Joint ventures in the clean energy sector: Transfer conditions

As noted in one of our earlier articles in this series, the shareholders’ agreement and articles for a joint venture company (the JV Arrangements) will generally include provisions governing the transfer of shares. The ability to exit a joint venture, and realise value, will be an important consideration for any joint venture and so an understanding of these provisions is critical.

Restrictions on transfers

The joint venture partners will often be prohibited from transferring their interests to certain parties who do not meet pre-agreed requirements, such as meeting certain financial covenant requirements or not being subject to any ongoing sanctions. These types of restrictions seek to ensure that only ‘appropriate persons’ who have the relevant financial strength to meet the ongoing obligations under the JV Arrangements are admitted as joint venture partners.

Lock in provisions

The JV Arrangements may contain “lock in” periods within which shareholders are unable to transfer their shares. It is not uncommon for parties in a clean energy joint venture to be prohibited from transferring their shares until certain project milestones are met, such as the date upon which the underlying project is “ready to build”. Similarly, there may be defined periods within which parties are unable to transfer their shares due to the difficulties this would cause for the joint venture itself, for example where a transfer was proposed in the immediate lead up to a financial investment decision being taken for a project.

Pre-emption rights

Existing joint venture partners are usually given the opportunity to purchase a departing partner’s share before it is sold to any third party – this is known as a “right of pre-emption”. There are two key types of pre-emption rights and the decision as to which option to go for is a point for negotiation.

A right of first refusal

The selling partner will set the price at which their shares will be sold and offer them to the other partners for purchase. If no partner takes them up on this offer, the shares can then be sold to a third party at a price equal to, or higher than, the price set.
One issue with this process is that its existence may dissuade potential third-party purchasers from engaging in any sales process being undertaken by the selling partner. Such third-party purchasers run the risk of investing time and expense into the sales process only to find that an existing partner decides to acquire the shares at the price such third party offered to the selling partner.

A right of first offer

This involves the selling partner asking the existing partner(s) to offer a price to acquire its shareholding. The existing partners then set the market. Once the offers are received, the selling shareholder can then decide whether to accept an offer from the existing partner(s) or, alternatively, whether to go to market and seek to sell at a higher price.

Tag rights

To avoid being ‘left behind’, the JV Arrangements will often include “tag along” rights. These rights require the purchaser of a partner’s shares (or, alternatively, a purchaser acquiring a certain percentage holding of the shares in the joint venture company) to acquire the shares of any other partner who wishes to sell their shares. Such sale, pursuant to the tag along rights, will be on the same terms as the underlying share purchase that gave rise to the operation of the tag along rights. This provision gives the partners the option to sell where the make-up/control of the joint venture is changing.

Drag along rights

“Drag along” rights work by allowing a qualified majority of the partners the opportunity to require the other partners in the joint venture to sell out on the same terms as they are accepting (i.e. the ability to “drag” the minority into a sale). These rights seek to avoid the situation where a minority joint venture partner may frustrate a sales process by simply refusing to sell their share. Parties should keep in mind the existence of the drag rights if, for example, they are negotiating contracts for a joint venture party with the joint venture company itself. As examples, should a below-market rent continue if the landlord is dragged into a sales process or, similarly, should a developer in a development services agreement be required to continue to provide services if they are dragged into a sale.

Change of control

The protections or restrictions imposed on the joint venture parties would to some degree be undermined if a corporate joint venture partner itself was able to undergo a change in ownership and thus, indirectly, also change the ownership of the joint venture company. Accordingly, joint venture partners should consider including a process to be followed where there is a change of control of one of the joint venture partners. It is often the case that a change of control would trigger the pre-emption rights and entitle the other partners to acquire the relevant partner’s share. In clean energy projects, where the joint venture parties will often be multinationals, listed entities, or funds, care must be taken when crafting such provisions to ensure they are appropriate for the relevant corporate structure.

Withdrawal

The JV Arrangements may also include provisions which allow for one party to completely exit a joint venture through gifting their shares to the company or having them ‘junked’ (being a conversion of their shares into a separate class of deferred shares without income rights, capital rights, or voting rights). This is usually encountered where a joint venture has strict financing requirements and one joint venture partner no longer believes in the project and so wishes to cease funding development budgets and exit entirely.

Thinking of entering into a joint venture?

If you are considering entering into a joint venture or require further information on this or another related matter, please do get in touch with our corporate finance team.

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