of a negotiating party. Each party is entitled to pursue his own interest in the absence of misrepresentations. So how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an agreement? It is here that the uncertainty lies. Comment The lock-out agreement in Walford failed to achieve a binding effect because the time period for its continuance was unspecified and it was therefore too uncertain to be enforceable. The implied lock-in agreement to negotiate with the appellants suffered from the same defect of uncertainty (but for different reasons). So did the agreement in Courtney to negotiate fair and reasonable contract sums. In Courtney there was no agreement on price or any method of ascertaining the price not dependent on negotiations between the parties. It was an agreement only to negotiate fair and reasonable sums. As price was of fundamental importance in building contracts, without it, the agreement remained one to negotiate and no legally binding contract could result. It was too uncertain to have binding force because there was no way of assessing damages. No one could tell whether the negotiations would succeed or fall through.

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Therefore there was no legal obligation to employ Courtney as builders and accordingly Tolaini were not in breach of contract in employing other building contractors. However, as will be seen below, it may not in certain circumstances be necessarily fatal to leave terms to be negotiated in an otherwise concluded agreement. In contrast, Lord Ackner suggested that there was no reason why a lockout agreement which contained a specified time period should not be valid if the other elements of a valid contract were present. There would be no uncertainty since at the expiry of the specified period, the obligation not to negotiate with others would cease. However, during the duration of the lock-out agreement, a term could not be implied to the effect that the vendors would continue to negotiate in good faith with the purchasers. Hence the vendors are entitled to do nothing at all and simply wait for the stipulated period to expire. This raises the question whether an expressly stipulated term to negotiate in good faith for a stipulated period will achieve the desired result. Again it is apparent from the House of Lords’ decision in Walford that it would be impossible to decide whether the requirement of good faith has been complied with and because it remains an agreement to negotiate devoid of all legal effect, there is consequently no legally binding obligation to negotiate for a fixed period and the vendors are entitled to break off negotiations at any time. Other Cases on Agreement to Negotiate At this stage it may be useful to deal briefly with the cases referred to in Walford from which commercial lessons may be learnt. Albion Sugar Co Ltd v. Williams Tankers Ltd9 Manufacturers agreed to charter a vessel under a time charter-party “subject to the satisfactory conclusion of two trial voyages.” One of the voyages having failed, the court held that since the condition precedent to contract had failed, no binding contract was concluded. It is interesting to note that the court construed obiter the words “satisfactory conclusion” as bing subject to bona fides but it was unnecessary to decide whether the test should be subjective or objective, the court having decided that there was no concluded contract. Malozzi v. Carapelli SpA10 One of the issues raised in a contract for the shipment of goods concerned a stipulation that the “first or second port was to be agreed between the sellers and buyers on the ship passing the Straits of Gibraltar.” The parties having failed to agree on the first port, the buyers alleged that the sellers were in breach of contract to negotiate. The trial judge applied Lord Wright’s dictum in Hillas v. Arcos and held that the sellers were indeed in breach for failing to negotiate bona fide in that they had merely adhered to their firm decision and did not do all they ought to have done by way of bona fide negotiation. The Court of Appeal dismissed Lord Wright’s dictum as having since been deprived of validity and reversed the decision at first instance. It held that there was no breach by the sellers of any obligation in respect of the first or second port because there was no legally binding obligation to negotiate. Goff LJ held that the words merely imported an agreement to negotiate with a view to agreeing that particular point. The words could not give rise to any enforceable liability simply for breach of contract to negotiate. The same principles applied whether the words were a term in a particular existing contract or as in Courtney merely an agreement to negotiate where there was no other agreement. Scandinavian Trading Tanker Co AB v. Flota Petrolera Ecuatoriana11 Owing to non-payment under a charter-party, the owners withdrew their vessel. The parties subsequently entered into a “without prejudice” agreement which provided inter alia that if within 60 days the discussions reached a conclusion mutually acceptable to both parties, then a specified rate of hire was to be paid. If not, then the rate was subject to the determination of the issue whether the owners were entitled to withdraw the vessel. The parties having failed to reach any agreement, it was contended that the plaintiffs were in breach of the implied term to use their best endeavours to reach a “mutually acceptable conclusion.” The court held that the phrase “mutually acceptable conclusion” was too vague to give any clear and certain meaning and would be struck out as being unenforceable in law. The agreement to seek a “mutually acceptable conclusion” was like an agreement to agree or an agreement to negotiate and conferred no rights or obligations of any kind. Nile Co for Export of Agricultural Crops v. H & JN Bennett (Commodities) Ltd12 The Egyptian sellers of potatoes which were subject to government control claimed for non-payment from the buyers. Clause 4 of the potato agreement provided a procedure in case of defective consignments for the deduction of the landed value of the damaged goods from the amount of the invoice accompanying the documents. The procedure to be adopted if the government representatives did not agree with the buyers’ surveyor on the quantity of damaged cargo was for the buyers to inform the sellers for the purpose of sending representatives to inspect the

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goods and “settle this dispute.” Then sellers contended that since the buyers had failed to operate the clause 4 machinery, they were debarred from claiming damages for defective cargo by way of defence and counterclaim. The buyers contended inter alia that clause 4 was unenforceable for uncertainty because the last sentence recorded an agreement to agree which was held to be unenforceable in Courtney. The court construed the last sentence to mean “so that a settlement could be reached by agreement” but such an agreement to negotiate a settlement could not be enforced. However, the last sentence did not affect the validity of the preceding parts of the clause since it was not the intention of the parties that an inability to enforce the last sentence should release them from the undertaking to abide by any agreement reached between the government representatives and their own surveyors. Star Steamship Society v. Beogradska Plovidba13 The issue here was whether a binding charter-party had been concluded between the parties. The court found that the parties had in mind the wellknown Gencon standard form and by using the expression “subject to details of the Gencon charterparty” the owners had made it clear that they would not commit themselves until agreement had been reached on the details of the Gencon form which in itself contained alternative provisions which required a positive selection of the desired alternative. Hence there was no binding contract between the parties. Trees Ltd v. Cripps14 This was an unusual action for alleged breach of confidentiality by intending vendors who had agreed to keep confidential the amounts of offers made by prospective purchasers, including an offer by the plaintiff company and to accept (subject to contract) the highest offer. The plaintiff complained that its offer was disclosed to another potential buyer who then made a higher offer which was accepted by the vendors. The court, after an exhaustive review of conflicting evidence, found on the facts that no obligation as to confidentiality had been established. Voest Alpine Intertrading GmbH v. Chevron International Oil Co Ltd15 This case qualifies the principle in Courtney. The facts, put very simply, were that the plaintiffs claimed the full purchase price from the defendants in respect of the sale of crude oil, negotiations for a base price having failed. The plaintiffs contended that the failure to negotiate a base price left the full price intact. The court rejected the claim on the ground that the normal expectation on a book-out16 was a payment of differences rather than a payment of the full purchase price. The plaintiffs’ alternative claim was that in the absence of agreement, it was to be implied that the buyer was obliged to pay his immediate seller the amount by which his price exceeded the minimum price in the circle. Were the plaintiffs in effect seeking to establish an agreement to negotiate as constituting a binding contract? The court found that the parties had reached an oral contract containing important established terms. Everything had been settled except the base price. It was not merely an agreement to agree or a situation where a large number of terms remained unsettled. Applying the ratio in Skyes (Wessex) Ltd v. Fine Fare Ltd17 and the principles laid down in Chitty on Contracts18 the court concluded that effect should be given to the contract by saying that in default of agreement as to a base price, it should be such reasonable base price as might be ascertained by the appropriate independent adjudicator. As in Skyes, any contrary view would have been contrary to the intention of the parties. The court applied Lord Denning’s statement that “in a commercial agreement the further the parties have gone on with their contract, the more ready are the courts to imply any reasonable term so as to give effect to their intentions. When much has been done, the courts will do their best not to destroy the bargain. When nothing has been done, it is easier to say there is no agreement between the parties because the essential terms have not been agreed. But when an agreement has been acted upon and the parties have been put to great expense in implementing it, we ought to imply all reasonable terms so as to avoid any uncertainties. In [Skyes] there is less difficulty than in others because there is an arbitration clause which, liberally construed, is sufficient to resolve any uncertainties which the parties have left.”19 Channel v. Grossman20 This case departs from English authorities. It concerned an action by prospective tenants against the owner for breach of contract to negotiate in good faith pursuant to a detailed letter of intent to proceed with the leasing of a store to completion and to withdraw the premises from the market during negotiations. Although an agreement to enter into a binding contract in future did not constitute a contract, the tenants here were not contending that the letter of intent was binding as a lease or was an agreement to enter into a lease. Rather, they were contending that it was enforceable as a mutually binding obligation to negotiate in good faith. Although no Pennsylvannian court had at that time considered whether an agreement to negotiate in good faith was enforceable, other jurisdictions had held that such an agreement, if it met the requisites of an enforceable contract, would be enforceable. For example, an agreement to use best efforts or to negotiate in good faith, unlike an agreement to agree, had been upheld.

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Accordingly, the question which arose in Channel was whether the agreement to negotiate in good faith met the tests of enforceability. They were: (1) whether the parties had manifested an intention to be bound (2) whether the terms of the agreement were sufficiently definite to be enforced (3) whether consideration had been provided. The Court of Appeals held that (1) the letter of intent and the circumstances surrounding its adoption (draft lease, on site visits, application for permission to erect Channel signs) supported the finding that there was an intention to be bound in agreement to negotiate in good faith (2) the promise to withdraw the store viewed in the context of the detailed letter of intent (which covered most significant lease terms) was sufficiently definite to be specifically enforced (3) the tenant’s execution and tender of the letter of intent conferred a benefit on the owner which was valid consideration for the owner’s return promise to negotiate in good faith. It was beneficial because the owner had intended to obtain financing and the letter of intent could be shown to banks and other creditors for that purpose. As for the dispute whether any time limit had been put on the negotiations, the court observed that if the tenants had orally agreed to forward a draft lease within 30 days of the date of execution of the letter of intent, failure to do so would have terminated the agreement. If no definite time had been fixed, a reasonable time would be implied. Under Pennsylvanian law therefore, a detailed letter of intent to negotiate in good faith could bind the owner for a reasonable period of time. Conclusion All but one of the above cases illustrate the principle that an agreement to negotiate, of which the lock-in agreement is an example, is unenforceable for lack of certainty. The same principle applies to incomplete agreements which are otherwise valid, but where some term is left to be agreed or negotiated between the parties. In the latter situation, the requirement of certainty may be subject to qualifications as illustrated by Voest Alpine v. Chevron International and Foley v. Classique Coaches Ltd,21 where in default of agreement on a term such as price the court may imply a term that a reasonable price must be paid. In Foley, the circumstances which assisted the court in reaching that conclusion were: (1) the agreement was contained in a stamped document (2) both parties had believed it to be binding and had acted upon it for a number of years (3) it contained an arbitration clause which was construed to apply as to any failure to agree on the price. Thus it is not necessarily fatal, once the parties have reached substantial agreement, merely because some term remains to be settled if it can be implied by the courts or by statute or if the agreement provides machinery such as arbitration to resolve the uncertainty. The commercial convenience of this rule is obvious, if businessmen are to continue their practice of agreeing in principle only, leaving details to be worked out later. In such a situation, the courts will try wherever possible, to giveeffect to commercial expectations. The further the parties have gone ahead with the agreement and the more expenditure they have incurred in carrying it out, the more likely will the courts imply whatever is necessary to uphold the agreement. (iii) Fiduciary/non-fiduciary (impt) · How to establish a fiduciary relationship? · Parties negotiating towards a JV may be deemed fiduciaries for one another. United Dominions Corporation v Brian Pty Ltd [1985] 60 ALR 741 - Test for fiduciary relation by Dawson J:

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Although the relationship between participants in JV which is to a partnership will be governed by the particular contract rather than extrinsic principles of law, the relationship may nevertheless be a fiduciary one if the necessary confidence is reposed by the participants in one another. Even in a partnership it is really the mutual confidence between parties which imposes fiduciary duties upon them and the same confidence may be found to exist between participants in a JV.

Biala Pty Ltd v Mallina Holding Ltd [1994 – 1995] 13 WAR 11 · Held: in a JV where the relationship was founded on the mutual trust and confidence of each in the skill, knowledge and integrity of the other, each owned fiduciary duties to each other. · These duties incl: (a) To refrain from pursuing and obtaining or retaining from himself any collateral advantage in relation to the proposed project without the knowledge and informed assent of the other participant. (b) Good faith (c) To state everything with strict and scrupulous accuracy. A successful plea of fiduciary breach affords one more attractive remedies than a contractual breach.

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Haw Par Brothers International v Jack Chiarapuk and Others [1991] 2 MLJ 428 Principle: · Fiduciary relationship is usually established if confidential information contained in the JVA is furnished for the purpose of the functioning of the JV and especially when the relationship is founded on mutual trust and confidence. Facts: · JV company founded to promote ‘Tiger Balm’. JV ended on 31 Dec 1991. · Dft started to sell ‘Lion’s Balm’ after the termination of the JV. · Whether there was a breach in fiduciary relationship as regards certain confidential information in the JVA. Held (Chao Hick Tin J) · Clear that the plf and and dft are in a JV to manufacture, promote, sell and develop Tiger Balm, for mutual profit and advantage. · The confidential information which would be furnished by the plf to the JV companies should only be used for the purpose of manufacturing Tiger Balm. Thus, the contents of the JVA suggest that there is a fiduciary relationship between the participants or at least an arguable case for it. Newacres Sdn Bhd v Sri Alam Sdn Bhd [2000] 2 MLJ 353 Facts: · Newacres (“N”) concluded JVA with Sri Alam (“S”), to develop a piece of land owned by S. Dispute arose between parties and N failed to fulfil his obligation of delivering luxury apartments to S. · Whether there was the existence of fiduciary duties and whether N breached its fiduciary duties. Held: · Found existence of fiduciary duties owned by N to S however, N had not breached its duties as the apartments had not been built and S cannot demand N to deliver the apartments that have not been built. (iv) Confidentiality and non-exploitation · Confidentiality agreement to protect the idea · Non-exploitive agreement signed before presentation of the idea; Microsoft can ∴ only develop the idea if they can prove that they have thought of a similar idea before Ali’s presentation. (3) Prior to Incorporation  Documents to be prepared  parties should ensure they confine themselves only to steps connected with the incorporation of the joint venture company or risk falling into the fiduciary trap: Spicer (Keith) v. Mansel [1970] 1 ALL ER 462  advise his/her clients on the type of joint venture (i) Memorandum · Note the effects of s25(2)(b) of CA where assertion of lack of capacity of the company may only be made by any members.

Ultra vires transactions. 25. —(1) No act or purported act of a company (including the entering into of an agreement by the company and including any act done on behalf of a company by an officer or agent of the company under any purported authority, whether express or implied, of the company) and no conveyance or transfer of property, whether real or personal, to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do such act or to execute or take such conveyance or transfer. (2) Any such lack of capacity or power may be asserted or relied upon only in — (a) proceedings against the company by any member of the company or, where the company has issued debentures secured by a floating charge over all or any of the company’s property, by the holder of any of those debentures or the trustee for the holders of those debentures to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company; (b) any proceedings by the company or by any member of the company against the present or former officers of the company; or (c) any application by the Minister to wind up the company. (3) If the unauthorised act, conveyance or transfer sought to be restrained in any proceedings under subsection (2) (a) is being or is to be performed or made pursuant to any contract to which the company is a party, the Court may, if all the parties to the contract are parties to the proceedings and if the Court considers it to be just and equitable,

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set aside and restrain the performance of the contract and may allow to the company or to the other parties to the contract, as the case requires, compensation for the loss or damage sustained by either of them which may result from the action of the Court in setting aside and restraining the performance of the contract but anticipated profits to be derived from the performance of the contract shall not be awarded by the Court as a loss or damage sustained. (ii) Articles of Association - Consider the creation of class rights to protect each parties’ specific concerns. Not only as a form of minority shareholders protection option. Insert Capital Reduction Trap – where one party cancels the shares of the other. Avoid this by preventing the resolution to reduce capital – ie have at least a 25% shareholding. Both the Memorandum and Articles of Association should conform with the provisions of the Joint Venture Agreement (iii) Insert Minority Protection clauses:  Would arise in any case other than in a 50/50 equity situation, and should be considered as a matter of course every time one acts for a minority shareholder (a) entrenchment of rights; (b) minority oppression action; (c) Winding up on just and equitable ground – objectives should be clearly spelt out in the Memorandum and Articles of Association (this being the advantage of customized object clauses) (d) weighted voting: Bushell v Faith [1970] AC 1099 (e) voting trust agreements: Greenwell v Carter [1902] 1 Ch. 530 Management control and minority protection - elaborate on this where asked on specific qns relating to them – (a) Board representation – most jt ventures 50-50, expect board to be 50-50. but often recipe for disaster because causes deadlock. Therefore to consider early on – whats the management control. -> one way to break is to have chairman. and chairman has casting vote so that he can break vote. Have rotation of chairman every 12 mths etc so that votes not always fav to one side but when jt ventures start, pple’s optimism and money => tendency for agreement through ways other than voting on direction fo company. Generally at beginning will follow company mission board repn to reflect shreholding. If repg minority, think of ways to protect minority since board consists of dirs fr other side. (b) Anti-dilution – concept that certain party’s shrholding shld not be diluted through issuance of new shares. Maj if they contro board can issue new shares to themselves or another party and dilute you below 25%. This anti dilution oblig os that certain party will not be diluted below certain pt so when issue new share, will also issue to that party so that he will not be directed below certain level. May be complicated formula or statement of intention. So caluse like this impt – this one shld go ito articles. Can enforce against company. If merely shr agreement, if maj refuses to issue new shares, will have to sue them for specific performance very difficult. If sue company directly, comp sec being neutral party or comp as sep legal entity wld be obliged to issue the shares. (c) “Reserved matters” – another way that min can prxt themselves. This is where req list of items requiring super maj approval or unanimous approval. Shld be sth that client as min can block. Act in ur client’s interest! 1. related party transactions – money may be siphoned out through this. Esp in emerging market deals 2. K expenditure – to req tt k expenditure beyond certain amt req threshold approval 3. variation of scope of business 4. transactions limited to fintei amt eond which approval wld be reqd 5. admnission of new shrs 6. amendment to articles and memorandum – note some rights tt min wld have need to be prxted in other ways (4) The Joint Venture Agreement (JVA) 1. 2. Key protection of parties rights in the JVA Kicks in what rights should be embodied in the JV.

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3. -

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the JVA or, as it is sometimes called, s Shareholders’ Agreement distinction from the constitutive documents of the joint venture company distinction between the 2 must be even more importantly borne in mind, especially: where JVAs embody more than rights qua members of the joint venture company, it may be better to make clear that it is binding as a JVA as such and not merely as a Shareholders’ Agreement

4.1 Constitutive Corporate Rights v Contractual Rights in the JV.

If the contractual terms in the JVA were meant to reflect the JV company’s constitutive documents, only rights qua members are enforceable.

Raffles Hotel Ltd v Malayan Banking Bhd (No. 2) [1966] 1 MLJ 206 Principle: · A person who was not a member of a company or party to the articles could not acquire rights under the articles. Facts: · Benefit of the lease of Raffles Hotel assigned to respondent company (Malayan Banking or “BH”) for 70 years and appellant company (“RH”) acquired leasehold in reversion with the benefit of the original lease. · RH in pursuance of Article 77 of the respondent company (which states that the lessor (in this case is RH) may appoint itself to be director of the company. Whether the appointment is valid. Held (Ambrose J): · The AA of a company did not constitute a contract between the company and a person who was not a member of the company. · In the absence if any contractual right, RH being an outsider cannot take advantage of a power given by Art 77 ∴ the appointment had no legal effect.

Contractual rights v constitutional rights – if JVA embodies more than rights qua members of the JV company, make clear that it is binding as a JVA as such and not merely a Shareholders’ Agreement.

Russell v Northern Bank Development Corporation [1992] 1 WLR 588 Principle · A Shareholders’ Agreement to determine how members will exercise their voting rights on a resolution to amend the articles is valid. It is binding on the Shareholders but not on the company. Facts: · 5 shareholders and the company provided that no further share capital would be created of issued without the consent of each of the parties. · Board proposed later to make an increase of capital to £4 mil by a rights issue. · The plf, being one of the shareholders objected. · Whether the agreement made was binding on his fellow shareholders. Held (Lord Jauncey of Tullichettle): · Whether the agreement constituted an unlawful fetter or no more than an agreement between the shareholders as to their manner of voting. · Such agreements would create personal obligations against only themselves and would not become a regulation of the company ∴ not an unlawful fetter of the statutory powers of the company Beh Chun Chuan v Paloh Medical Centre Sdn Bhd [1999] 3 MLJ 262 (Malaysian case) Principle: · Necessary that the Shareholders’ Agreement to be incorporated into the M&AA if it were to binding the shareholders qua members. Facts: · Petition for winding up under oppression. · Shareholders’ Agreement executed where it was provided that the parties shall amend the company’s M&AA in order to company with the terms of the Shareholders’ Agreement. · No steps were taken to procure the amendment. · Petitioner complains of oppression based on alleged breach of the terms of the Shareholders’ Agreement which had not been incorporated into the AA of the company. Held (Kang Hwee Gee J):

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·

·
·

Necessary to incorporate terms of the Shareholders’ Agreement to bind shareholders inter se. Submission that the terms in the Shareholders’ Agreement governed the conduct of the company and prevailed over its AA was untenable ∴ the petitioner’s complaints anchored on the breach of the Agreement must fail. In order to ensure that the terms of the shareholders` agreement shall bind the shareholders inter se under the Companies Act 1965, it would be necessary to incorporate them into the articles of association of the company. In the instant case, however, the terms in the shareholders did not initiate any proposition to amend the articles to incorporate the terms in the shareholders` agreement into the articles (see p 267B-C). The submission that the shareholders` agreement governed the conduct of the company and prevailed over its articles of association was untenable. In the event, it follows that all the complaints put forth by the petitioner which were anchored on the breach of the agreement must fail. But even assuming that the shareholders` agreement could be the basis of oppression in place of the articles of the company, the court did not find any of the complaints oppressive that would require a relief under s 181 of the Companies Act 1965 (see p 269FH).

Relationship between shareholders’ agreements and constitutional documents arises if using corp vehicle. Constit doc – articles of assoc and memorandum as corp lawyer – client says want to set up jt venture, incorp comp, then they will say whether can have shr agreement, draft this, sign, additional step – incorp key terms into articles of association. - Last step – tedious process. Jt venture agreements written and arts written are diff. latter – lang fr perspective of company. Cannot just transplant clauses of agreement into articles - So why put them in if already in shrs agreement? – taken for granted in practice. Shrs agreement is contract bet parties. Private doc governed by contract law and governing law of tt contract. It requires unanimous agreement to amend. Arts of assoc on other hand supposed to be contract bet members inter se. but slightly different because

1.

doc reqg only 75% of voting rights to amend – impt depending on which aprty u act for. If acting for minority, then bear in mind tt something in arts but not agreement may be amended by majority. Articles can be amended anytime by members meeting called for. Even shrs resolution arts also public document and therefore if anything which aprties do not want public to see through extraction from ACRA, then need to consider whether to put into articles or not effect of non compliance with contract and articles – contract not complied with is breach/ art not complied with – act itself is potentially void against members and against company esp latter.  Rights like voting/ types of shares/ share rights – these may find their way into both arts and jt entur agreement but effect is different. whether arts or agreement is meant to prevail. Most think that arts to prevail. But if provision hich substantively meant to achieve the same thing, but because of way drafted, 2 possible interpretations then what to do? to avoid arg, advisable to have prevalence clause in jt venture agreement – in case of inconsistency, which wld prevail.

2.
3.

4.

4.2 Basic clauses (a) Parties clause · Sufficient identify the parties to the JVA · Carry out company searches to ascertain identities of corporate JV partners. (b) Prefatory clause · States the background and objectives of the JV. · Usually termed the ‘Recitals’ clause. · Share capital in JVC (authorised, issued and paid-up) is usually mentioned in the Recitals. · Recitals are not intended to be legally binding · May be used to give a contextual background against which otherwise ambiguous terms may be interpreted (c) Definition or Interpretation clause

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(d) -

Currency clauses The currency the share is to be denominated in; The need for valorisation clauses; and The presence of any exchange control regulations.

(e) Capitalisation of the JVC Consider what ‘payment’ the JVC is to exact return for issuing shares to the JV partners. - Where the consideration is to be otherwise than for cash, ensure that the issue of the shares is not tainted as an issue at a discount. Rf Ooegum Gold Mining Co of India v Roper [1892] AC 125 Care must be taken to ensure that if relevant the entitlement for the issue of shares otherwise than for cash be documented in a distinct collateral agreement to avoid any issue relating to the need to file the entirety of the joint venture or shareholders’ agreement – s. 63(4) Companies Act Return as to allotments. 63. —(4) Where shares are allotted as fully or partly paid up otherwise than in cash and the allotment is made pursuant to a contract in writing the company shall lodge with the return the contract evidencing the entitlement of the allottee or a copy of any such contract certified as prescribed. Committed party may wish to consider granting them “put option” rights (to permit their selling out if performance targets are not attained) or “forced buy-in” provisions to compel their buy-in after a trial period Increasingly joint venture parties desire having the right to have a joint venture company deemed its “subsidiary” Equity control is only one of various ways to achieve this Therefore 2 or more joint venture/parties may simultaneously achieve the same objective of having the joint venture company deemed a subsidiary simultaneously of them all respectively S63(4) CA Use “put option” rights – permit selling out if performance targets not achieved Use “forced buy-in” to compel purchase of shares after trial period. Management provisions

(f)

(i) Board Representation –  determine number of directors on the Board;  nominee directors in JVC are permitted to give ‘special consideration’ to the commercial wishes of shareholders in relation to the JV partner who appointed them.  counsel of prudence will take traditional view  minority shareholder will often insist that its nominee/appointee be part of the quorum requirements (but see Re Opera Photographic Ltd [1989] 1 WLR 634)  still controversy on whether a nominee director of a corporate shareholder may render the corporate shareholder vicariously liable for the nominee’s default  s. 158 Companies Act on the power of nominee directors to disclose corporate information and its limitations Disclosure of company information by certain directors 158. —(1) A director of a company may disclose information which he has in his capacity as a director or an employee of a company, being information that would not otherwise be available to him, to the persons specified in subsection (2) if the conditions specified in subsection (3) are met. (2) The information referred to in subsection (1) may be disclosed to — (a) a person whose interests the director represents; or (b) a person in accordance with whose directions or instructions the director may be required or is accustomed to act in relation to the director’s powers and duties. (3) The conditions referred to in subsection (1) are — (a) the director declares at a meeting of the directors of the company the name and office or position held by the person to whom the information is to be disclosed and the particulars of such information; (b) the director is first authorised by the board of directors to make the disclosure; and (c) the disclosure will not be likely to prejudice the company.

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(4) The matters declared by a director under subsection (3) (a) shall be recorded in the minutes of the meeting of the directors.  Manner of appointment and removal of directors  Quorum required for Board meetings  If directors to be given indemnities, bear in mind s172 CA  Any provision indemnifying a person from liability for negligence, default breach of duty or breach of trust shall be void  Exceptions refer s172(2) Provisions indemnifying directors or officers. 172. —(1) Any provision, whether in the articles or in any contract with a company or otherwise, for exempting any officer or auditor of the company from, or indemnifying him against, any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void. (2) This section shall not prevent a company — (a) from purchasing and maintaining for any such officer insurance against any liability referred to in subsection (1); or (b) from indemnifying such officer or auditor against any liability incurred by him — (i) in defending any proceedings (whether civil or criminal) in which judgment is given in his favour or in which he is acquitted; or (ii) in connection with any application, under section 76A (13) or 391 or any other provision of this Act, in which relief is granted to him by the court.  Nominee directors  Traditionally the nominee director treated like any director  Owed duties to the coy as a whole and not to any particular class of shareholders in relation to the JV who appointed them  However law in England developed to permit nominee directors to given special consideration to the commercial wishes of persons who appointed them.  If nominee director has to make decision for JV he should make decision qua directors (then clearly director’s duties equals his fiduciary duty)  But if decision for employer co, then can have special consideration for employer co  Re Opera  disclosure of corporate information i. s158 CA ii. can disclose as long as conditions met iii. if it is disclosed to person 1. whose interests the director represents 2. a person in accordance with whose directions/instructions the director may be required or accustomed to act in relation to the director’s powers and duties iv. s158(3) conditions 1. director declares at a meeting of the directors of the coy the name and office or position held by person to whom the info to be disclosed is and particulars of such info 2. directors is first authorised by Board of Directors to make the disclosure 3. disclosure will not likely prejudice the coy 4. have to have recorded in the minutes of the meeting of directors (ii) Choice of Officers – state the officers; and terms of their employment. (g) Business clause · Defines the type of business the JVC is to carry on, and where, and how. · consider if necessary licensing arrangements for technical assistance, patent rights, or other industrial property rights

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(h) Matters requiring unanimous approval · List the matters which require unanimous approval of the parties to the JVA. · Usually these matters include: (i) Scope and extent of business; (ii) Transactions of a capital nature; (iii) Borrowings; (iv) Appointment and removal of officers; (v) Issue of further shares other than that provided for in the JVA; (vi) Amendments to M or AA. (i) Pre-emption rights · Provide for rights of pre-emption of each other in the event of a transfer of shares and the issue of new shares. Deadlock clause · Particularly when acting for 50/50 equity situation · Common deadlock clause: just and equitable winding up. · Provide distinctions between disputes on commercial policies (where neutral director best to break deadlock) and disputes as to legal rights amongst the parties (where no option but to go court or wind up) · E.g chairman has casting vote and each sh takes turns to appoint him · Odd no of directors · if a party wants to “withdraw” from the joint venture and dispose of its shares, it is to notify the joint venture company or the other shareholders of its intention to do so and, if within a defined period the other shareholders do not buy up its shares and cannot get a third party to purchase its shares, all parties will then take steps to wind-up the joint venture company · other variations exist, it is a test of the imagination of the lawyer concerned to draft creative deadlock provisions

(j)

(k) Name of company · State name of the company in the JVA, may carry the tradename of the JV partners. · venture company may carry the corporate name of a joint venture party or the trade name or trade mark of that joint venture party · the term “DBS” has may have such significant commercial value that it would be desirable to spell out that DBS has an interest in that name – by providing that the parties to the JVA acknowledge the right, title and interest of the DBS Ltd in the term · also provide as to how DBS Ltd can require the joint venture company to drop the term “DBS” from the corporate title of the joint venture company (l) Non-competition clause · Parties during the term of the JVA will not be directly or indirectly interested in any enterprise carrying on business in competition with the JVC. · Non-competition with parent coy?

(m) Financing clause · Define the respective parties’ obligation to secure financing for JV. · Provide for how additional finance is to be raised if subsequently required · whether directly out if its own pocket or indirectly through borrowing · never accept it if your clients tell you “We will discuss it at the material time” (n) Dividend policy · Provide for dividend policy. • prudent to put a clause to the following effect:  “The dividends of the Company shall be such as shall be recommended by the Board of Directors from time to time who shall act in the best interests of the Company when making any recommendations therefore and the parties hereto agree to declare in general meeting all final dividends so recommended but interim dividends may be declared by the Board of Directors without the sanction of any general meeting.”

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(o) Financial year · Provide for the commencement and ending of the financial year, preferably the same as that the JV partner (if JVC is to be deemed its subsidiary). (p) Conflicts between JVA and A/A · Determine which one prevails should they be in conflict. · there may be a conflict between one or more Articles and the JVA · it would therefore be necessary to determine which prevails · Greenwell v Porter [1902] 1 Ch 530 · Puddlephat v Leigh [1916] 1 Ch 200 (q) Duration, default and termination · How long the JVA is to continue in force · What amounts to a default by a party to the JVA · How clt can terminate the JVA in the event of such default and what happens upon such termination. · Buy-out or sell-out clauses should be considered. (r) Choice of law clause · Forum conveniens · Insert too a Resolution of Dispute Clause to submit parties to ADR before adjudication. · Possibilities include laws of a neutral country, the “market” or of one of the joint venture partners or the place of incorporation of the joint venture company · Possibilities range from the court to arbitration to expert determination · Parties should be made familiar with each mode and the advantages and disadvantages thereof · Legal mechanism is not always the best for resolving commercial disputes · Consider also the use of multi-tiered resolution mechanisms Force Majeure clause whether time extensions are appropriate and if so for what periods consequences for exceeding time extension Material Adverse Change/Stabilisation clasue escape clauses Contracts (Rights of Third Party) Act 2001 – consider the need to exclude restrict its application Domicile – consider the need to provide for domicile and tax residency

(s)

(t)

(u) (v)

4.3 Ancillary Agreements  To give further effect to the JV. (a) Technology Transfer/Licence Agreement (b) Management/Administrative Services Agreement (5) Final Steps 5.1 Termination and Realisation 5.2 Available termination options  Consensual  Sell-out (i) Fortification by restraint covenants? (ii) 3rd party piggy drag/tag along provisions  tag along: i. minority sh can tag along with a majority sh when the majority sh wants to sell out

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ii. majority sh has obligation to make sure that buyer of his shares must be willing to buy minority shares as well drag along: i. right of certain sh to drag other sh to force them to sell their shares ii. price will be stipulated in the clause

Default sell-out (i) Put options  Ask the existing sh to buy your shares at X time  No choice, sh have to buy (ii) call options  ask JV partner to sell shares to u at X time. Deadlock/dispute sell-out  Russian roulette i. Person who wants to sell will name price for the share ii. Buyer can buy the shares from seller at this price iii. Or he can sell his own shares to the initial seller at the same price iv. Self regulating mechanism  Mexican or Texas shoot-out Winding up – s254(i) CA Oppression relief – s216 CA Moratorium on the transfer of shares (pre-emption rights)  After a period of time if want to sell out, have to first offer the shares to the other parties in the JV before can sell to a 3P

 

Exit and deadlock - first four are exit mechamisms. Relevant for min investor or venture capitalist.  min – mst have way to exit if not happy. If held ten percent which is not listed, ten percent may be hard to sell o buyers will ask for discount  venture capitalists – they go into make a quick buck, not to stay long, so need ways to exit. (a) Drag-along – right given to anyone typically to majority where if maj found buyers of its ahres, it can drag min along and oblige min to sell its shares. Darg along – maj can oblig min to sel and min must sell shares at certain price which is what maj is selling at or determined by auditor. (b) Tag-along (piggy-back) – opp of drag along. Here maj obliged to inform min as to when selling shares, and min can ex tag along to req tt maj must make buyer also buy min shares. (c) Put-and-call options – one party can put option to other party and other party can buy at agreed price. Or call other side’s shares and oblige other side to sell to you. (d) Share buybacks – comp may be reqd to buy back shares in certain situations. not common method because procedurally quite cumbersome. => exit mechanisms can cure deadlock this is a deadlock mechanism. (e) Russian roulette – “texas shootout” – seller names price, buyer can either buy at that price or sell at that price to seller. Therefore if you are seller and nme price too high, then may end up having to buy at that price. if name too low, buyer may buy at that price. Self regulating mechanism because makes one naming price name a fair price – both wiling to buy or sell at. This comes close to what wld be fair. (f) nuclear deterrent concept – both parties agree that if x agree within x no of days, will liquidate the company

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(g) highest sealed bid – each offers to buy shares at other side price, sealed, given to third party, whoever is highest will get to bu other side shares. Not as self regulating as Russian roulette.

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Often, wont get to see how they work. Parties go to court directly rather thn exercise deadlock mechanisms Deadlock may arise on simple matter Jt ventures break up as often as they are formed.

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