What we do
Company Investment & JVs
Charltons is committed to assisting companies, joint venture (JV) partners and investors grow their ideas and investments in Hong Kong and the PRC.
We are experienced in advising both buyers and sellers in private equity transactions. We frequently advise on fund formation, transactions, portfolio management, investment restructuring, exits,leveraged buyouts, management buyouts, buy-ins, venture capital investments and financing transactions. We also advise pre-IPO and cornerstone investors.
The boutique nature of our practice means we are frequently retained by smaller and mid-size businesses and closely-held companies seeking an exit or growth financing. We derive a great deal of satisfaction from managing our clients’ Hong Kong company investment and PRC investment solutions and contributing to their success stories. We are happy to advise clients regardless of their size or the size or complexity of the proposed investment.
We regularly act as Hong Kong legal advisers to PRC based JVs. As well as advising generally on the appropriateness of a particular joint venture structure, we can draft the term sheet, the letter of intent and the joint venture agreement, perform due diligence on PRC joint venture partners together with local lawyers and draft or review and revise other relevant documents such as the sale and purchase agreement and disclosure letter. We also advise on the composition of the board and senior management, regulatory requirements, confidentiality and IP protection. We regularly cooperate with lawyers from other jurisdictions on joint venture related matters. We are also experienced in advising on more traditional partnerships including limited partnerships and limited liability companies where the nature of the relationship is set out in the partnership or operating agreement.
For more information about the services we offer in relation to Hong Kong company investment and joint ventures, please click here.
For further information on how we can assist with company investment and joint ventures in the PRC, please click here.
JV series – Joint venture agreement
The principal documents required for a corporate joint venture are:
- the articles of association of the joint venture company, and
- the shareholders’ agreement
The purpose of the joint venture agreement is to establish the rights and obligations of the parties in relation to the joint venture, to ensure that the company and its business is established and run in accordance with the parties’ objectives, and to set out procedures for dealing with any difficulties which may arise.
Key matters covered in the joint venture agreement are:
- the business of the joint venture
- the composition of the board and management arrangements
- share capital and funding of the company
- distribution of profits
- restrictive covenants
- protection of minority and majority interests (if applicable)
- resolution of deadlocks
- transfer of shares, and
Parties to the shareholders’ agreement
The parties to the shareholders’ agreement are usually the shareholders of the joint venture company and the joint venture company may be included, e.g. for the purposes of allotting shares or giving restrictive covenants. The problem of making the company itself a party to the shareholders’ agreement is illustrated in the leading case in this area of Russel v Northern Bank Development Corp Ltd. In this case, the company was a party to the shareholders’ agreement and thereby had agreed not to increase its authorised share capital or to issue new shares without the unanimous consent of the shareholders. The validity of the shareholders’ agreement was challenged by one of the shareholders. The company’s articles provided that the company could increase its share capital by way ordinary resolution. The House of Lords ultimately held that the promise not to increase its authorised share capital or to issue new shares without the unanimous consent of the shareholders was unenforceable against the company. The House of Lords went on to state that the offending provision can be severed from the shareholders’ agreement and the rest of the shareholders’ agreement could be enforced between the shareholders in the usual way.
Therefore, if the joint venture company is included as a party to the shareholders’ agreement, the shareholders’ agreement should not include any restrictions on the exercise of the company’s statutory powers since any such restrictions will be unenforceable. However, such restrictions may be enforceable as between the shareholders if the joint venture company’s obligations are severable.
In order to ensure that no fetters on the company’s statutory powers are included, the shareholders’ agreement could:
- make it clear that the joint venture company is only a party for the purposes of certain clauses (none of which restrict its statutory powers). For example, where the company is a party to the shareholders’ agreement, the agreement must make a distinction between the type of clause that fetters the company’s statutory powers and the type of clause that does not. The former obligations should be expressly drafted to apply only to the shareholders inter se but not to bind the company. In respect to the latter obligations, the company may be bound in the usual way. It may be difficult to assess which clauses fall into a particular category. Therefore, it is advisable to draft clauses as separately as possible so that if there is a challenge, the Court has the opportunity to sever the unlawful parts of the agreement (i.e. those parts which act as an unlawful fetter on the statutory powers of the company).
- include indirect restrictions by means of weighted voting rights or by obliging the shareholders to procure that the joint venture company does not take certain actions without the unanimous approval of the shareholders
In the Russel v Northern Bank Development Corp Ltd, the House of Lords cited a dictum from the Welton v Saffery case which supported the view that shareholders among themselves may agree to exercise their voting rights in a certain way on specific matters. This would have the effect that the undertakings in the shareholders agreement are enforceable between the shareholders as a personal agreement.
Certain restrictions on shareholders may also constitute an unenforceable fetter on statutory powers. In particular, a provision in a shareholders’ agreement which has the effect of preventing a shareholder from exercising its statutory right as a contributory of a company to petition for its winding-up would constitute a fetter on the statutory right conferred by the Companies Ordinance Cap. 622 (CO).
In addition, while a shareholder could be given an enforceable right to appoint a representative to the board of directors, an unqualified agreement between shareholders not to remove a particular person as a director would constitute an unlawful fetter on the company’s statutory power to remove a director under the CO, even if contained in a separate shareholders’ agreement between shareholders.
Shareholders’ agreements are generally valid and enforceable as between individual shareholders on the basis that they create only personal obligations and shareholders may deal with their own interests by contract in such way as they may think fit. However, if the agreement purports to bind future shareholders (for example, by requiring such shareholders to execute a deed of adherence before being registered as a shareholder) then such agreement may be deemed to operate beyond a personal contract between individual shareholders and be “elevated to the status of a regulation” of the joint venture company.
The above issues may be avoided by the use of weighted voting rights, which allow certain shareholders or classes or shareholder to exercise super-voting rights in respect of certain matters.
The parties to the shareholders’ agreement may want to consider whether any of the shareholders’ obligations should be guaranteed by their respective parent companies. For example, this may be appropriate where the proposed shareholder in the joint venture company is a new company specifically created for the purpose of holding its group’s interest in the joint venture.
Additional considerations should be taken into account if any of the parties is an individual (including the need for specific termination provisions in the event of death or incapacity) or a listed company (including potential amendments which may be required to deadlock and compulsory transfer provisions