Hong Kong SMEs expanding business needs
Charltons advise on a wide variety of operational and commercial agreements for Hong Kong expanding businesses including supply, manufacturing, outsourcing, R&D, distribution, agency, franchising, logistics, licensing and employment agreements. We also assist clients with identifying, protecting and commercialising their intellectual property rights, including patents, brands and trademarks, trade secrets and copyright. We also provide legal support for businesses on day-to-day operational activities such as software licensing, website development and web hosting, Internet advertising, linking and co-branding, privacy and data protection, website terms and conditions and e-commerce. We aim to provide smart, practical and cost-effective advice and pragmatic risk assessments to our start-up clients.
We have a deep understanding of how start-ups and Hong Kong SMEs are financed and grown, and can advise emerging companies on financing arrangements to suit their expanding business needs, whether through equity investments, working capital loans or other debt financings. We can also advise on the major government funding schemes that are available to Hong Kong SMEs to develop brands, upgrade and restructure their business operations, promote sales and exports and expand access to markets outside Hong Kong.
As well as financing and funding advice, we also provide smart, practical and cost-effective advice on a wide variety of operational and commercial agreements for expanding businesses including supply, manufacturing, outsourcing, R&D, distribution, agency, franchising, logistics, licensing and employment agreements.
JV series – Russian Roulette and shoot-outs
Standard put and call options are unlikely to work in deadlock situations as there is no party in default and the options would therefore be exercised by whoever served notice first. For this reason, two-party venture agreements often include a variation on put and call options known as Russian roulette.
A typical Russian roulette provision works by one party (A) offering to buy the other party’s (B‘s) interest in the joint venture at a price specified by A. B has a limited period of time to sell its interest at that price or, if it does not want to sell its interest, to purchase A’s interest at the same price. If B does not respond within the specified time, B may be deemed to have accepted A’s offer to buy its shares.
Such provisions are designed to ensure that the price paid for the transfer of shares is fair and that the parties only resort to the use of the procedure if they are unable to continue the joint venture together. However, these provisions usually only work in a two-party joint venture and the arrangements are likely to favour the party that is financially stronger or more involved in the joint venture business. In addition, such provisions will not work where one party is legally prevented from acquiring the shares of the other, e.g. because local laws require its interest in the joint venture company to be capped at a certain percentage.
An alternative to Russian roulette which is sometimes used is Mexican or Texas shoot-out. This usually involves one party (A) offering to buy the other party’s (B‘s) shares at a price specified by A. B is then entitled either to accept A’s offer or to reject A’s offer and state that it wishes to buy A’s shares at a price higher than that specified by A. A and B then make sealed bids or enter into an auction, and the person who bids the highest is entitled to buy the other out. This procedure is subject to the same objections as Russian roulette procedures but is also more open to exploitation, as a party who does not really want to buy the other party out could force the other party into paying a higher price than it initially offered.
If neither party is in a position to buy out the other party, the parties may attempt to sell the whole joint venture company to a third party, failing which the joint venture company may enter into voluntary liquidation. However, in a multi-party joint venture, it may be possible for one of the shareholders to transfer its shares and exit the joint venture without affecting the ongoing operation of the joint venture as between the other parties.
Voluntary liquidation of the joint venture company will usually be a last resort where none of the parties are in a position to buy the others out and the parties are unable to effect a trade sale of the joint venture company to a third party.
Voluntary liquidation involves the joint venture company being wound up and selling its assets and/or distributing them. If the company sells some or all of its assets, the shareholders may be entitled to make bids to the liquidator for assets that they want.
Alternatively, the shareholders may prefer to agree in advance how the company’s assets are to be redistributed to them if there is a surplus on liquidation.
If the joint venture company is a Hong Kong company, one or more of the parties may alternatively apply to the court for the joint venture company to be wound up on just and equitable grounds. However, there is no certainty that the court would determine that the grounds for such a petition had been satisfied.