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Joint ventures
Protections for minority shareholders in Asia Pacific
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Joint ventures
Protections for minority shareholders
in Asia Pacific
A Norton Rose Fulbright guide
Preface
We are pleased to present this revised edition of Joint
ventures: protections for minority shareholders in Asia Pacific.
This guide forms part of our key Asia Pacific publication
series which currently includes M&A law in Asia Pacific,
Anti-corruption law in Asia Pacific, Banking Security law in
Asia Pacific and Doing Business in Asia Pacific. Although the
title of this guide suggests a minority shareholder slant, we
hope it will be of general interest not only to international
and regional investors interested in joint ventures, but also to
actual or prospective majority shareholders of a joint venture.
The information contained here is as up-to-date as possible
as at 1 July 2012 when the original edition was published.
The guide addresses the key issues relevant to joint ventures
in the region and is not a substitute for legal advice. If you
would like to discuss any of the issues raised here, please get
in touch with us.
Acknowledgements
We gratefully acknowledge the assistance of the law firms who contributed to the chapters on India,
Japan, Malaysia, Mongolia, Philippines, South Korea and Vietnam.
Contents
Overview 06
Australia 12
China 22
Hong Kong 30
India 38
Indonesia 48
Japan 56
Malaysia 62
Mongolia 70
Philippines 78
Singapore 86
South Korea
92
Thailand 100
Vietnam 108
Contacts114
Contributing law firms
116
Joint ventures – protections for minority shareholders in Asia Pacific
Overview
A substantial amount of international investment in Asia
Pacific is effected through investors taking minority stakes in
either companies with an existing business or in newly
incorporated joint venture vehicles. Investment in this way
will be driven by either commercial reasons or regulatory
requirements or a combination of the two. In the former case,
an international investor may initially acquire a minority
stake in a joint venture so as to benefit from a partner’s
greater understanding and experience of local markets but
with the ultimate intention of acquiring a majority stake.
Alternatively, a minority interest may present a more cost
effective means for an international investor to obtain
exposure to a particular market. It is a feature of Asia Pacific
that a number of jurisdictions operate foreign ownership
restrictions in industry sectors considered to be of strategic
importance so that a minority stake is all that can be taken.
In each case, special consideration must be given as to how
best to protect minority interests through agreements which
do not emasculate or prevent the development of successful
commercial relationships.
Many companies in Asia Pacific are conglomerates
owned by principal or family shareholders who continue
to play an active role in management. In the context of
joint ventures with unequal holdings, this can present
particular challenges. A principal shareholder may be
resistant to perceived minority interference in management
decisions. On the other hand, a minority shareholder may
be concerned about the risk of domination or abuse by a
majority shareholder. As a result, there may be a tendency
for international investors to put in place and require
comprehensive agreements that focus too much on the
downside at the expense of developing a flexible commercial
relationship based on trust. Before entering any joint venture
agreement or enterprise, it is absolutely vital that an investor
carries out effective due diligence about its proposed partner.
Even the most sophisticated and comprehensive joint
venture agreement may not, in fact, prevent a determined
majority shareholder from exploiting its position of
dominance.
The objective of this guide is: firstly, to highlight those areas
that a minority investor in a privately owned company
should consider to protect its investment, regardless of the
jurisdiction concerned, and, secondly, to identify on a
jurisdictional basis particular local law considerations that
may need to be taken into account. These considerations
might be of equal relevance if the investor is domestic or
foreign. However, some will arise only in cases of a partly-
8 Norton Rose Fulbright
foreign owned entity, and it is with these issues that this
guide is particularly, though not exclusively, concerned.
This guide deals specifically with considerations which will be
relevant to the investor in a privately owned company rather
than a corporation whose shares are publicly traded. However,
there are many common areas of concern for investors about
standards of corporate governance in both types of investment.
These are areas of focus for regulators (and those, such as the
OECD, that seek to influence them) in the context of listed
companies, and include transparency and independence of
decision making, rights to participate in fundamental decisions
and the fair and timely dissemination of information.
Considerations when making the investment
Foreign ownership control and bilateral investment
treaty protection
A potential minority shareholder in Asia Pacific must consider
whether there are any limitations on foreign ownership.
Regulation of foreign ownership can be a fast changing picture.
Many jurisdictions are relaxing restrictions in order to encourage
greater foreign investment. On the other hand, increased foreign
ownership can create pressure to introduce or reintroduce
restrictions. For that reason, consideration should be given at the
outset to structuring an investment within the scope of a bilateral
investment treaty. Such treaties can offer certain guarantees for a
foreign investing party and where treaty rights are infringed will
provide independent and enforceable international dispute
resolution.
The extent of foreign ownership restrictions will often
depend on the area of business into which the investment
is being made, with local law allowing for more significant
levels of foreign investment in some areas than others. Such
restrictions may not only restrict the extent of the interest,
but its form as well. For example, it may not be possible to
structure a joint venture using the jurisdiction’s standard
private corporate vehicle because one of the shareholders
is foreign. The alternatives (and their limitations and
shortcomings) will have to be considered in such a situation.
Protections afforded by the law
Many jurisdictions in Asia Pacific (particularly those such
as India, Singapore and Hong Kong, with legal systems with
their origins in English common law) provide some form
of statutory protection for minority shareholders. Whilst it
is always important to take advice on and understand the
extent of the protections which the law provides, a prudent
Overview
minority shareholder is likely to want to supplement
these through a shareholders’ agreement. At the outset,
consideration must be given as to whether the jurisdiction
recognises such agreements, whether they are compatible
with existing national company law and whether they have
to be disclosed to the authorities or otherwise made public.
or jurisdictions concerned. In addition, some jurisdictions
including the European Union and China have far-reaching
merger control regimes which require notification even
where the joint venture has no activities within the
jurisdiction, but where the shareholders (and their respective
groups) have significant sales.
A significant number of non-common law jurisdictions
within Asia Pacific afford minority shareholders the right to
divest themselves of shares at an independently determined
price in certain circumstances which may include
fundamental changes to the enterprise or the alteration
of certain shareholder rights. This can be a powerful
tool for ensuring that the interests and views of minority
shareholders are taken into account by both majority
shareholders and potential investors alike.
Compliance with international and national anti-corruption
legislation is now an absolutely key requirement. In an
international context, the UK’s Bribery Act 2010 has
introduced potentially much more draconian provisions than
the USA’s Foreign Corrupt Practices Act 1973. Apart from
the substantive bribery offences, the UK Act has introduced
a new strict liability offence of failing to prevent bribery
subject only to a defence of having “adequate procedures”
to prevent such an offence. The new offence applies to all
companies carrying on a business or part of a business in
the UK. The UK authorities have published non-statutory
guidance on how the legislation should apply to joint
ventures. Most countries in Asia Pacific have national
anti-corruption legislation but recently there has been a
concerted drive to introduce more extra-territorial legislation
targeted at international bribery of public officials. China
has introduced international offences of bribing “foreign
officials” and “officials of international public organisations”
and India is also in the process of introducing similar anticorruption legislation.
Important ancillary issues
Once it is established that an appropriate legal framework
exists to enable and protect a minority shareholders’
investment, consideration must be given to wider legal and
regulatory requirements, including employment, tax and
merger control laws to achieve the optimal structure and
form for that investment.
Competition law and merger control laws may have a
significant impact on the timing of completion of the
transaction, and sometimes on the structure of the
transaction. Merger control approval processes are now
widespread and most of the jurisdictions covered in this
guide operate at least some form of competition merger
control regime. Many jurisdictions in Asia Pacific treat the
taking of a minority stake as a merger where the minority
shareholder acquires joint control over the conduct of the
target’s business (for example through minority protection
rights conferring a veto right over key business matters
such as budgets and business plans). This is the case, for
instance, in China and Singapore. Other jurisdictions, such
as Japan and Korea will require merger control approval
for the acquisition of minority stakes above a certain
voting threshold (which can be as low as 20 per cent)
irrespective of the minority protections obtained by the
investor. These approval processes usually delay the closing
of the transaction and require that a significant amount
of information be provided to the regulators. They require
careful planning and significant management time.
Merger control regulations apply to joint ventures with
activities (usually classed as sales, assets or market shares
reaching certain statutory thresholds) within the jurisdiction
Accordingly, it is absolutely vital that proper due diligence
is carried out into potential corruption risks of a potential
joint venture by reference to its location, the identity of its
shareholders and the proposed business model. In some
jurisdictions, this may well prove challenging. However,
the criminal, commercial and reputational risks of noncompliance now present real and serious challenges that
should be addressed at the outset of any joint venture.
Another important issue to consider at an early stage will
be the likely financing requirements for the venture and
whether the minority shareholder will wish to or be in a
position to respond to future cash calls. The ability of a
majority shareholder to call for further investment by way of
a share issue may operate to dilute a minority shareholder’s
interest and foreign ownership restrictions may impede
or prevent the exercise of pre-emption rights. Where bank
finance is required, it will be important to determine whether
foreign or local lenders should be approached. Again, sector
restrictions on foreign ownership will often have an impact
on the available source and type of bank finance.
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Joint ventures – protections for minority shareholders in Asia Pacific
Objectives and termination
One of the most common causes of dispute is how a joint
venture should come to an end. Whilst it may be tempting
to avoid discussion on some of the difficult commercial
issues which this topic might raise, it is generally sensible to
include exit mechanisms in some form. Some jurisdictions
recognise the concepts of a quasi partnership, which can be
wound up on the achievement of the purpose of the venture
but that is not the case with all jurisdictions which can
leave an unwilling party locked into the venture. The sort of
questions which the parties should consider include:
• Should the venture be for a finite life – if so, what is to
happen to the shares in and/or assets of the joint venture
company at the end of this period?
• Should the parties be permitted to transfer their shares
to a third party? If yes, only after first offering them to the
other shareholder?
• Should the venture end in circumstances where there is a
default, insolvency or even change of control of one party
or if the parties are in deadlock over key commercial or
strategic matters?
Governing law
At the outset, it is important to establish what law will
apply to the agreement and whether or not a more effective
governing law can be chosen to regulate the parties’
relationship and for the purposes of potential dispute
resolution. Complications can often arise by choosing a
governing law which is either incompatible or inconsistent
with the local law of the joint venture. For instance, some
jurisdictions in Asia Pacific will require disputes over land or
certain assets to be determined only under local law.
Offshore structures
Where national legal or tax conditions create an unfavourable
environment for a joint venture, the parties may instead consider
the use of a shareholders’ agreement to regulate an offshore
ownership structure. In such circumstances, the parties should
consider whether a local jurisdiction will recognise such a
structure or any offshore judgment or award that may be given in
respect of a dispute.
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Managing the investment
Veto rights, reserved matters and weighted voting
The extent to which a minority shareholder can control
or influence the business of a joint venture will invariably
depend on the size of its shareholding. A small shareholder
may be able to insist on protection extending to amendments
to the Company’s constitution, major asset disposals or
fundamental changes to the nature of business operations.
A large shareholder may seek more extensive control
and protection on matters such as quorum rules, the
appointment and removal of directors, strategic management
decisions, capital calls and share issues as well as major
asset acquisitions and disposals. Protection can be provided
in the form of director or shareholder veto rights or weighted
voting rights in respect of specified “reserved” matters. It will
be vital to consider in any jurisdiction how these restrictions
interact with national legislation.
Governance
When drafting any shareholders’ agreement, consideration
must be given to the existence of any local law rules
regarding residency or nationality of directors, and
whether a right to appoint or nominate for appointment a
director by reason of a party’s shareholding is enforceable.
Where a shareholder is entitled to board representation,
consideration must be given to the nature and extent of any
duties that he owes under the law of the jurisdiction in which
the joint venture company is incorporated.
In some jurisdictions, there may be a requirement for a
board of commissioners, a supervisory board or a control
committee tasked with monitoring the operating board and
its executives. Although the composition of such boards
often reflects the size of the parties’ shareholdings, the
existence of these structures may complicate the operation of
a shareholders’ agreement.
The provision of regular and transparent information
about operations and decision making is vital. The lack
of such information is often the major cause of difficulty
for a minority shareholder, since without a contractual
entitlement to key business and financial information, its
legal entitlement to information may be limited.
Overview
In most jurisdictions, the directors will owe duties to act
in good faith in the interests of the company. In the case of
joint ventures this can cause difficulty where directors have
been appointed by the respective parties to a shareholders’
agreement. Where directors find themselves in conflict on
account of divergent interests, recourse may be had to the
shareholders to resolve the issue but in some jurisdictions
such recourse may itself be problematic or not available.
Realising capital
Capital calls and pre-emption rights
Options over shares
During the life of the joint venture company, there may well
be a need for additional equity. It will of course be important
to look at whether the local law provides for any statutory
right of participation in such issues. However, ownership
restrictions may affect a minority shareholder’s ability to
exercise pre-emption rights leading either to dilution or to
the introduction of a third party investor. Accordingly, it is
important that any shareholders’ agreement addresses what
should happen in such an event.
Non-compete undertakings
Where a foreign minority shareholder is looking to go into
business with a local partner, it is likely to be important for
the foreign investor to know that its partner will be putting
all of its efforts into the joint venture and will not compete
with the Company. It is here that the effectiveness of noncompete provisions are particularly important. For example,
different jurisdictions will have different views on the
validity of such clauses and the length of time that they can
operate and their geographic reach before they are regarded
as an unfair restraint on trade or are otherwise incompatible
with local laws.
Realising the investment
If the minority shareholder anticipates that it may wish
to exit the investment by way of a sale of its holding, it
must consider any restrictions at law on persons to whom
the holding can be offered. Additionally, it is important to
establish whether the continuing shareholder has to be given
a right of first refusal, and if so, whether this would be at any
pre-determined price.
As part of the joint venture arrangements, put and call
options may be used as mechanisms for resolving deadlock
or achieving an exit. The legal validity and enforceability of
such options is something that needs to be established in the
relevant jurisdiction.
Deadlock and termination provisions
Precisely how the parties should behave when a deadlock
situation arises is something that will need to be considered
in detail and outlined in any shareholders’ agreement.
There will, in some situations, be local law considerations
to take into account when considering key elements of such
procedures such as valuation of shares in the absence of
agreement between the parties.
A majority shareholder may expect to have a right to “drag”
a reluctant minority shareholder into a sale of his shares
so that the Company can be sold in its entirety. Similarly, a
minority shareholder will want to ensure that it is not left
behind in the event that a third party purchaser is secured.
Accordingly it will require the ability to “tag” with the
majority shareholders ie, require its shares to be sold on the
same terms as a condition of the majority shareholder’s exit.
The compatibility of these rights with local laws should be
considered.
Deriving income
It is vital that there is a full appreciation of any jurisdictional
tax, and exchange control issues that could be relevant when
receiving income, interest or capital receipts. Further, when
it comes to extracting value from the Company by way of
income, the minority shareholder needs to be aware of what
classes of equity are permitted in the jurisdiction to achieve
this since some jurisdictions do not recognise different
classes of shares.
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Joint ventures – protections for minority shareholders in Asia Pacific
12 Norton Rose Fulbright
Australia
Joint ventures – protections for minority shareholders in Asia Pacific
Australia
Making the investment
Foreign ownership and control
The Australian government has, for many years, publicly
stated that it welcomes foreign investment and recognises
the contribution that foreign investment is able to bring to
the development of Australia’s industries and resources.
Australia’s Foreign Investment Policy Framework (January
2012) (Policy) provides the framework for Government
scrutiny of proposed foreign purchases of Australian
businesses and real estate. The Government has the power
under the Foreign Acquisitions and Takeovers Act 1975 (Cth)
(FATA) to block those proposals determined to be contrary to
the national interest. The FATA and the Foreign Acquisitions
and Takeovers Regulations 1989 (Cth) provide monetary
thresholds below which the relevant provisions do not apply,
and separate thresholds for acquisitions by US investors.
The FATA is administered by the Federal Treasurer, who is
assisted by the Foreign Investment Review Board (FIRB), a
division of the Commonwealth Government Treasury.
Generally speaking, all foreign investments in Australian
urban land require notification. Investment in companies
whose Australian urban land assets make up over 50
per cent of their total assets are classed as an investment
in Australian urban land and therefore must generally
be notified. Under the Policy, all “direct investments” in
Australia by foreign governments including state owned
enterprises and other associated entities of foreign
governments must also be notified to FIRB, and are required
to be approved by the Federal Treasurer, regardless of the
value of that investment.
For US investors which are not foreign governments (or
associated entities of foreign governments) FIRB notification
is required for acquisitions of 15 per cent or more in an
Australian corporation which is valued at over A$1,062
million (indexed annually). Non-US investors must notify
FIRB of intended acquisitions of 15 per cent or more in
an Australian corporation valued at over A$244 million
(indexed annually).
Investments in certain sensitive sectors of the Australian
economy (such as media) attract different thresholds under
the FATA and the Policy.
14 Norton Rose Fulbright
Bilateral investment treaties
Australia has a number of bilateral investment treaties in
place. Generally, bilateral investment treaties involving
Australia provide mechanisms for foreign investors to
make claims directly against the host state (usually by
way of arbitration proceedings) for actions in breach of the
treaty. However, the provisions of the FATA and the Policy
still apply to all foreign investment in Australia. Where
preferential treatment is accorded to foreign investors from
particular jurisdictions under bilateral investment treaties,
such protections are required to be implemented through
domestic legislation.
Currently only US investors have been accorded such
preferential treatment in Australia. However, in 2011,
Australia signed the Investment Protocol to the AustraliaNew Zealand Closer Economic Relations Trade Agreement.
Once implemented, this will result in New Zealand investors
being essentially accorded the same preferential treatment as
US investors.
Statutory minority protection and conflicts with
shareholder agreements
It is a fundamental tenet of Australian corporations law
that companies operate on the majority rules principle
and persons who acquire shares in a company voluntarily
agree to abide by the internal rules of that company. The
Corporations Act 2001 (Cth) (Corporations Act) adopts a
“replaceable rules” approach to the internal management
of a company. A company’s internal management may be
governed by provisions of the Corporations Act that apply as
replaceable rules, by a constitution or by a combination of
both. Because of this, protections for minority shareholders
are generally negotiated prior to the formation of the
company or the acquisition of the shares by way of adoption
of, or amendment to, the company’s constitution or entering
into a shareholders’ agreement. A shareholders’ agreement
may be drafted so as to prevail over the company’s
constitution in the event of any conflict. Importantly, unless
a shareholder agrees in writing to be bound, that shareholder
may not be bound by any modification to the constitution
made after the date on which they became a shareholder so
far as the modification requires them to take up additional
shares, increases their liability to contribute to the share
capital of, or otherwise to pay money to, the company or
imposes or increases restrictions on the right to transfer the
shares already held by the shareholder.
Australia
Where no constitution is adopted or shareholders’ agreement
is entered into, the replaceable rules include the following
rights designed to protect a minority shareholder:
• the directors of a company must call and arrange to hold
a general meeting on the request of members with at least
five per cent of the votes that may be cast at the general
meeting or at least 100 members who are entitled to vote
at the general meeting
• written notice of a meeting of the company’s members
must be given individually to each member entitled to
vote at the meeting
• before issuing shares of a particular class, the directors
of a proprietary company must offer them to the existing
holders of the shares of that class and
• variation of class rights may only be by way of special
resolution or with the written consent of members with at
least 75 per cent of the votes in the class.
The Corporations Act also includes the following general
statutory protections designed to protect minority
shareholders:
• Directors’ and other officers’ duties of care and diligence,
good faith, use of position and use of information.
• The requirement for certain matters to be passed by
special resolution (ie,, a 75 per cent majority of the
votes cast at a general meeting). These matters include
modification or repeal of the company’s constitution,
selective reduction in the company’s share capital,
selective buy-back of the company’s share capital and
changing the company’s name.
• The court may make a number of orders if the conduct
of the company’s affairs or a resolution of members
is either contrary to the interests of the members as a
whole or oppressive to, unfairly prejudicial to, or unfairly
discriminatory against, a member or members.
• A member may bring proceedings on behalf of a company,
or intervene in any proceedings to which the company is a
party for the purpose of taking responsibility on behalf of
the company for those proceedings.
• A member may make an application to the court to inspect
the books of the company.
As most of the management decisions of a company in
Australia will be made by simple majority resolution of
the directors or the members, a minority shareholder will
be better protected under a shareholders’ agreement or an
amended constitution than it would be under the statutory
regime alone.
Issues commonly encountered by a foreign or
domestic minority shareholder
Employment
The workplace relations climate in Australia is, generally
speaking, favourable for foreign investors. However,
there has been a recent increase in industrial activity and
industrial disputes in certain sectors, specifically mining,
manufacturing, transport and construction.
From 1 January 2010, minimum employment conditions
for all Australian employees are contained in the “National
Employment Standards”. By law, no workplace agreement
can provide conditions which are less than those in the
“National Employment Standards” which includes:
• a 38 hour working week for full time employees (plus
“reasonable additional hours”)
• four weeks paid annual holiday for full time employees
(pro-rated for part-time employees but not extended to
casual workers)
• paid personal/carer’s leave and compassionate leave for
full-time and part-time employees
• right to request flexible working hours
• long service leave.
Most employees in Australia also have the benefit of an
industrial award which applies to either an occupation
or an industry in which the employee is employed. These
industrial awards operate nationally and apply in respect
of the type of work performed. They contain terms and
conditions in addition to the National Employment
Standards which are specific to the relevant occupation or
industry and have the force of statute.
Australian immigration policy requires all non-citizens
wishing to enter to work in Australia to hold a visa.
Applications can be made for visas for business visits,
temporary and permanent visas for business development
and temporary and permanent visas for skilled workers.
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Joint ventures – protections for minority shareholders in Asia Pacific
Under the transfer of business rules in the Fair Work Act 2009
(Cth), enterprise agreements (collective agreements made at
an enterprise level between employers and employees about
terms and conditions of employment), and enterprise awards
if applicable, follow transferring employees to a new employer
and continue to apply to the transferred employees until such
time as the transferred agreement/award is replaced or
terminated in accordance with applicable legislation. In some
circumstances, transferred agreements/awards can also apply
to new employees performing the same work that the
transferring employees are performing.
This means that where a joint venture partner transfers
a business to a joint venture company, any transferring
employees will be covered by the old employer’s enterprise
agreements or awards until the enterprise agreements or
awards are terminated or replaced in accordance with their
terms and the appropriate legislation. This raises the difficult
situation of the joint venture company potentially being
bound by different enterprise agreements in relation to
employees performing the same work.
If the new employer does not want to be bound by a
transferring enterprise agreement/award, then they can
make application to the Fair Work Australia tribunal for
an order avoiding the transfer. Such orders will only be
given if the new employer can demonstrate that the terms
and conditions of employment that would apply to the
transferring employees if the transferring instrument were
avoided would not cause any detriment to the transferring
employees.
Finally, it is important to note that some sectors of the
Australian workforce are highly unionised, and accordingly
negotiations with Unions and costs of Union involvement in
joint venture projects, including in terms of higher pay rates
acquired through collective bargaining, need to be taken
into account, particularly in any proposed construction and
manufacturing projects.
Tax
Australia has a comprehensive and complex taxation system.
At the Federal level, Australia imposes income taxation
(including capital gains tax and fringe benefits tax), goods
and services tax and customs duties. In addition, each of
Australia’s six States and two Territories has its own stamp
duties, payroll tax and land tax system.
16 Norton Rose Fulbright
Generally, non-residents of Australia are subject to taxation
in Australia only in respect of income sourced in Australia.
Dividends payable by an Australian resident company
to a non-resident will generally be subject to 30 per cent
withholding tax, unless a double tax agreement applies to
reduce the rate or the dividends are fully franked.
Non-residents are not liable for capital gains tax in Australia
except in respect of “taxable Australian property”. Taxable
Australian property includes land in Australia (whether
owned or leased) and mining rights where the minerals
are located in Australia. Taxable Australian property also
includes interests in an entity (such as shares in a company)
where more than 50 per cent of the market value of that
entity’s assets is attributable to Australian real property.
The transfer of shares in an Australian company can
attract stamp duty, depending on the State or Territory of
incorporation of the company. In addition, land rich or
landholder duty may be payable depending on the extent of
the company’s landholdings in the relevant State or Territory.
The Australian Taxation Office (ATO) has recently taken
an aggressive stance in respect of foreign private equity
investments into Australia, where the investment is
structured to take advantage of the provisions of double tax
agreements. The ATO has demonstrated its willingness to
apply Australia’s general anti-avoidance provisions where
it considers that treaty shopping has occurred to obtain tax
advantages.
The ATO has expressed the view that foreign private equity
investments in Australia are generally on revenue account,
and not on capital account, because the intention is
generally to sell the investment at a later date at a profit.
Competition law and merger control
It is necessary to consider whether the establishment of the
joint venture gives rise to any Australian antitrust issues
and, in particular, whether it risks offending the prohibition
under the Competition and Consumer Act 2010 (Cth) (CCA)
in respect of anti-competitive mergers. The Australian
competition regulator, the Australian Competition and
Consumer Commission (ACCC), has the power to seek to
injunct a merger (or seek a divestiture order in relation to
a merger which has already occurred) which is likely to
substantially lessen competition in any relevant Australian
market.
Australia
The ACCC has issued merger guidelines which, broadly,
encourage notification to it of a merger for its clearance
where:
Cartel provisions
To satisfy the joint venture exception in relation to that in
respect of cartel provisions, it is necessary to establish that:
• the products of the merger parties are either substitutes or
complements and
• There is a legally binding contract in place between
the joint venture parties, which contains any relevant
cartel provisions. Practically, this means that joint
ventures between competitors must be documented in a
legally binding manner up front. It is not acceptable to
commence to engage in the joint venture conduct without
a legally binding joint venture agreement being in place.
• the post-merger firm will have a market share of greater
than 20 per cent of the relevant market.
The guidelines do not operate so as to provide any financial
safe harbour and, ultimately, it is necessary for the
parties establishing the joint venture to make their own
determination as to the need for merger clearance. As a
result, it is usual practice in Australia for parties to seek to
have their transaction cleared by the ACCC if they cannot
definitively satisfy themselves that there will not be a
substantial lessening of competition.
Clearance by the ACCC may be sought either on an informal
basis, or in a formal application. If the proposed joint venture
is likely to substantially lessen competition in the relevant
market but there are overriding public benefits likely to flow
from its establishment, it is possible to seek authorisation
of the joint venture by an application to the Australian
Competition Tribunal.
Joint venture exception to cartels and exclusionary
provisions
If a joint venture involves competitors or potential
competitors, care must be taken to ensure that the creation
and giving effect to the joint venture does not infringe any of
the cartel or exclusionary provisions in the CCA.
Cartel provisions refer to price fixing, bid rigging, market
sharing and competitors coordinating their production or
output. These provisions now potentially attract both civil
and criminal consequences, including very high maximum
penalties, and jail terms for individuals.
Exclusionary provisions to some extent overlap with cartel
provisions, and essentially are directed at prohibiting
boycotts by two or more competitors of suppliers or
customers. Infringement of exclusionary provisions attracts
high civil penalties, but not criminal penalties.
As these provisions are per se illegal, it is essential that any
joint venture involving competitors is documented so as to
attract the joint venture defences which are available to both
cartel provisions and exclusionary provisions.
• The cartel provision must be for the purpose of the joint
venture.
• The joint venture must be for the production and/or
supply of goods and services.
• The joint venture must be a true joint venture, either
incorporated or unincorporated.
In addition to satisfying the above exception for cartel
provisions, in respect of any joint venture between competitors
it is necessary to also be satisfied that the joint venture will not
breach the general prohibition in the CCA in relation to
anticompetitive contracts or arrangements. Therefore, the
parties need to be satisfied that the joint venture is not likely to
give rise to a substantial lessening of competition in any market.
This is more likely to be an issue if a joint venture involves two
large competitors.
Exclusionary provisions
The joint venture defence in relation to exclusionary
provisions is different to cartel provisions. It is less technical,
and requires that:
• there is a contract, arrangement or understanding
containing the exclusionary provisions (c.f. the cartel
provision exception, which requires a legally binding
contract)
• the exclusionary provision must be for the purpose of a
joint venture and
• the provision must not otherwise substantially lessen
competition.
As joint ventures will generally attract the potential
application of both the cartel provisions and exclusionary
provisions, both the exceptions must be satisfied. It is vitally
Norton Rose Fulbright 17
Joint ventures – protections for minority shareholders in Asia Pacific
important to document joint ventures with competitors up
front, and before giving effect to any provisions in them.
Otherwise, the cartel provision exception will not apply.
To the extent that the potential joint venture parties wish
to enter into a Memorandum of Understanding (MoU)
ahead of implementing a joint venture, it is desirable to
include a paragraph in the MoU to the effect that there is
no understanding between the parties in connection with
the creation or giving effect to a cartel provision unless and
until the parties have entered into a formal joint venture
agreement.
Financing issues
Most joint ventures in Australia are initially financed by the
shareholders’ equity. The required contributions of each
shareholder are generally dealt with in the shareholders’
agreement or the joint venture agreement. Some prefer to
continue to finance the joint venture through continued
contributions of the shareholders, generally in proportion to
each shareholder’s capital while others prefer to finance the
joint venture through loans or other financial arrangements.
Objectives and termination
It is not uncommon for joint venture documentation to
expressly limit a joint venture to only carry out certain
objectives. This is particularly the case where there are
any trade practices concerns where the shareholders may
otherwise be in competition with each other and are relying
on the joint venture exception.
Unless the joint venture has been formed for a particular
project with a defined lifespan, generally joint ventures in
Australia will not contain an express term. However, most
shareholders’ agreements will deal with circumstances
where a shareholder wishes to exit the joint venture. This
may include put and call options or drag-along and tag-along
rights.
Most shareholders’ agreements will also provide specific
termination regimes which will enable a non-defaulting
party to exercise its termination rights in circumstances
where the other party has committed a material breach and
not remedied that breach within a certain period of time, or
is the subject of an insolvency event or a change in control
event. Rather than providing termination rights, such events
could also give rise to a call option, giving the non-defaulting
party the right to acquire the defaulting party’s shares.
18 Norton Rose Fulbright
Governing law
The Australian courts will uphold the parties’ choice of
governing law and the parties are free to specify whichever
law they wish, even if that law has no connection with the
joint venture or its business. However, an Australian court
will not give effect to a choice of law made in order to evade
the application of a law which would have applied in the
absence of such choice, if that is a law of the appropriate
forum. There are also certain circumstances where the law
specified as the governing law of the joint venture will not
determine all issues which arise in connection with it. For
instance, the occupational health and safety regulations
of the jurisdiction where the work is being carried out
will apply and Australian employment law will govern all
employees working in Australia. Obligations to pay tax in
Australia will also not be affected by the choice of governing
law but will rather depend on other characteristics such as
residency of the relevant parties and the source of income.
Offshore structures
It is possible to utilise offshore structures for a joint venture
in Australia and this most commonly occurs in the case
of infrastructure projects. Offshore structures are often
utilised for tax purposes. For instance, a Bermudan joint
venture company may be used as a holding company for
a business operation or infrastructure project in Australia.
If the Bermudan joint venture company is able to provide
sufficient evidence to the ATO that it is not obliged to pay
tax in Australia, only the more generous taxation regime in
Bermuda will apply.
If using an offshore structure, parties should be aware
that the enforcement of foreign judgments in Australia
is statutorily provided for under the Foreign Judgments
Enforcement Act 1991 (Cth). However, this act is restricted
to specified countries and courts, so common law rules will
apply to the enforcement of a judgment falling outside of the
act.
Managing the investment
Veto rights, reserved matters and weighted voting
Veto rights, reserved matters and weighted voting rights
are commonly included in shareholders’ agreements in
Australia. These mechanisms are used to provide minority
shareholders control over certain matters relating to the
company. For instance, the decision to wind up the company
or substantially change the nature of the business of the
Australia
company may be reserved for the members and require a 75
per cent majority decision.
Governance
A proprietary company in Australia must have at least one
director and that director must ordinarily reside in Australia.
A proprietary company in Australia is not required to have a
secretary but, if it does have one or more secretaries, at least
one of them must ordinarily reside in Australia.
Directors of Australian companies are subject to duties
imposed by the Corporations Act and also by the general law.
As the statutory duties are based on the general law duties,
there is considerable overlap between the two sources of law.
The duties under the Corporations Act are:
•
•
•
•
•
duty of loyalty and good faith
duty of confidentiality
duty to exercise due care, diligence and skill
duty not to misuse information or position and
duty to prevent insolvent trading.
The duties under the general law include the obligation to:
• act in good faith
• use their powers and knowledge as directors for a proper
purpose (only for the benefit of the company and not for
their own benefit)
• avoid conflicts of interest and
• exercise due care, diligence and skill.
Australian proprietary companies generally operate under a
simple management structure. The shareholders’ agreement
of a joint venture company will usually stipulate how
directors are to be appointed, with board control usually
resting with the majority shareholder. Certain matters are
often reserved and decisions relating to these matters will
generally require a higher majority or minority shareholders
may have a veto right.
The Corporations Act requires large Australian proprietary
companies and small proprietary companies controlled by
foreign companies if they are not consolidated in a foreign
registered company’s accounts lodged with the Australian
Securities and Investments Commission (ASIC) to prepare
a financial report and a directors’ report for each financial
year. If at least two of the criteria below are satisfied, then the
company will be classified as a large proprietary company. If
less than 2 of the criteria are satisfied, the company will be a
small proprietary company. The criteria are:
• the consolidated revenue for the financial year of the
company and the entities it controls (if any) is A$25
million or more
• the value of the consolidated gross assets at the end of the
financial year of the company and the entities it controls
(if any) is A$12.5 million or more and
• the company and the entities it controls (if any), at the end
of the financial year, have 50 employees or more.
While a proprietary company in Australia is not required to
hold an annual general meeting, if a general meeting is to
be held, shareholders are entitled to receive notice of the
meeting. A notice of a meeting of a company’s members
must set out the place, date and time for the meeting,
state the general nature of the meeting’s business and, if a
special resolution is to be proposed at the meeting, set out
an intention to propose the special resolution and state the
resolution. Members are also entitled to access the minute
books for the meetings of its members.
The members of an Australian proprietary company may
apply to a court to make an order to inspect the books of the
company. Also, the directors of a company, or the company
by a resolution passed at a general meeting, may authorise
a member to inspect books of the company. This right could
also be included in a shareholders’ agreement.
The directors of an Australian joint venture company are
bound by their statutory and general law duties to act in
good faith and to avoid conflicts of interest in respect of the
joint venture company, regardless of who appointed them.
While there is provision in the Corporations Act to allow
directors of a wholly-owned subsidiary appointed by the
parent company to take into account the interests of the
parent company, no such provision applies for joint venture
companies. Therefore, potential conflicts of interest may
arise between a director’s duty to the joint venture company
and his or her duty to his employer. This issue may be
mitigated by ensuring that a director of the shareholder is
not also appointed a director of the joint venture company
or by including provisions in the shareholders’ agreement
which requires certain key matters to be approved at the
shareholder level.
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Joint ventures – protections for minority shareholders in Asia Pacific
Capital calls and pre-emption rights
The company’s constitution or the shareholders’ agreement
usually includes provisions which deal with capital calls and
the circumstances in which the company may seek further
funding. Generally, these provisions will be drafted so as
not to dilute each of the shareholders’ interests, normally by
requiring any capital contributions to be made in proportion
to the number of shares held by each shareholder.
The Corporations Act requires that before issuing shares of a
particular class, the directors of a proprietary company must
offer them to the existing holders of the shares of that class.
This statutory requirement is commonly waived in a
proprietary company’s constitution and replaced with a
contractual pre-emptive rights regime agreed by the parties.
Non-compete undertakings
Non-compete undertakings or restraint of trade covenants
are only enforceable in Australia to the extent that they
protect a legitimate identifiable interest of the person or
company seeking to enforce the restraint and the restraint
or covenant is no broader than is required to protect that
interest. In particular, this means that the duration and
geographical area in respect of which the non-compete
undertakings are to apply should be considered and be no
more extensive than is required and is appropriate to protect
such legitimate identifiable interest.
Realising the investment
Deriving income
There are no restrictions on Australian and foreign currencies
being brought into or sent out of Australia. Restrictions may
sometimes be imposed for foreign policy reasons, but not
normally for economic reasons. Some international transfers
of funds must be reported to the Australian Transaction
Reports and Analysis Centre under the Financial Transaction
Reports Act 1988 (Cth) but this is aimed at detecting tax
evasion and identifying the proceeds of crime, rather than at
exchange control.
The Corporations Act imposes a “solvency test” for the
declaration of dividends. A company may only pay a
dividend if:
• the company’s assets exceed its liabilities immediately
before the dividend is declared and the excess is sufficient
for the payment of the dividend
20 Norton Rose Fulbright
• the payment of the dividend is fair and reasonable to the
company’s shareholders as a whole and
• the payment of the dividend does not materially prejudice
the company’s ability to pay its creditors.
There are no restrictions on the creation of classes of shares
in Australia but a company may issue preference shares only
if the rights attached to the preference shares with respect
to repayment of capital, participation in surplus assets and
profits, cumulative and non-cumulative dividends, voting
and priority of payment of capital and dividends in relation
to other shares or classes of preference shares are set out in
the company’s constitution (if any) or have otherwise been
approved by special resolution of the company (requiring a
75 per cent shareholder majority).
Realising capital (transfer restrictions)
Transfers of shares are not perfected until the transferee’s
name is entered on the register of members. The directors
of the company are not required to register a transfer of
shares in the company unless the transfer and any share
certificate have been lodged at the company’s registered
office, any fee payable on registration of the transfer has
been paid and the directors have been given any further
information they reasonably require to establish the right
of the person transferring the shares to make the transfer.
Other than these conditions, so long as the transfer is made
under a proper instrument of transfer, there are no other
statutory restrictions on the transfer of shares in a company
in Australia.
If a party is contemplating purchasing shares in an existing
company, it should take into consideration the provisions
of the Corporations Act which cover unsolicited offers. Any
unsolicited offers where the offeror is not in a personal or
business relationship with the offeree prior to the making
of the offer to purchase shares or other financial products
must comply with the Corporations Act. In particular, the
offer must include the price at which the offeror wishes to
purchase the shares or other financial products and a fair
estimate of the value of the shares or product as at the date
of the offer, and an explanation of the basis on which that
estimate was made. These provisions are aimed at protecting
minority shareholders who may be the target of unsolicited
“low ball” offers.
Australia
The Corporations Act also allows for compulsory acquisition
in certain circumstances. Therefore, there is a risk that a
shareholder with less than ten per cent of the shares can be
“squeezed out” whether it likes it or not by a shareholder
with 90 per cent of the securities in the relevant class.
The Corporations Act includes protections for minority
shareholders in these circumstances. Essentially, there is
a general compulsory acquisition power for shareholders
who hold (together with related bodies corporate) beneficial
interests in at least 90 per cent of the securities (by number)
of that class or have voting power in the company of at
least 90 per cent and hold (together with related bodies
corporate) full beneficial interest in at least 90 per cent by
value of all the securities in the company. As a protection
for minority shareholders, any compulsory acquisition
notice by a shareholder must be accompanied by an expert’s
report which must state whether, in the expert’s opinion,
the terms proposed in the notice give fair value for the
securities concerned and set out the reasons for forming that
opinion. The compulsory acquisitions provisions can only
be exercised within six months of the 90 per cent holder
becoming a 90 per cent holder so a ten per cent holder
may be able to obtain assurances that the power won’t be
exercised via a “standstill” arrangement or similar in the
joint venture agreement.
Deadlock and termination provisions
It is not unusual for shareholders’ agreements to include
procedures for the resolution of deadlocks. Often these
procedures will provide for a right of a shareholder to offer
to purchase the other shareholders’ shares in the event of
a deadlock which offer to purchase may also be deemed
an offer to sell its own shares in the company. If this does
not resolve the deadlock, the shareholders may request the
company secretary to take action to place the company in
liquidation. Drag-along and tag-along rights are also fairly
common in Australian shareholder agreements. These are
generally drafted in the form of put and call options to
ensure that no agreement exists for the sale of the shares
before the option is exercised. Otherwise, capital gains tax
consequences could arise on entry into the agreement, or
whenever the conditions for the tag-along or drag-along
rights are satisfied.
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Joint ventures – protections for minority shareholders in Asia Pacific
22 Norton Rose Fulbright
China
Joint ventures – protections for minority shareholders in Asia Pacific
China
Making the investment
Foreign ownership control
Restrictions on foreign ownership in China are principally
imposed through China’s Foreign Investment Industrial
Guidance Catalogue (most recently revised in 2011) (the
Investment Catalogue). The Investment Catalogue classifies
certain foreign investment into China as “Encouraged”,
“Restricted” or “Prohibited”, depending on the industry sector.
Activities not listed in the Investment Catalogue fall into a
fourth category, which are treated as “Permitted” industries.
Foreign entities cannot invest in Prohibited industries.
Examples of Prohibited industries include gambling and
media industries like news agencies, books and newspaper
publication. Foreign investment in a Restricted category
industry means that the foreign investor may need to seek a
higher level government approval at a lower value threshold
(compared to investments in Permitted and Encouraged
categories). Typically, where the total amount of investment
is equal to or exceeds US$300 million for investments in the
Permitted and Encouraged category industries, approval
will need to be obtained from the national-level Ministry
of Commerce (MOFCOM). In the case of investments in the
Restricted category, the foreign investor will need to seek
approval from the national-level MOFCOM where the total
investment amount is equal to or exceeds US$50 million.
There may also be restrictions on the stake which the foreign
investor may take. For instance, in the case of a life insurance
company established in China, the foreign interest must not
exceed 50 per cent. In the case of a securities company, the
foreign interest may not exceed 33 per cent. It should be
noted that even if the foreign investment is an Encouraged
industry, the foreign party may not be permitted to be sole
owner of the project company. For instance, construction
and operation of nuclear power stations is in the Encouraged
category, but Chinese shareholders must have a controlling
interest in the project company.
The approval process, the type of investment vehicle which
can be used and the permitted level of foreign ownership will
depend on the categorization of the investment under the
Investment Catalogue. In addition, shareholding restrictions
and other requirements (such as qualifications of the
investor or licences), may also be set out in industry-specific
regulations.
24 Norton Rose Fulbright
A new version of the Investment Catalogue was jointly issued
by the National Development and Reform Commission (NDRC)
and MOFCOM on 29 December 2011 (the New Catalogue). The
New Catalogue came into effect on 30 January 2012 and its
previous version issued in 2007 ceased to be effective
simultaneously. The New Catalogue includes more
environmentally-friendly and high-end industries in the
Encouraged category compared to the 2007 version. Industries
included as Encouraged in previous versions of the Investment
Catalogue which are no longer considered environmentallyfriendly or high-end have been removed from that category.
Generally, the New Catalogue is more focused on encouraging
foreign investment in industries involving alternative energy
resources, new methods of energy utilisation, energy efficiency,
R&D and high/new technologies. It also sends a clear message
that China will continue opening up its market to foreign
investment and at the same time demonstrates China’s
attempts to leverage foreign investment to upgrade its own
industrial abilities.
The limited liability equity joint venture company (EJV) is
by far the most commonly used investment vehicle for joint
ventures in China. The other option is a vehicle called the
cooperative joint venture company (CJV). The main difference
between the two is that a CJV generally does not have legal
person status and offers greater flexibility for the parties to
decide the terms of the investment and the distribution of
profits to investors. Approval of CJVs is, however, becoming
increasingly difficult to obtain, which is the reason EJVs
are now normally preferred. For the purposes of this guide,
references to a joint venture company are to an EJV unless
otherwise specified.
Qualification as a foreign-invested enterprise
Under PRC law, foreign-invested enterprises (FIEs) and
domestic enterprises are treated differently in many respects.
A joint venture company in which the foreign shareholding
is less than 25 per cent will not enjoy the same rights as a
FIE, although the regulatory approval procedures governing
the incorporation of FIEs would still apply. Although the
enterprise income tax laws applicable to FIEs and domestic
companies have been unified since 1 January 2008 and the
preferential tax treatment applicable to FIEs will be phased
out by the end of 2012, certain regions of China offer other
incentives to FIEs to attract foreign investment. In addition,
FIEs are in a much better position to obtain foreign debt
financing than their domestic counterparts.
China
In general, a FIE having 25 per cent or more of its equity
interest held by a foreign shareholder is able to borrow
foreign debt from its offshore shareholder or a third party.
This offers an additional platform for the FIE to access
external financing. The amount of such foreign debt
incurred by FIEs is subject to a limit which is normally called
the “borrowing gap”. The borrowing gap represents the
difference between the total investment and the registered
capital of the FIE. “Total investment” means the total amount
of money that will be required to operate the business or
develop the project as contemplated by the investor; and
the “registered capital” refers to the capital contribution
that the investor will pay out of its own resources. These two
figures must be set out in the FIE’s articles of association and
approved by the relevant approval authority in the PRC.
A foreign debt falling within the borrowing gap of an FIE
needs to be registered with State Administration of Foreign
Exchange (SAFE) within 15 days after the loan agreement is
signed.
In contrast, prior approval from SAFE is required for a
domestic enterprise (including an FIE in which the foreign
equity interest falls below 25 per cent) wishing to borrow
foreign debt. In practice such approval is difficult to obtain.
Therefore, foreign shareholding of at least 25 per cent in
a joint venture company is generally advisable unless an
investment at that level is restricted by the Investment
Catalogue or industry-specific regulations.
Bilateral treaty protection
China has entered into bilateral investment treaties (BITs)
with more than 130 countries. These BITs generally follow a
similar form and contain the following key features:
• They espouse the general principle of encouraging crossborder investment.
• They prescribe the State’s treatment of foreign investment,
which may be different according to the countries with
whom the BITs are made. In general terms, three levels
are recognised: fair and equitable treatment, national
treatment and most-favoured treatment.
• They envisage compensation for the expropriation of
assets in China, which includes “efficient” and “prompt”
compensation in certain newly signed BITs.
• They respect the transfer of foreign currency, which
normally includes a guarantee of being able to transfer
profits out of the host state.
• They contain provisions for the enforcement of these
protections in a neutral forum and the recognition
of dispute resolution provisions generally, such as
international arbitration, subject to the principle of the
“exhaustion of local remedies”.
Statutory minority protection and conflicts with
shareholder agreements
Statutory minority protection can be found in PRC company
law and in the laws and regulations governing joint ventures.
Particular care should be taken to ensure that shareholders’
agreements (and other constitutional documents) do not
conflict with the statutory requirements or restrictions,
as such contractual provisions may be invalid and
unenforceable.
The protections offered to minority shareholders by the
PRC company law (which is generally considered also to be
available to shareholders of a foreign invested joint venture
company) are as follows:
• all shareholders are entitled to copies of the articles of
association, minutes of shareholders’ meetings, board
resolutions, resolutions of the board of supervisors and
the financial accounts/reports of the company
• in the following situations, a shareholder who votes
against the relevant decisions may request the company
to purchase its equity interest in the company at a
reasonable price (and seek remedy through court
proceedings if no agreement is reached regarding such
purchase):
—— no dividends having been distributed to shareholders
for five consecutive years if the company has made
profits during that period and is in a position to
distribute dividends lawfully
—— the merger or division of the company or a transfer of
its material assets
—— a decision being made by shareholders not to dissolve
a company after the expiry of the company’s business
term or the occurrence of any other situations which
should trigger dissolution of the company
Norton Rose Fulbright 25
Joint ventures – protections for minority shareholders in Asia Pacific
• if directors, supervisors and/or other senior managerial
personnel of a company act contrary to the company’s
interest, shareholders are entitled to commence
proceedings (ie, a derivative action) against such
individuals if the company itself fails to take any action
• in the last financial year: (a) the combined total turnover
within the PRC of all the undertakings participating in the
concentration exceeded RMB 2 billion, and (b) at least two
of these undertakings each had a turnover of more than
RMB 400 million within the PRC.
• if directors and senior managerial personnel of the
company violate laws, regulations and/or the articles of
association of the company in a manner which prejudices
shareholders’ interests, the relevant shareholders are
entitled to commence proceedings against such individuals
directly.
Parties reaching the above thresholds must notify the
Antimonopoly Bureau of MOFCOM and obtain its clearance
before implementing the proposed transaction. Even when the
thresholds are not met, the Antimonopoly Bureau retains the
discretion to investigate any concentrations which may have
the effect of restricting or eliminating competition in the PRC.
Issues commonly encountered by a foreign or
domestic minority shareholder
All joint ventures that meet the concentration thresholds
set out above must be notified to MOFCOM. For example,
if a greenfield joint venture is to be established between a
PRC party and a foreign party both with group turnover of
more than RMB 400 million within the PRC, and the foreign
party had worldwide turnover exceeding RMB 10 billion, the
proposed joint venture would need to be notified.
There is no mechanism under PRC law which operates to
transfer employees by operation of law from the transferor
to the transferee on a sale or transfer of assets/business.
The existing employment contracts between the transferor
and the relevant employees (Transferring Employees) will
have to be terminated and new employment contracts will
have to be entered into by the Transferring Employees and
the transferee. As such, the express written consent of each
Transferring Employee would be required. If an employee
does not wish to be transferred, the transferor may continue
with the employment relationship or terminate his/her
employment contract in accordance with the applicable PRC
laws and the specific terms and conditions of the relevant
employment contract.
Once a merger notification is accepted, the Antimonopoly
Bureau has 30 days to complete the first phase review, at the
end of which it will either clear the transaction or, if it still
has doubt about potential anticompetitive effects, proceed
with a 90 day second phase review, which can be extended
by another 60 days. If a decision is not reached within the
above time limits, the transaction is deemed cleared and the
parties can proceed.
Employment
It should also be noted that in order for an expatriate
employee to work legally in China, certain procedures must
be completed by the onshore company and the expatriate
employee to secure the necessary visas and work permits.
Competition law and merger control
China’s Antimonopoly Law has introduced a comprehensive
competition merger control regime that imposes a mandatory
pre-merger clearance requirement for business concentrations
(ie, mergers and acquisitions of control) where:
• in the last financial year: (a) the combined total worldwide
turnover of all undertakings participating in the
concentration exceeded RMB 10 billion, and (b) at least
two of these undertakings each had a turnover of more
than RMB 400 million within the PRC or
26 Norton Rose Fulbright
In practice, the above timetable tends to be extended
significantly. This is because the Antimonopoly Bureau has
a strict policy with regard to the information required for
notification: it can refuse to accept a merger notification on
the ground that the information provided is incomplete and
time limits for formal review would not apply until officials
are satisfied that the notification documents are complete.
Parties are strongly encouraged to file an advance draft
notification before making a formal filing and to engage in
pre-filing discussions with the Antimonopoly Bureau.
Failure to notify a notifiable transaction and implementation
without proper merger approval may lead to the unwinding
of a completed transaction and/or fines of up to RMB
500,000.
China
National security review
With effect from 5 March 2011, foreign investments in
China are subject to the additional regulatory requirement
of national security review, which finds its legal basis in
Article 31 of the Antimonopoly Law. The parallel process
of security review applies to joint ventures which take any
of the prescribed forms of “foreign acquisition of domestic
enterprises” and which involve industries related to national
security, including military and national defence activities,
important agricultural production, infrastructure and key
technology.
Parties to transactions falling within the scope of a security
review will need to apply to MOFCOM for a security review,
regardless of the parties’ scale or the transaction value.
After the application is considered complete and accepted,
MOFCOM will within 15 working days determine whether a
full security review is required and, if so, refer the case to the
inter-agency panel for a substantive review within the next
five working days. In the absence of such written notice upon
expiry of the 15-day time limit the applicant and relevant
parties may proceed with the transaction. The panel, led
by MOFCOM and the NDRC and joined by relevant industry
regulators, will adopt a two-phase approach (30 working
days plus 60 working days) to examine the impact of the
transaction on national security. However, if it fails to reach
a conclusion at the end of the 90 working days period the
case will be referred to the State Council for a final resolution
– the time limit for which is not stipulated. MOFCOM and
the relevant sector regulators may require a transaction
considered to have a significant impact on national security
to be terminated or modified in order to eliminate such
impact.
The national security review regime will certainly affect
the structure and timetable of the closing of transactions
falling within the ambit of security review regulations. The
security review regulation is also unclear in certain aspects
including the definition of key sectors which we expect will
be further elaborated. How this regulation will be interpreted
and implemented in practice remains to be seen. Again, it
is advisable for parties, in particular foreign investors, to
consult with MOFCOM before proceeding with a transaction
which appears to come within the security review regime.
Objectives and termination
The business term of the company is normally set out in its
articles of association and shown on its business licence. The
shareholders (and/or board of directors in the case of EJVs
and CJVs) may decide to continue the business operation
of the company beyond its business term in which case an
application should be submitted to the competent regulatory
authorities for an extension of the company’s business term.
If the parties decide not to extend the business term, they
may instead apply to the competent authorities to liquidate
the company and distribute the remaining assets (if any).
The liquidation process can be very time-consuming as
it will involve regulatory approvals (if the company is an
FIE), notification to creditors, the evaluation of assets and
distribution to creditors, fulfilment of various regulatory
deregistration procedures requiring the involvement of the
tax authority, customs authority and eventually the company
registration authority.
In addition to commonly adopted contractual termination
events, PRC laws and regulations relating to joint ventures
stipulate various circumstances which may lead to the
termination of a shareholders’ agreement and the dissolution
of the joint venture company, such as:
• the business term of the joint venture company expires
• the joint venture company suffers serious loss (due to
force majeure or otherwise), which makes it unable to
continue its operations
• one party fails to perform the shareholders’ agreement or
articles of association, making the joint venture company
unable to continue its operations
• the joint venture company fails to achieve the objectives
initially set for its establishment in circumstances which
are unlikely to improve.
PRC law allows the shareholders to provide contractually
for the termination of the shareholders’ agreement in
certain circumstances. In addition to provisions allowing
for termination by mutual agreement of the shareholders,
or in circumstances when the shareholders are in breach
of the agreement or are insolvent, additional contractual
termination events may include:
• the introduction of a new law or regulation preventing
any party from collecting dividends in freely convertible
foreign currency and remitting such payments outside of
the PRC
• the scope of business of the joint venture company being
adversely affected by the promulgation of any new laws
or regulations resulting in the joint venture company not
being able to operate as originally envisaged.
Norton Rose Fulbright 27
Joint ventures – protections for minority shareholders in Asia Pacific
Governing law
Governance
• Sino-foreign joint venture contracts (whether EJV or CJV)
PRC company law provides that a director of a company owes
duties of fidelity and diligence to the company and must not
conduct any of the following activities:
The following contracts in respect of foreign investment must
be governed by PRC law:
• equity transfer contracts in respect of the acquisition of an
equity interest in an FIE (even if all parties to the contract
are foreign parties)
• contracts for the acquisition of an equity interest (or the
subscription for increased registered capital) in a domestic
enterprise by foreign investor(s)
• contracts for the acquisition of assets from a domestic
enterprise.
Offshore structures
Although it is possible for a Chinese party and foreign parties
to establish their joint venture entity in offshore jurisdictions
such as Hong Kong, BVI and the Cayman Islands, before
using the offshore entity to set up a legal entity in China,
investors should be aware that this type of arrangement
raises some complexities. It is likely to require the PRC
investor to seek approval from central MOFCOM. In practice
it has been very difficult for a PRC investor to obtain such
central MOFCOM approval and as a result offshore ownership
structures are less common for joint ventures. However,
when a number of foreign investors wish to invest in a joint
venture in China, they may consider first teaming up offshore
and using this offshore structure to act as the foreign investor
in the Chinese joint venture.
Managing the investment
Veto rights, reserved matters and weighted voting
PRC law requires certain decisions and matters relating to
a joint venture company to be approved unanimously by
the board of directors present at a duly convened board
meeting. These matters include amendments to the articles
of association, dissolution of the company, increases or
reductions of the company’s registered capital and the
merger of the company with another company. The parties
may agree contractually on a range of other matters which
must be approved by the board of which the quorum
must comprise director(s) appointed by any particular
shareholder(s).
28 Norton Rose Fulbright
PRC law has no particular requirements concerning the
nationality or residency of directors.
• misappropriating the company’s funds
• depositing the company’s funds into an account under his
own name or any other individual’s name
• without consent given by a shareholders’ meeting or, as
applicable, the board of directors, lending the company’s
funds to a third party or granting security over the assets
of the company in respect of the obligations of a third
party
• entering into a contract or trading with the company in
breach of the articles of association of the company or in
the absence of the requisite shareholder consent
• without consent of the shareholders, diverting business
opportunities which should belong to the company for the
benefit of himself or anyone else, or operating a similar
business to that of the company for himself or any other
parties
• taking commissions for transactions entered into by and
between the company and other parties
• disclosing the company’s confidential information
without due authorisation
• any other misconduct which breaches the fiduciary duties
of directors.
Income derived from any misconduct mentioned above is
deemed to belong to the company. The relevant director must
compensate the company for loss or damage incurred as a
result of his misconduct.
The highest decision-making body of an EJV is its board of
directors (or the board of directors or the joint management
committee in the case of a CJV) appointed by the
shareholders. There is no shareholders’ general meeting in
an EJV. The board must comprise a minimum of three and
a maximum of 13 directors appointed by the shareholders.
The proportion of directors appointed by each shareholder
China
should generally mirror the respective shareholding ratios
in the company although, within reasonable limits, it is
possible for parties to agree otherwise.
A foreign invested joint venture company must additionally
have at least one supervisor or a board of supervisors
(including at least three supervisors) in place to supervise
the board of directors and senior management in the
performance of their duties.
The powers and decision-making procedures of the board
of directors and the rights of any supervisory body should
be detailed in the joint venture agreement and articles of
association of the company. In practice, supervisors and
boards of supervisors have limited, advisory, roles.
Board meetings of a joint venture company must be held at
least once per calendar year. An interim board meeting may
be convened if proposed by at least one third of the directors.
The requisite quorum for a duly convened board meeting is
at least two thirds of the directors.
All shareholders are entitled to review and receive a copy of
the articles of association, shareholders’ meeting minutes,
board resolutions, resolutions of the board of supervisors
and financial accounts/reports of the company. PRC law does
not preclude shareholders from receiving a broader range of
information about the financial and business matters of the
company.
Pre-emption rights
The general principle of PRC company law is that
shareholders are entitled to subscribe for registered
capital increases (the equivalent of issuing new shares) in
accordance with their respective actual capital contribution
ratios at the time of such capital increase, unless otherwise
agreed by the parties. This principle can be modified
contractually. Accordingly, it is sensible to deal with preemption rights on capital increases explicitly in the joint
venture contract. The company law also provides for
pre-emption rights of shareholders but generally allow the
parties to agree on more elaborate terms in the articles of
association.
PRC regulations governing EJVs also deal with pre-emption
rights on equity transfers but offer less flexibility. Under
these regulations a shareholder may transfer all or part of
its equity interest to a third party provided that: (a) the other
shareholders have been offered but decided not to exercise
their pre-emption rights to buy such equity interest; and
(b) the other shareholders have given their consent to the
transfer to the third party. Any transfer made in breach of
these conditions will be invalid. Although these rules cannot
be modified contractually, it is normal to include preemption provisions in the joint venture contract. Sometimes
the joint venture contract will also attempt to deal with
the difficult situation that could arise where the other
shareholders do not take up the offers of equity interest, but
also do not consent to the transfer, by providing that if the
other shareholders do not accept the offers within a specified
period they will be deemed to have given their consent
and waived pre-emption rights. The effectiveness of such
provisions is not entirely clear.
Non-compete undertakings
Historically, PRC law has had no specific restrictions on
the enforceability of non-compete undertakings. Generally
speaking, parties were free to include non-competition
clauses in shareholders’ agreements or joint venture
contracts. However, since the coming into force of the
Antimonopoly Law in 2008, there is a general prohibition
of agreements that restrict competition in the PRC, unless
the agreements present certain redeeming benefits.
Although there has so far been no case law on the point, if
the PRC courts and the authorities in charge of enforcing
the Antimonopoly Law follow the EU precedent, on which
the Antimonopoly Law is largely modelled, non-compete
arrangements among parties to a joint venture may be
considered to contravene the Antimonopoly Law if they are
not necessary to bring about the benefits of the joint venture.
For example, a non-compete clause concluded among
the shareholders with a product or geographic scope that
exceeds the activities of the joint venture may be deemed as
restricting competition.
Realising the investment
Deriving income
China maintains tight foreign exchange controls. Before a FIE
can declare and pay dividends to its foreign investor, it must
satisfy the following conditions:
• the FIE must first have made up any losses incurred by
it in previous years of operation and allocated a certain
proportion of its after-tax profits to its statutory enterprise
funds as specified under the applicable PRC laws and
regulations
• the distributable profits of the current year must have
been audited by a certified public accountant in China
Norton Rose Fulbright 29
Joint ventures – protections for minority shareholders in Asia Pacific
• the registered capital of the FIE must have been paid-up
in accordance with any timetable set out in its approved
articles of association
the audited accounts or assets appraisal report of the target
company at the time when the equity transfer actually takes
place.
• a board/shareholder(s) resolution must be passed to
declare dividends
On the liquidation of a PRC company, generally speaking,
the remaining assets (after repayment to the creditors)
of the company must be distributed to the shareholders
in accordance with their respective shareholdings in the
company. After fulfilment of the regulatory liquidation and
deregistration procedures, the company will cease to exist.
• the FIE must have paid all due taxes in full.
To remit dividends lawfully to a foreign investor, the
remittance of dividends must be verified by a PRC bank
authorised by SAFE. For this purpose, the FIE will need to
submit to its bank an application letter for the declaration
and payment of dividends, the foreign exchange registration
certificate of the FIE, and a number of other documents
which evidence that the FIE has satisfied all the conditions
for dividend payments.
Unless a more preferential tax rate is available under any
reciprocal tax treaties, under the Enterprise Income Tax
Law, repatriation of profits by foreign investors is subject to
withholding tax at a rate of ten per cent in China.
As a general principle governing dividend distribution
under PRC company law, the shareholders are entitled
to dividends in accordance with their respective actual
capital contribution ratios in the registered capital of
the invested company unless otherwise agreed by all
shareholders (in which case the dividend distribution may
be disproportionate to the shareholders’ capital contribution
ratios). However, under the laws and regulations relating
to joint ventures, the profits of an EJV must be distributed
strictly in proportion to each shareholder’s equity
investment.
Realising capital
As mentioned above, where a shareholder of a limited
liability company wishes to transfer its shares, PRC law
provides a statutory right of first refusal for the remaining
shareholders. The transferor must first offer its equity interest
to the existing shareholders and the equity interest may
not be transferred to a third party on terms and conditions
more favourable to the third party purchaser than those first
offered to the other shareholders. A transfer of an equity
interest in an FIE requires governmental approvals in the
PRC. Complexities arise if the equity is to be transferred at a
pre-determined price as the PRC regulatory authorities may
withhold approval if the transfer price is unreasonably lower,
or substantially higher, than the “equity value” as shown on
30 Norton Rose Fulbright
Deadlock and termination provisions
Sino-foreign joint ventures contracts commonly address
the consequences if the parties are unable to agree on
key identified business matters commonly referred to as a
“deadlock” situation.
However, the implementation of put and call options as a
way of resolving such a deadlock may encounter problems
in the PRC as regulatory approvals will be required for
the equity transfer resulting from the exercise of a put
or call option. A pre-determined price (or even a pricing
mechanism) may not be approved if the resulting price is
unreasonably lower, or substantially higher, than the equity
value of the equity interest to be transferred. In addition,
the cooperation of all parties is required to prepare, sign
and deliver the documents (which have to be submitted for
approval) in connection with the exercise of the put or call
option. The party exercising the put or call option may have
to seek remedies from an appropriate dispute resolution
forum if the other party (and/or the company controlled by
the other party) declines to provide any such cooperation.
More complications arise if the other party is a state-owned
enterprise as the disposal of state-owned assets (and the
acquisition of such assets) may require approval of the Stateowned Assets Supervision and Administration Commission
(or its authorised local counterparts) and a public bidding
procedure may be required under PRC laws and regulations.
Foreign investors may be unable to exercise a call option
if the target company is operating in an industry which
restricts foreign investment to the extent that any increase of
foreign shareholding would breach such restrictions.
Drag and tag provisions are also seen in Sino-foreign joint
venture contracts in the PRC. The implementation of drag
and tag provisions face similar difficulties as those that arise
from put or call options. But in general PRC law is more
compatible with drag and tag provisions as compared to call
and put options.
Hong Kong
Joint ventures – protections for minority shareholders in Asia Pacific
Hong Kong
Making the investment
Foreign ownership and control
Hong Kong is one of the most open economies in the world to
foreign investment. There are no generally applicable
restrictions on the level of foreign ownership of Hong Kong
companies or businesses. However, investment in some
business sectors (for example, banking and insurance) may
need authorisation from the relevant regulatory body.
Broadcasting is the only sector where foreign ownership
is restricted. Prior approval is required for the holding,
acquisition or exercise of voting control by non-resident
investors of two per cent or more of a television licensee.
The Broadcasting Authority will rarely give its approval
where this would involve control or management of the
licensee being exercised outside Hong Kong. In addition,
the Broadcasting Ordinance includes provisions which
weaken the influence of a foreign shareholder in certain
circumstances.
Foreign ownership of companies licensed to provide audio
broadcasting services is limited to 49 per cent. There are no
exemptions from this restriction.
Bilateral investment treaties
Hong Kong has a number of bilateral investment treaties in
place. However, because there are no general restrictions on
foreign ownership and because of Hong Kong’s developed
legal system and strong rule of law, investors tend to be less
concerned about bringing their investment within the scope
of a BIT.
Statutory minority protection and conflicts with
shareholder agreements
Hong Kong company law is predicated on the basis of
majority rule. Accordingly, a shareholder of a Hong Kong
company who holds more than 50 per cent of the voting
rights and the right to appoint the majority of the board of
directors is capable of controlling the company. However,
the parties to a shareholders’ agreement have a free right of
contract. Therefore, where the shareholdings are unequal,
it is relatively common to see weighted voting rights or
the inclusion of a list of “reserved matters” which require
the approval of the minority shareholder (at board or
shareholder level) or a special majority vote.
32 Norton Rose Fulbright
Where no minority protections are provided by contract,
the Companies Ordinance of Hong Kong includes certain
minimum shareholder rights designed to protect a minority
shareholder. These include:
• The right of any shareholder to be notified of general
meetings of the company and to attend and vote.
Shareholders holding 2.5 per cent or more of the voting
rights or numbering more than 50 can requisition for
a resolution to be considered at the company’s annual
general meeting. There is also a right for shareholders
holding five per cent or more of the voting rights, to
requisition an extraordinary general meeting.
• The requirement for certain matters to be passed by
special resolution (ie, a 75 per cent majority of the votes
cast). Those matters include alterations to the company’s
constitutional documents, increases or reductions in
share capital and a change of name. The ability of a
shareholder holding more than 25 per cent to block a
special resolution is known as “negative control”.
• The right not to be unfairly prejudiced. Any shareholder
who believes that the affairs of the company are being
or have been conducted in a manner which is unfairly
prejudicial to the members generally or some part of
the members (including himself) can apply for a court
order. The court will make whatever order it sees fit. This
may include an injunction, an order that proceedings
be brought against the wrongdoer in the name of the
company, an order for winding up or an order for the
purchase of the shares of the innocent party. It may also
order damages to be paid. Unfair prejudice actions are
rare in practice due to the complexity and expense of
bringing a claim.
• The right to bring an action on behalf of the company if
a misfeasance is being (or has been) committed against
the company and the company has failed to bring the
action itself. “Misfeasance” is defined as fraud, negligence
or default in compliance with any enactment or rule
of law, or breach of duty (and will usually involve the
act or omission of a director). As with a claim for unfair
prejudice, the court may make any order it sees fit. The
leave of the court is required to bring a claim. Like unfair
prejudice actions, the procedure is lengthy and potentially
expensive.
Hong Kong
In addition, a minority shareholder has a common law right
to bring an action where a company does something which is
illegal or outside the company’s powers (ultra vires) or which
comprises a fraud on the minority or in certain other limited
circumstances.
The statutory and common law protections for minority
shareholders described above are relatively limited and
take time and involve expense to enforce. Therefore the
parties almost always seek additional contractual protection
through a shareholders’ agreement, as well as in the articles
of association.
A minority shareholder will, on the whole, be better
protected under a shareholders’ agreement than it would be
if it relied solely on the articles of association to define its
rights. Additionally, since the shareholders’ agreement is a
private document (while the articles of association must be
filed with the Registrar of Companies in Hong Kong and are
therefore public), the shareholders may prefer not to put all
the detailed contractual provisions into the articles and rely
instead on the shareholders’ agreement alone. It is common
for the parties to agree that in the event of inconsistency, the
shareholders’ agreement will prevail over the articles.
Issues commonly encountered by a foreign or
domestic minority shareholder
Employment
In keeping with Hong Kong’s free market principles, Hong
Kong companies enjoy a relatively unrestricted employment
environment when compared to other developed economies.
Where an overseas investor intends to second or transfer
employees to a joint venture, those employees will need a
work visa to take up employment in Hong Kong, unless they
are permanent residents of Hong Kong. Applications for work
visas must be sponsored (usually by the employing company
in Hong Kong) but historically, have not been difficult to
obtain for skilled workers.
Where a joint venture partner transfers a business to a
joint venture company, then the employees engaged in the
business do not transfer automatically and their employment
must be separately terminated by the old employer with the
employees re-engaged by the joint venture company. This
is a relatively time-consuming procedure and presents risks
in terms of the ability to transfer the whole workforce to the
new employer.
Competition law and merger control
On 14 June 2012, Hong Kong adopted its first crosssector Competition Ordinance which is expected to
come into operation within the next two years. Once in
force, the Competition Ordinance will replace sectorspecific competition rules that currently exist under the
Telecommunications Ordinance and the Broadcasting
Ordinance.
The Telecommunications Ordinance and the Broadcasting
Ordinance, which are now governed by the Communications
Authority, prohibit licensees in the telecommunications and
broadcasting sectors from engaging in conduct that has the
purpose or effect of preventing, distorting or substantially
restricting competition in the relevant markets. When the
Competition Ordinance becomes effective, the licensees will
be subject to the new conduct rules like other undertakings,
namely, the prohibition of anticompetitive agreements and
of abuse of a significant degree of market power that has
the object or effect of preventing, restricting and distorting
competition in Hong Kong. In addition, the Competition
Ordinance introduces a specific prohibition of exploitative
conduct by dominant licensees in the telecommunications
market.
The telecommunications sector is the only sector where
competition merger control applies. Transactions leading
to changes in shareholder voting rights in carrier licensees
are subject to review by the Communications Authority. The
changes subject to merger control are:
• the acquisition by one or more parties of more than 30 or
50 per cent of the voting shares of a carrier licensee
• the acquisition by one or more parties of the power to
control a carrier licensee and
• the acquisition by one or more parties who hold more
than five per cent of the voting shares of another carrier
licensee or who control another carrier licensee, of more
than 15 per cent but less than 30 per cent of the voting
shares of a carrier licensee.
In such circumstances, the Communications Authority has the
power to review the transaction, and parties have the option to
seek prior consent from the Communications Authority. As part
of its review, the Communications Authority will assess whether
the transaction leads to any substantial lessening of competition
in any relevant telecommunications markets, and if so, direct
the licensees to take actions to eliminate or avoid such effect.
Norton Rose Fulbright 33
Joint ventures – protections for minority shareholders in Asia Pacific
The Competition Ordinance will not introduce any
comprehensive merger control regime; it expressly provides
that the conduct rules are not to be applied to merger
activities. Nevertheless, the Competition Ordinance preserves
merger control in the telecommunications sector, adapting
existing rules to a new set of rules which are more in line
with international standards and look to the substantive
control relationships between transaction parties to decide
whether merger control applies.
Tax
Hong Kong is a low tax jurisdiction. There is no capital
gains tax, inheritance tax, estate duty, value added tax or
goods and services tax. The taxes that are currently levied
in Hong Kong are profits tax, salaries tax, property tax
and stamp duty. Profits tax (currently set at 16.5 per cent
for corporations) and salaries tax (currently charged at a
maximum flat rate of 15 per cent) are low by international
standards. Profits tax is payable on all assessable profits
derived from a trade, profession or business, which have a
Hong Kong source. Receipts of a capital nature and dividends
are not subject to Hong Kong profits tax. Expenses are
generally deductible to the extent that they are incurred in
the production of profits that are chargeable to tax.
A joint venture partner who transfers Hong Kong real
estate to a new joint venture company (whether as part of
a business or not) must pay stamp duty on the property
transfer or lease. The maximum duty payable on a sale or
transfer of real property is currently 4.25 per cent. The duty
payable on a lease is between 0.25 per cent and 0.1 per
cent of the yearly (or average yearly) rent. When a minority
shareholder transfers Hong Kong stock, then 0.1 per cent
of the consideration (or its value) is payable by the seller as
stamp duty on the contract note. A further 0.1 per cent is
paid by the buyer. These rates of stamp duty are significant
and can influence the structure of a joint venture transaction.
Financing issues
Most joint ventures are initially financed by the shareholders’
equity contributions and shareholder loans. Further issues of
shares will be dilutive unless all shareholders are offered an
allocation pro rata to their existing shareholdings and are in
a position to take that offer up. It is therefore common for the
parties to agree that a bank loan will be the preferred source
of any further funding.
34 Norton Rose Fulbright
Objectives and termination
Unless the joint venture is being established for a particular
project, most Hong Kong joint ventures will not be expressly
limited in duration although they may provide for the parties
to agree to work towards a particular exit route (such as a
trade sale or an IPO) within a certain time frame. In addition,
there may be a point at which one party wishes to exit
the venture (and realise its investment or stem its losses)
while the other would prefer to continue. It is therefore
not uncommon to include in the shareholders’ agreement,
procedures that will apply in those circumstances although a
minority shareholder’s bargaining position to insist on such
provisions may be limited.
In any event, it would be normal for a shareholders’
agreement to provide that where a party has committed a
material breach of the joint venture agreement, then the
non-defaulting party may be given a put or call option, in
these circumstances, sometimes exercisable at a discount to
fair value. Where a party becomes insolvent or undergoes a
change of control, the other party may be given a call option,
giving it a right to acquire the defaulting party’s shares.
Governing law
The Hong Kong courts will uphold the parties’ choice of
governing law of a contract, provided it is made expressly
and does not contradict public policy. The parties are free
to specify whatever law they choose, even if that law has no
connection with the joint venture or its business. However,
there are circumstances where the law which governs
a contract will not determine all issues which arise in
connection with it. For example, certain Hong Kong statutory
provisions relating to employment and insolvency cannot be
avoided by choosing a foreign governing law.
Offshore structures
Hong Kong joint venture companies are commonly used
as holding companies for a business operation based
in Mainland China or elsewhere in the region. In those
circumstances, the Hong Kong tax exposure will be very
limited, as the company’s only income is likely to be
dividend income (which is not taxable in Hong Kong). The
most common alternative is to use a company incorporated
in the British Virgin Islands or the Cayman Islands. These
jurisdictions offer slightly more flexible laws and fewer
disclosure requirements. However, the benefits are often
outweighed by the presentational advantages of using a
holding company incorporated in the Greater China region.
Hong Kong
Managing the investment
Veto rights, reserved matters and weighted voting
Veto rights and weighted voting rights are commonly used
in Hong Kong, as contractual mechanisms to give a minority
shareholder a level of control over key matters concerning
the business and operations of the joint venture. There are no
restrictions or limitations on their use at law.
Governance
There are no general statutory nationality or residency
requirements relating to the directors of a Hong Kong
incorporated private company. There is a requirement for
the company secretary to be resident in Hong Kong, but in
practice this requirement is often fulfilled by appointing
a local Hong Kong company (often a specialist company
secretarial service provider) to this position.
There are different rules for companies engaged in certain
broadcasting activities. In addition, the Listing Rules impose
specific requirements on companies (wherever incorporated)
which are listed in Hong Kong.
The principal common law duties of the directors of a Hong
Kong company are:
• to exercise due care and skill
• to act bona fide in the best interests of the company
• to exercise their powers for a proper purpose
• to avoid conflicts of interest between their duties as
directors and their personal interests.
These are common law duties and are not currently codified.
There are government proposals to codify the first of these
into a statutory duty (contained in the Companies Ordinance)
to “exercise reasonable care, skill and diligence”. This will
replace the common law duty. The other three (fiduciary)
duties are unlikely to be codified.
Hong Kong incorporated private companies usually operate
a simple management structure. The board of a joint
venture company usually consists of appointees of each
of the shareholders, with board control usually resting
with the majority shareholder, except in relation to certain
reserved matters, where the minority shareholder may have
weighted voting rights or a veto right. The chairman and
chief executive or finance director’s position may also be
specifically allocated (often to the majority shareholder).
All shareholders of a Hong Kong incorporated company are
entitled, by law, to receive notice of any general meeting
of the company provided they have supplied an address
in Hong Kong to which such notice can be sent. The notice
must specify the place, date and time of the meeting and the
nature of any non-routine business. The notice of a meeting
at which the company’s accounts are to be approved by the
members (usually the Annual General Meeting) must be
accompanied by a copy of the audited accounts. This is the
only financial information that is available to a shareholder
by law as there is no general right of inspection of the
company’s books by a member. It is common, therefore, for
a shareholders’ agreement as a minimum to give the parties
contractual rights to inspect the books and records of the
joint venture company.
The directors of a joint venture company enjoy full rights
of access to the joint venture company’s business and
financial information including monthly management
accounts. However, a director who has been appointed as a
shareholder’s nominee would normally be prevented by his
fiduciary duties to the joint venture company, from disclosing
that information to his or her appointing shareholder. It is
therefore normal to include a contractual provision giving
such a director the right to disclose information to and
discuss the affairs of the joint venture company with, his
or her appointing shareholder. In return, the shareholder
usually undertakes to keep that information confidential.
The directors of a Hong Kong joint venture company are
bound by their fiduciary duties to act in the best interests of
the joint venture company, regardless of who appointed them.
This often leads to potential conflicts of interest between a
director’s duty to the joint venture company and his or her
duty to his employer. The issue is often addressed by including
a provision in the shareholders’ agreement which requires
certain key matters to be approved at shareholder level. There
are no problems with this approach under Hong Kong law.
Capital calls and pre-emption rights
The articles of association of a joint venture company
usually include provisions for further funding aimed at
avoiding dilution of each of the shareholder’s interests. The
parties may agree that the first port of call for new funding
will be a bank loan or new shareholder loans. Further
capital contributions may be excluded contractually as a
Norton Rose Fulbright 35
Joint ventures – protections for minority shareholders in Asia Pacific
source of funding, particularly where one of the parties is
financially weaker than the other. However, if further capital
contributions are envisaged, the articles or the shareholders’
agreement should specifically entitle the existing
shareholders to apply for a pro rata allocation of any new
shares, based on their existing shareholding. This is because
there is no statutory right of this nature in Hong Kong.
Non-compete undertakings
At present, the main concern in relation to restrictive
covenants (including non-compete undertakings) is that
they should not risk being interpreted as being in restraint of
trade under common law and thus unenforceable. In general
terms, this means that the restriction should be reasonably
necessary (in terms of geographic extent and length of time)
to protect the legitimate business interests of the party
concerned.
The newly enacted Competition Ordinance expressly
excludes from its scope all agreements bringing about
mergers (including the establishment of a joint venture). It
remains unclear however whether ancillary non-compete
provisions, such as those included in a shareholders’
agreement, will also be exempted or if they need to
be compatible with the statutory prohibition on anticompetitive agreements.
At this early stage it may be prudent for parties to design
their ancillary restraints in a way that complies with the
provisions of the Competition Ordinance. The general
prohibition on anti-competitive agreements is subject to
several exclusions and exemptions, one of them being that
the agreement is indispensable to improving economic
efficiencies and does not eliminate competition in respect of
a substantial part of the products in question. If the relevant
provisions of the Competition Ordinance are interpreted
consistently with foreign competition law rules, non-compete
undertakings among parents of a joint venture may be
considered to contravene the statutory prohibition if they are
not necessary to bring about the benefits of the joint venture.
For example, a non-compete clause concluded among
the shareholders with a product or geographic scope that
exceeds the activities of the joint venture may be considered
to restrict competition.
A party who expects to benefit from a non-compete
undertaking would be well advised to take specific legal
advice on the provision’s compatibility with both the
common law principle and the Competition Ordinance. In
addition, there are some drafting techniques that can to
some extent mitigate the risks in this difficult area.
36 Norton Rose Fulbright
Realising the investment
Deriving income
There are no exchange controls in Hong Kong.
The only legal restriction on the payment of dividends is
the Companies Ordinance requirement that they must be
made out of “profits available for distribution” – that is,
accumulated, realised profits less accumulated, realised
losses. However, it is fairly common to see a provision in the
articles or shareholders’ agreement which obliges the joint
venture company to pay out dividends to the extent that it
has adequate working capital and it is legally able to do so.
It is also relatively common to see Hong Kong joint venture
companies issuing two or more classes of shares with
different dividend or voting rights or different rights on a
return of capital. The company’s articles of association must
authorise the issue of shares with different share rights and
if not, they must be amended to permit this. The articles
usually provide that an ordinary resolution (ie, simple
majority) is sufficient to create a new class of shares. Certain
statutory requirements must also be fulfilled. For example,
the resolution creating the shares must be filed with the
Companies Registry and every share certificate must detail
the different share classes.
Warrants (ie, rights to subscribe for new shares) are
sometimes issued by Hong Kong joint venture companies
particularly in venture capital or private equity transactions.
However, the new Companies Ordinance is expected to
repeal the power to issue warrants as they are perceived to
present significant money laundering risks.
Realising capital (transfer restrictions)
Hong Kong law imposes no restrictions on the transfer of
shares, except in relation to certain regulated industries,
where the approval of the regulator may be necessary. The
parties are free to impose whatever restrictions they wish by
contract. This is usually done in the articles of association of
the joint venture company or in the shareholders’ agreement
(or in both) by way of contractual pre-emption rights.
Deadlock and termination provisions
Where neither party to a joint venture has voting control
(as would be the case with a 50:50 venture) it is common
to see some sort of procedure for the resolution of deadlock
included in the shareholders’ agreement. Deadlock can also
occur in a split-interest joint venture in relation to reserved
matters, where the minority shareholder has weighted voting
rights or a right of veto.
Hong Kong
In Hong Kong it is common to include provisions for the
resolution of deadlock at management level. For example,
the chairman or a non-executive director of the joint
venture company may be given a casting vote or the matter
may be referred to an independent expert. However, the
most effective solution in practice, may be to require
the deadlock to be referred to each shareholder’s chief
executive or chairman because this will focus the efforts of
the management team responsible for the joint venture on
resolving the deadlock.
The shareholders’ agreement does not always make further
provision where deadlock cannot be resolved using any of
these methods. Put and call options, while presenting no
particular issues under Hong Kong law, carry some practical
risks. The parties may be motivated to “engineer” a deadlock
to trigger such options. To try and address some of the risks
of engineered deadlock, such provisions may be drafted in
the form of “Russian roulette” or “Texan/Mexican shoot-out”
provisions. These are put and call options which incorporate
detailed mechanisms aimed at ensuring that one party buys
out the other at a fair price.
Drag-along and tag-along provisions present no difficulties
under Hong Kong law and are commonly included in
shareholders’ agreements, particularly in split-interest joint
ventures, to deal with the situation where one party wishes
to exit and the other party does not. Drag-along rights enable
an exiting shareholder (usually the majority shareholder) to
require the other (usually the minority shareholder) to sell
out to the same buyer on the same terms. Tag-along rights
prevent a shareholder (usually the majority shareholder)
from selling out unless the buyer also offers to buy the other
(usually, minority) shareholder’s interest on the same terms.
Norton Rose Fulbright 37
Joint ventures – protections for minority shareholders in Asia Pacific
38 Norton Rose Fulbright
India
Joint ventures – protections for minority shareholders in Asia Pacific
India
Contributed by Bharucha & Partners
Making the investment
Foreign ownership and control
Foreign investment into India and exchange control are
governed by the Industrial Policy (which is issued by
the Indian Government from time to time), the Foreign
Exchange Management Act 1999 (FEMA), the regulations
issued under FEMA (FEMA Regulations) and the Foreign
Direct Investment (FDI) Policy issued by the Department of
Industrial Policy and Promotion (DIPP) every six months.
The Indian regulatory authorities that administer the
regulations governing foreign investment in Indian securities
are the Foreign Investment Promotion Board (FIPB), DIPP
and the Reserve Bank of India (RBI), the Central Bank.
Certain industries have industry specific regulators, such
as the Insurance Regulatory and Development Authority
(IRDA), which regulates the insurance sector, and the
Telecom Regulatory Authority of India, which regulates the
telecommunications sector.
FDI, whether by way of subscription for new shares or
by way of an acquisition of existing shares of an Indian
company, is permitted in most industries without prior
approval from the FIPB or the RBI subject to compliance with
certain conditions including those relating to sectoral caps
and pricing, as described further below.
Circumstances in which prior FIPB/RBI approval is required
for an investment by way of an acquisition of existing shares
of an Indian company by a non Indian person include the
following:
• an acquisition of shares of a company in the financial
sector such as a bank, a non-banking financial company
or an insurance company
• the transfer of ownership or control of a target company
from a resident to a non-resident in certain sectors such
as defence production, air transport services, ground
handling services, asset reconstruction companies, private
sector banking, broadcasting, commodity exchanges,
credit information companies, insurance, print media,
telecommunications and satellites.
The FEMA Regulations and the FDI Policy classify foreign
investment into different categories depending on the
industry sector. The particular sector of industry into which
investment is to be made will affect the permitted level of
40 Norton Rose Fulbright
foreign ownership. In addition, other restrictions such as
licensing obligations may also be imposed through industry
specific regulations.
Prohibited activities: FDI in certain sectors, including the
following, is strictly prohibited:
•
•
•
•
retail trading (except single brand product retailing)
atomic energy
gambling and betting
lottery businesses.
Automatic Route: foreign ownership of up to 100 per cent of
the share capital of an Indian company is permitted in most
sectors without the prior approval of the RBI or the FIPB.
Government Approval Route: In certain sectors such as
financial institutions (eg, banks), foreign ownership of up
to a specified percentage of the share capital of an Indian
company is permitted, subject to the prior approval of the
FIPB or the Secretariat of Industrial Assistance, DIPP.
It should also be noted that downstream investments by
Indian companies which are owned or controlled by a
non-resident shareholder into other Indian companies are
subject to the same FDI restrictions as those set out above.
A company is considered to be owned by non-resident
entities if more than 50 per cent of the equity interest in
it is beneficially owned by non-residents. A company is
“controlled” by non-resident entities if such non-residents
have the power to appoint a majority of its directors.
Whilst generally there are no specific exemptions from the
sectoral caps and other restrictions for any specific class
of investors, exemptions from certain restrictions may be
available to entities registered as foreign venture capital
investors (a specific category of non-resident investor
required to be registered with SEBI).
Bilateral investment treaties
The Government of India has entered into Bilateral
Investment Promotion & Protection Agreements (BIPA)
with 82 countries out of which 72 BIPAs have already come
into force and the remaining agreements are in the process
of coming into force (those in force include Indonesia,
Mauritius, the United Kingdom, Vietnam and China).
The important features of the BIPAs signed by India are:
India
• they apply to all investments made by the investors of one
contracting party in the territory of the other contracting
party in accordance with applicable laws and regulations
• the term “investment” is defined broadly to include
every kind of asset including shares in the stocks and
debentures of a company and any other similar forms of
participation in a company
• they provide that investments and returns of the investors
of each contracting party shall at all times be accorded
fair and equitable treatment in the territory of the other
contracting party
• they guarantee that the investments from the contracting
parties will receive treatment at least as favourable as the
treatment which the host country grants to investments by
nationals and companies from any third State
• each contracting party is to permit all funds of an investor
of the other contracting party related to an investment
in its territory to be freely transferred, without any
unreasonable delay and on a non-discriminatory basis.
Such funds may include:
• capital and additional capital amounts used to maintain
and increase investments
• net operating profits including dividends and interests in
proportion to their shareholdings
• repayments of any loan, including interest, relating to the
investment
• payment of royalties and service fees relating to the
investment
• proceeds from sales of shares
• proceeds received by investors in case of sale or partial
sale or liquidation
• the earnings of citizens/nationals of one contracting
party who work in connection with the investments in the
territory of the other contracting party.
All such transfers are permitted in the currency of the
original investment at the current exchange rate prevailing in
the market on the date of transfer.
BIPAs contain elaborate provisions for the resolution of
disputes between the investor and a contracting party as
well as between the contracting parties. In the former case,
flexibility is provided for settlement of disputes either under
the domestic laws or under international arbitration. In
the latter case, if the dispute relates to the interpretation or
application of the agreement, it is, as far as possible, to be
settled through negotiations. If it is not settled within six
months from the time the dispute arises, it is to be submitted
to an Arbitral Tribunal. The decision of the tribunal is
binding on both the contracting parties.
Statutory minority protection and conflicts with
shareholder agreements
Sections 397 to 409 of the Companies Act of India 1956
(Companies Act) deal with the prevention of oppression and
mismanagement in Indian companies.
Members of a company have a right to apply to the
Company Law Board (CLB) for relief from oppression and
mismanagement if they believe that:
• the affairs of the company are being conducted in a
manner prejudicial to the interests of the company or the
public, or in a manner oppressive to any member(s) or
• a material change, which is not a change brought about
by or in the interest of any creditors or shareholders of the
company, has taken place in the management or control
of the company due to which it is likely that the affairs of
the company will be conducted in a manner prejudicial to
public interest or to the interests of the company.
In cases of a company having a share capital, these
complaints can be made by either:
• at least 100 members or ten per cent of the total number
of members, whichever is the lesser or
• any member or members who together hold not less than
ten per cent of the paid-up capital of the company.
If the CLB accepts the complaints, it can pass such orders as
it deems fit including with respect to (a) the regulation of the
conduct of the company’s affairs in future, (b) the purchase
of shares or interests of members by other members or by
the company, (c) the termination or modification of any
agreement between the company and its directors, manager
or any other person, and (d) any other matter for which in
the opinion of the CLB, it is just and equitable that provision
should be made.
Norton Rose Fulbright 41
Joint ventures – protections for minority shareholders in Asia Pacific
A similar number of members may apply to the CLB on
similar grounds and seek an order from the CLB to directing
the Central Government that a specified number of directors
be appointed to the board to prevent the mismanagement
of the company. On the grant of such an order, the Central
Government may appoint the directors for a specific period
of time.
Under Section 235 of the Companies Act, shareholders may
make an application requesting the CLB to investigate the
affairs of the company. If the CLB is satisfied that the affairs
of the company ought to be investigated and on a declaration
being made to that effect, the Central Government will
appoint one or more inspectors to investigate the company
and to submit a report in accordance with its directions. The
application can be made:
In case of a company having a share capital, by
• 200 or more members or
• members holding ten per cent or more of the total voting
power in the company.
Under Section 243 of the Companies Act, if the Central
Government, on investigation of the affairs of the company
is of the view that the business of the company is being
conducted with a view to defrauding its creditors, members
or any other persons for any fraudulent or unlawful purpose,
or in a manner oppressive to any of its members or that the
persons concerned in the formation or management of the
company are guilty of fraud, misfeasance or misconduct
towards the company or its members, then the Central
Government may direct any person to present a petition for
winding up of the company to the CLB on the grounds that it
is just and equitable to do so or make an application for relief
from oppression and mismanagement or both.
Issues commonly encountered by a foreign or
domestic minority shareholder
Competition law and merger control
The Competition Act, 2002 (Competition Act), which aims
to prevent practices having an adverse effect on competition
and to promote and sustain competition in the market, has
been brought into force in stages. Whilst the provisions of
the Competition Act on anti-competitive agreements and
abuse of dominant position came into effect in May 2009,
the merger control provisions came into effect from 1 June
2011. The Competition Act is enforced by the Competition
Commission of India (CCI) and the Competition Appellate
42 Norton Rose Fulbright
Tribunal. The Government has announced plans to subject
transactions in the banking sector to the review of the
Reserve Bank of India and not to the CCI.
The Competition Act will affect joint ventures differently
depending on whether they are incorporated or not. Of
relevance to unincorporated joint ventures, the Competition
Act prohibits an enterprise(s) or person(s) or association
of enterprises or persons from entering into any agreement
in respect of production, supply, distribution, storage,
acquisition or control of goods or provision of services,
which causes or is likely to cause an appreciable adverse
effect on competition within India. However, the prohibition
does not apply in cases of agreements entered into by way
of joint ventures if such agreement increases efficiency in
production, supply, distribution, storage, acquisition or
control of goods or provision of services.
Investments in incorporated joint ventures may be subject
to merger control requirements. Mandatory pre-merger/
acquisition clearance is required in India all for mergers and
acquisitions if (i) the transaction qualifies as a “combination”
and (ii) the parties to the transaction meet the relevant
turnover or assets criteria.
Under the Competition Act, a combination refers to any
merger or amalgamation of enterprises as well as any
acquisition by an enterprise or an individual of shares, voting
rights, assets or control in an enterprise. In contrast to what
is the case under merger rules in many other jurisdictions,
there is no minimum threshold in the amount of shares
or voting rights being acquired and even acquisitions
of minority equity stakes qualify as a “combination” for
purposes of the Competition Act. Investments in joint
ventures will thus also qualify as “combinations”.
Mandatory pre-merger clearance is required in India if the
parties to the combination meet any of the following assets
or turnover thresholds.
The following principles appear to apply in the calculation of
the merger thresholds:
• “Parties” refers to the acquiring legal entity and the target
in the case of an acquisition; in the case of a merger or
amalgamation, the parties are the merging parties or the
enterprise created as a result of the amalgamation.
• For the purpose of determining whether the “corporate
group” thresholds are met, the turnover or assets must
India
Thresholds for parties
Thresholds for corporate groups
In India
Worldwide
In India
Worldwide
Value of
combined assets
INR15 billion
US$750 million, of which at least
INR7.5 billion in India
INR60 billion
US$3 billion, of which at least
INR7.5 billion in India
Value of
combined turnover
INR45 billion
US$2.25 billion ,of which at least
INR22.5 billion in India
INR180 billion
US$9 billion, of which at least
INR22.5 billion in India
include all companies in which the parent company
of the group is able to: (i) exercise 50 per cent or more
of the voting rights, (this 50 per cent threshold applies
for a temporary period of five years from 1 June 2011.
Afterwards, it will likely be brought down to 26 per cent
as provided for in the Competition Act.) (ii) appoint more
than half of the board of directors, or (iii) “control the
management or affairs” of the company in question.
Acquisitions involving a target whose assets are below
INR 2.5 billion in India or whose sales are below INR 7.5
billion in India are exempted from the merger notification
requirement (this exemption applies for a temporary
period of five years from 1 June 2011). This exemption only
applies in relation to the enterprise “whose control, shares,
voting rights or assets are being acquired”. The exemption
would not be available to parties involved in mergers and
amalgamations.
A transaction which falls within any of the above thresholds
must be notified to the CCI within 30 days of signing the
transaction documentation or board approval for the merger
(whichever is the earlier). Under the Competition Act, the
review period can last up to 210 days from the date when
a complete filing has been made with the CCI. However,
the CCI will endeavour to pass an order or issue directions
within 180 days. However, this is not a strict timeline since
the Competition Act still provides for a period of up to 210
days for passing an order. No combination can take effect
until the CCI has granted approval. Where the CCI issues no
decision within the statutory review period, the combination
is deemed to be approved. The substantive test for the
merger review is whether a combination is likely to have an
appreciable adverse effect on competition within the relevant
market in India. So far, the CCI has been consistently
approving cases in less than 30 days’ time.
Under the Competition Act, the CCI has the power to impose
fines of up to one per cent of the total turnover or assets of
the parties involved (whichever is higher) for violations of
the merger control rules. In addition, failure to comply with
orders or directions of the CCI can be fined an amount of
up to INR100,000 for each day during which such noncompliance occurs, subject to a maximum of INR100 million.
Further, non-compliance with the orders of the CCI will be
punishable with imprisonment for a term of up to three years
or with a fine of up to INR 250 million, or both.
Objectives and termination
Typically, shareholders’ agreements provide that the
agreement will cease to bind a shareholder when such
shareholder ceases to hold any shares (or a stipulated
minimum percentage of shares) in the company. Other
common events of default resulting in termination are
change of control of a shareholder, insolvency events
affecting a shareholder and material breach of the joint
venture arrangements. The defaulting shareholder is
typically required to sell its shares to the non – defaulting
shareholder at a prescribed price or in accordance with a
prescribed price formula. Alternatively, the non-defaulting
shareholder may be entitled to sell its shares to the
defaulting shareholder. In this context, the FEMA rules
relating to the price at which a transfer of shares between
residents and non-residents can be effected must be
considered.
Governing law
Where the parties have expressly chosen the governing law,
the choice would be enforceable provided that the intention
expressed is bona fide and legal and there are no grounds for
avoiding the choice on the grounds of public policy.
Offshore structures
Choosing the best offshore jurisdiction to invest into
India requires a careful consideration of the benefits and
drawbacks of investing through the relevant jurisdiction.
Often one of the main drivers for the use of such offshore
structures is taxation considerations. Typically such offshore
structures involve the establishment of special purpose
vehicles in certain jurisdictions with which India has
beneficial tax treaties and investment through such special
purpose vehicles into Indian joint venture companies.
Several countries have double taxation avoidance
agreements (DTAA) in place with India, but Mauritius and
Norton Rose Fulbright 43
Joint ventures – protections for minority shareholders in Asia Pacific
Singapore are currently the main offshore jurisdictions from
which investment into India is routed. It is less common to
see offshore structures where the joint venture company
(in which the foreign shareholder has an interest) itself is
situated outside India.
• the articles of association should authorise the issue of
shares with differential voting rights
Vodafone International Holdings B.V. vs. Union of India &
Anr. is a recent case which is relevant in the context of the
offshore structures described above. The main issue in the
Vodafone Case was, where a transfer of shares of a company
(holding an indirect shareholding interest in an Indian
company) takes place outside India and between two nonresidents – whether such transfer would be subject to capital
gains tax (on any capital gains arising on such transfer)
on the basis that such company holds a direct or indirect
interest in an Indian company. On a strict reading of the law
applicable at the time of the Vodafone case, capital gains
tax was only payable on a direct transfer of Indian shares.
The Bombay High Court held that capital gains tax would
arise on the basis that the subject matter of transfer in this
case was not just the shares of the non-resident companies
but underlying assets situated in India. This was reversed by
the Supreme Court in its recent verdict. The Court ruled that
Indian authorities cannot bring to tax the consideration in
respect of a sale of offshore assets from one person resident
outside India to another such person merely because the
offshore asset relates to shares of an Indian company.
However, the Government has now amended the tax laws
to make such offshore transactions taxable in India with
retrospective effect.
• the issue of such shares should be approved by a special
resolution (passed by a 75 per cent majority) of the
shareholders
Managing the investment
Veto rights, reserved matters and weighted voting
rights
Differential voting rights
Whilst an Indian public limited company can have only two
types of share capital, ie, equity share capital or preference
share capital, a private company may have more than
two classes of shares, carrying varying rights as to voting,
dividend and liquidation preference. Equity share capital of
a public limited company, with differential rights in respect
of voting and dividend is subject to the Companies Issue of
Share Capital with Differential Voting Rights Rules, 2001 (the
Rules). The Rules require the following conditions (among
other conditions) to be complied with in order for equity
shares to carry “differential voting rights” which is defined as
rights as to dividend or voting:
44 Norton Rose Fulbright
• the company should have distributable profits for three
financial years preceding the year of issue of the shares
• the total number of shares issued with differential voting
rights should not exceed 25 per cent of the total share
capital of the company.
Where a foreign investor has any differential rights as
to voting, such voting rights will be considered towards
calculating the permitted foreign investment limits.
Veto rights
Negative veto rights in respect of identified “reserved
matters” are commonly drafted in shareholders’ agreements
for private and unlisted public limited companies and
these rights are enforceable as a matter of Indian law. Any
negative veto rights which a foreign investor may have in an
Indian private or unlisted public limited company will not be
considered towards foreign investment limits, ie, the investor
will not be deemed to be in “control” for the purposes of
foreign investment laws. “Control” is defined as the power to
appoint a majority of the directors in a company for purposes
of foreign investment laws. However, specific advice should
be taken as a broader “control” test may be relevant in
certain regulatory contexts.
Governance
There are no statutory nationality or residency requirements
relating to the directors of a company incorporated in India,
although there may be certain industry specific regulations
which require the management of the relevant company to
be in “Indian hands” (for example, the telecommunications
sector). While there are no nationality requirements
applicable to company secretaries, the Company Secretaries
Act, 1980 stipulates that the Central Government or the
Institute of Company Secretaries in India may stipulate
certain additional requirements for non-residents desiring to
practise as company secretaries in India.
The general scope of directors’ duties is not codified. However,
the principal duties of directors have been recognised under
common law and, among others, include duties to:
India
• exercise due skill, care and diligence
• not compete against the company and to act bona fide in
the best interests of the company
• disclose conflicts of interest
• maintain confidentiality
• not to make secret profits and to make good losses, if they
occur due to breach of duty, negligence, etc
• comply with statutory or other regulatory requirements
(including special requirements applicable to that
company)
• not abrogate responsibility.
Directors also have fiduciary duties towards the company
and must act in the interest of and for the benefit of the
company.
Breach by the director of his duties may make him/her liable
to the company for both civil and criminal consequences
depending on the nature of the breach and the statutory
provisions involved.
No agreement or the articles can exempt a director from
or indemnify him against any liability which would attach
to him at law, for negligence, breach of trust, or the like.
However, the articles can permit the company to indemnify
a director against any liability incurred by him in defending
any proceedings, civil or criminal if any of the following
apply:
• the proceedings are decided in his favour
• he is acquitted or discharged by the court or
• the court relieves him of liability on the basis that he acted
honestly and reasonably and that having regard to all the
circumstances of the case, including those connected with
his appointment, he ought to be excused.
Board management and supervisory structures: every
company in India has a unitary board structure. Although
the boards of listed companies are required to comprise
a certain proportion of non-executive and independent
directors, no such constraints apply to private limited
companies. In the case of a joint venture company, the board
of directors will generally comprise appointees or nominees
of the shareholders.
It is common for a company’s articles to delegate the
management of its affairs to its board of directors. However,
certain decisions must be taken by the general meeting
of shareholders. The board can also specifically delegate
some of its powers to committees comprising of one or more
directors or other authorised personnel to manage certain
operations.
The Companies Act requires that every company must
disclose certain key business and financial information to its
shareholders. Every shareholder of a company is entitled to
receive a copy of the balance sheet, including the profit and
loss account and auditors’ report, at least twenty-one days
prior to the date that it is laid before the company in general
meeting. The Companies Act also provides that other books
and records of the company such as the registers of directors
and charges should be kept open for inspection by any
shareholder of the company.
There are other circumstances where a company must
disclose information to its shareholders, the public and/or
to regulatory bodies. Some of these disclosure obligations
are periodic while others are triggered by specific events or
developments. Disclosure obligations which are applicable to
all companies include the following:
• every company must disclose information relating to its
assets and liabilities, financial results, money expended
and received, and such other information specifically
provided for in the Companies Act
• changes in the company’s capital structure, memorandum
and articles must be made public
• the appointment and resignation of directors
• the creation of a charge over the company’s assets, and
any modification or satisfaction of that charge, must be
notified to the specified authorities
• all material information in relation to any special
resolution to be passed at a general meeting must be
made available to all shareholders eligible to attend the
meeting.
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Joint ventures – protections for minority shareholders in Asia Pacific
Notwithstanding these statutory obligations, it is common
for shareholders’ agreements to specify periodic financial
and operations information to be generated by the joint
venture company and supplied to its shareholders.
Just as with all companies regulated by the Companies Act,
there is an implicit duty on the directors of an Indian joint
venture company to act in the best interests of the joint
venture company. This may result in a conflict of interest
between a director’s duty to the joint venture company and
his or her duty to the shareholder which nominated him
for appointment. It is common to include a provision in the
shareholders’ agreement which requires certain key matters
(where there may be a potential conflict of interest) to be
approved at shareholder level. The Companies Act does not
restrict the inclusion of such a provision.
Capital calls and pre-emption rights
Section 81 of the Companies Act provides for any shares
offered in a further issue of shares by a public limited
company to be first offered to all the existing shareholders
of the company on a pro-rata basis. However, these preemption rights can be disapplied and shares can be allotted
to any person, whether an existing shareholder or not, if a
special resolution of the shareholders (by a three – fourths
majority) is passed to this effect or where no such resolution
is passed, the votes cast in favour of such proposal are more
than the votes against it and Central Government’s approval
is obtained in that respect. This rule is not applicable to a
private limited company which, by a resolution of its board
of directors, may freely issue shares to any person.
If the company is engaged in a sector where the permissible
foreign investment is capped, then the minority non-resident
shareholder may not be able to participate in a further issue
of shares by the Company to all the shareholders unless
all shareholders take up their shares according to their
pro-rata entitlement. Also, certain sectoral and foreign
exchange regulations impose restrictions on the issue of
certain instruments such as non-convertible debentures and
warrants to foreign shareholders of a company, despite the
rights available to such shareholders under Section 81 of the
Companies Act.
Where a majority shareholder is able to pass a special
resolution (by a 75 per cent majority), it would be able
to procure the issue of further shares and thereby dilute
the minority shareholder’s interest (unless the minority
shareholder has a veto right on a further issue of shares).
46 Norton Rose Fulbright
Where bank finance is sought from foreign lenders,
regulations on external commercial borrowings (ECB) would
be applicable, which prescribe restrictions on the principal
amount of the loan and interest as well as eligibility criteria
for lenders/borrowers.
Non-compete undertakings
Section 27 of the Indian Contract Act 1872 states that every
agreement by which anyone is restrained from exercising a
lawful profession, trade or business of any kind, is to that
extent void, provided that where the goodwill of a business
is sold, the seller may agree with the buyer to refrain from
carrying on a similar business, within specified local limits,
so long as the buyer carries on a similar business and
provided that the limits appear to the court to be reasonable,
regard being had to the nature of the business.
The Indian courts have held that where the restriction
protects a legitimate interest and where the restraint is
reasonable (with reference to the parties and the interests of
the public), the restraint may be allowed. Thus, restrictions
which are reasonably necessary to protect the legitimate
interests of contracting parties may be allowed.
Realising the investment
Deriving income
Dividends cannot be declared or paid by a company for any
financial year except out of profits of the company for that
year after providing for depreciation; or out of profits of
the company for any previous financial year or years after
providing for depreciation and remaining undistributed; or
out of both. No dividend can be declared or paid by a company
for a relevant financial year out of the profits of the company
for that year except after transferring an amount up to ten per
cent of the profits of such year to the reserves of the company.
Exchange control restrictions: Dividends paid by Indian
companies to non-resident shareholders as well as the
proceeds of sale of securities issued by an Indian company
are freely repatriable (net of taxes payable) through an
authorised dealer bank subject to certain sector specific
policies (for example, proceeds from a divestment of shares
in the construction and development sector may not be
repatriated for a period of three years from the date of the
original investment, ie, the date on which the entire amount
was brought in as foreign direct investment).
India
The maximum permissible dividend that can be paid on
preference shares is 300 basis points above the State Bank
of India’s prime lending rate from time to time. The prime
lending rate system is no longer in use in India and base
rates are now used. However, since the provisions of the
FEMA have not been amended, it is not clear as to whether
calculation will be made with reference to base rate.
Foreign investment is typically made in the following types
of instruments:
• Equity shares: defined as all shares which are not
“preference shares”.
• Preference shares: the two characteristics of preference
shares are: (a) they carry a preferential right to a fixed
amount or a fixed rate of dividend; and (b) they carry a
preferential right to repayment of capital on a winding up
or repayment of capital.
• Compulsorily convertible preference shares (CCPS):
CCPS are preference shares which are compulsorily
convertible into equity shares after a specified time period.
The maximum permitted tenure for CCPS is 20 years.
The general view is that CCPS cannot be redeemed, the
rationale being that redemption would result in the CCPS
being extinguished prior to conversion (though there are
differing views on this). Investment in CCPS is treated
as investment in the equity share capital of a company
for the purposes of FDI and the FEMA Regulations and
is therefore, subject to the same investment restrictions
as applicable to investment in the equity share capital
of Indian companies. It should be noted that optionally
convertible, partially convertible or non-convertible
preference shares are treated as debt instruments and are
subject to various restrictions applicable to ECB, imposed
by the RBI. Investment in optionally convertible, partially
convertible or non-convertible preference shares is not
included for the purposes of calculation of FDI limits.
• Compulsorily convertible debentures/fully convertible
debentures (CCD/FCD) which are subject to the same FDI
conditions/restrictions as CCPS (as described above).
• Foreign currency convertible bonds (FCCB): these are
bonds (denominated in foreign currency) issued in
accordance with the Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depositary Receipt
Mechanism) Scheme, 1993. FCCBs are issued to nonresidents in foreign currency and are convertible into
equity shares of the issuing company (including on the
basis of equity related warrants attached to such FCCB).
• Warrants: generally, instruments which are convertible
into equity shares. Prior approval of the FIPB is required
for the issue of warrants, irrespective of the sector. Whilst
granting approval, the FIPB generally stipulates that the
warrants should be exercised within twelve months of
their issue.
Realising capital (transfer restrictions)
Whilst Indian law imposes no restrictions on the transfer
of shares (leaving aside FDI or regulatory constraints), any
restrictions on a transfer of shares which are not specified
in the articles of association do not bind the company,
the shareholders and third parties (V.B. Rangaraj vs V.B.
Gopalakrishnan and Others AIR 1992 SC 453). This principle
applies to public companies and private companies. There
has been a recent decision of the Bombay High Court which
held that a private arrangement imposing a restriction on
transfer is enforceable unless barred by the Articles. However
the Supreme Court’s decision in Rangaraj is still the law on
this point.
Any approvals which may be required for transfers of shares
from a resident to a non-resident in certain situations
(described in the section on Foreign ownership and control
above) should be considered. Also, restrictions on the price
at which shares can be transferred between residents and
non-residents (described below) should be considered in the
context of transfer restrictions.
Acquisitions of shares or other instruments convertible into
equity by a non-resident investor are subject to restrictions
on the price at which such shares or convertible securities
may be acquired.
Acquisition of shares in a joint venture company by a
non-resident through a subscription for new shares
Indian law stipulates a minimum price at which a nonresident investor can acquire shares in an Indian company
by subscription. Different rules apply to companies listed
on the Indian Stock Exchange, but in the case of an issue
of shares by an unlisted company: the price is arrived at
on the basis of a fair valuation of shares undertaken by a
category 1 merchant banker registered with the Securities
Exchange Board of India or a chartered accountant, using the
“discounted free cash flow” methodology (the Unlisted Share
Price).
Norton Rose Fulbright 47
Joint ventures – protections for minority shareholders in Asia Pacific
Transfer of existing shares from a resident to a nonresident
Indian law also stipulates a minimum price at which a nonresident investor can acquire existing shares in an Indian
unlisted company from a resident transferor, being the
Unlisted Share Price, as described above.
Transfer of existing shares from a non-resident to a
resident
Indian law stipulates a maximum price at which a resident
investor can acquire existing shares of an Indian company
from a non-resident transferor, being the Unlisted Share
Price, as described above.
Pricing of convertible instruments
The conversion price or the formula for conversion (taking
future performance into consideration) for any convertible
instruments should be determined at the time of issue of such
instruments and that the conversion price should not be lower
than the Unlisted Share Price or the price at which companies
listed on an Indian Stock Exchange can issue shares, in each
case, as applicable when such instruments are issued.
Deadlock and termination provisions
Drag along and tag along rights are fairly common in Indian
shareholder agreements. However any regulatory approvals
which may be required for transfers of shares from a resident
to a non-resident in certain situations and restrictions on the
price at which shares can be transferred between residents
and non-residents should be considered in the context of the
operation of the drag along/tag along provisions.
While put and call options are fairly common in Indian
shareholder agreements, there is some uncertainty as to
whether these are enforceable. Whilst the better view is
probably that enforceability is an issue only with respect
to options over shares in listed companies, specific advice
should be taken on this point. Although the Government
has withdrawn its earlier proposal to treat equity shares and
equity related instruments issued to non-resident investors
with in-built options as external commercial borrowings
subject to a different regime, the RBI still continues to
maintain that such instruments will fall outside the FDI
Policy. There is, therefore, currently uncertainty as to the
classification of equity shares and equity related instruments
with in-built options issued to non-resident investors.
48 Norton Rose Fulbright
Given that approvals may be required for transfers of shares
from a resident to a non-resident in certain situations and
there are restrictions on the price at which shares can be
transferred between residents and non-residents, there
is limited flexibility for structuring put and call options
in India. Put and call options are generally structured
by providing a mechanism for the appointment of an
independent valuer by parties who will determine the price
at which the put or call option will be exercised. However
an additional condition is generally imposed contractually,
stating that the price that is determined by the independent
valuer will have to be above the minimum prescribed price
where the transfer is between a resident to a non-resident
and that such price will be subject to a maximum cap where
the sale is from a non resident to a resident.
Indonesia
Joint ventures – protections for minority shareholders in Asia Pacific
Indonesia
Making the investment
Foreign ownership and control
Law No. 25/2007 regarding Investment (Investment
Law) governs Indonesia’s foreign direct investment. The
Capital Investment Coordinating Board (Badan Koordinasi
Penanaman Modal) (BKPM) is the institution responsible
for coordinating and supervising both domestic and foreign
direct investment activities in Indonesia.
On 25 May 2010, Presidential Regulation No. 36 of 2010
regarding the List of Business Lines Closed and Business
Lines Open with Conditions for Investment (Negative List)
was issued. The Negative List specifies categories of business
lines which are:
• absolutely closed to all private, foreign and domestic
investment. This category is reserved for the Government
of Indonesia to explore and exploit in the national
interest. It can also be used for non-commercial purposes
such as research and development, subject to approval
from the relevant government institutions which are
responsible for developing those business fields
• open to foreign investment but subject to foreign
ownership limitations
• subject to additional requirements
• closed to foreign investment and only open to 100 per
cent domestic investment (eg, retail trading).
Although the 2010 Negative List has increased the number
of sectors open to foreign investment, it applies only to
direct investments and does not extend to portfolio or fund
investments. The spirit of the Investment Law and the
Negative List is to require that all foreign and domestic direct
investments are conducted under the auspices of BKPM
which will issue an investment principal licence as well as
a business licence. However, as the 2010 Negative List does
not apply to certain industry sectors, such as insurance
and banking, restrictions on foreign investment may also
exist under the specific laws and regulations issued by
the relevant ministries. For example, the regulator of the
insurance industry is the Ministry of Finance (MOF), which
issues all licences and permits required by Indonesian
insurance companies, whereas Bank Indonesia supervises
and issues bank business licences. Consequently, foreign
investors interested in investing in those two business sectors
must liaise with the MOF and Bank Indonesia, respectively.
50 Norton Rose Fulbright
Further, in line with Law No. 21 of 2011 regarding the
Financial Services Authority (the FSA), which was enacted
on 22 November 2011, the MOF’s authority, regulatory
and supervisory roles will be transferred to the FSA on
31 December 2012, while Bank Indonesia’s authority,
regulatory and supervisory roles will be transferred to the
FSA on 31 December 2013.
The investment vehicle of a foreign investor wishing to
engage in business activities permitted by the Negative List
will either be a Foreign Capital Investment (Penanaman
Modal Asing) Company (PT PMA) or a non-PMA company (PT
Joint Venture).
Determining whether foreign investors should use a PT PMA
or a PT Joint Venture is not a straightforward exercise. For
some business activities, a PT PMA may be entitled to special
treatment for import duty (this is advantageous for PT PMAs
that engage in goods trading). But for other sectors, such as
insurance, foreign investors are required to use a PT Joint
Venture.
The Investment Law includes an express prohibition on an
investor (whether local or foreign) declaring that it holds
shares on behalf of another party. There is no criminal
sanction for breach of this provision. Rather, the Investment
Law states that any such declaration or agreements will be
void.
Bilateral investment treaties
The Government of Indonesia has entered into Investment
Promotion and Production Agreements (IPPAs) with 60
countries, including Australia, France, Germany, India,
Singapore and the United Kingdom.
Indonesia is a member of the Multilateral Investment
Guarantee Agency, which is designed to protect investments
against various political risks.
The Investment Law guarantees that the Government of
Indonesia will not nationalise or take over the ownership
rights of foreign investors “except through the law”.
Statutory minority protection and conflicts with
shareholder agreements
Although there is no specific regulation affording protection
to minority shareholders, various provisions of Law No. 40
of 2007 concerning Limited Liability Companies (Company
Law) are designed to protect minority shareholders.
Indonesia
Right to lawsuit (Article 61 of the Company Law): every
shareholder is entitled to file a lawsuit against the company
if the shareholder suffers a loss caused by the action of
the company which is deemed unfair and without proper
reason as a result of decisions made by the general meeting
of shareholders, board of directors (BOD) and/or board of
commissioners (BOC).
Right to fair treatment (Article 62 of the Company Law):
subject to the buyback provisions under the Company Law,
every shareholder has the right to require the company to
buy back its shares or to assist in the sale of such shares to
a third party at a reasonable price (the market value of the
shares to be determined by an independent valuer) where
there is:
• an amendment to the articles of association
• a transfer or security granted over assets of the company
with a value exceeding 50 per cent of the net assets of the
company or
• a merger, consolidation, acquisition or splitting of the
company.
Right of access to information about the company (Article
138 of the Company Law): one or more shareholders having
at least a ten per cent shareholding in a company are
entitled to request an audit of the company to obtain data or
information to determine whether:
• the company has committed an unlawful action causing a
financial loss to shareholders or a third party or
• members of the BOD or BOC have committed an unlawful
action inflicting a financial loss to the company,
shareholders or a third party.
Right to request liquidation (Article 146 of the Company
Law): the District Court is able to dissolve the company on
the request of, among others, shareholders, the BOD or BOC,
on the grounds that it is impossible for the company to carry
on business.
Appointment of the BOD and the BOC: it is common for
the articles of association of a joint venture company in
Indonesia and/or shareholders’ agreements to stipulate
that each foreign shareholder and local shareholder may
nominate representatives to the BOD and the BOC for the
purpose of safeguarding their respective interests in the
joint venture company. The Company Law acknowledges
that shares of an Indonesian company can be classified
into, among others, shares with special rights to nominate
members of the BOD and/or BOC.
Article 4 of the Company Law stipulates that an Indonesian
limited liability company should adhere to the Company
Law, its articles of association, and other relevant prevailing
laws and regulations. A shareholders’ agreement can be
used as a contractual alternative to provide more extensive
protections to minority shareholders in a PT PMA or PT
Joint Venture. However, both the articles of association and
the shareholders’ agreement must be consistent with the
Company Law.
Issues commonly encountered by a foreign or
domestic minority shareholder
Language
Article 31 of the Flag, Language and State Symbol and
National Anthem Law provides that any memorandum of
understanding or agreement which involves an Indonesian
party should also be presented in the Indonesian language or
in a bilingual format.
Employment
Article 163.1 of the Labour Law states that on the change
of a company’s status, merger, consolidation or “change of
ownership”, its employees have the right to choose whether
to remain or terminate their employment with the company.
Under Article 163.2, the employer has the right to dismiss
employees only in the event of the change of a company’s
status, a merger and consolidation, but not in the event of
“change of ownership”.
A “change of ownership” is frequently associated (but
not always) with a change of the controlling shareholder.
However, any substantial changes in management and
employment policy affecting the employees may also
trigger the rights under Article 163 even though the new
shareholder may not be a controlling shareholder.
The Labour Law refers simply to a “change of ownership” but
does not state what percentage this requires. Consequently,
one must consider both the percentage change of ownership
of the company and whether or not there are changes
to HR or management policies regarding the rights and
entitlements of employees (to the extent permitted under
Indonesian law, which is quite strict in this respect).
Norton Rose Fulbright 51
Joint ventures – protections for minority shareholders in Asia Pacific
Competition law and merger control
Some joint ventures may be subject to mandatory merger
control requirements. Article 28 of Law No. 5 of 1999
concerning the Prohibition of Monopolistic Practices and
Unfair Business Competition (Anti-Monopoly Law) prohibits
mergers, consolidations and share acquisitions which result
in monopolistic practices or unfair business competition.
Article 26 of the same law prohibits interlocking directorates
in certain circumstances.
taxpayers which, in the absence of a tax treaty, will give rise
to an obligation on the company to pay withholding tax.
Accordingly, proper and adequate information must be given
to minority shareholders in advance, in order for them to
evaluate their risk should they elect to tag along with the
new majority shareholders and to assess whether there are
significant taxation or legal risks on account of the proposed
change of shareholders.
The Anti-Monopoly Law is administered by the Business
Competition Supervisory Commission (KPPU), which has the
authority to issue implementing regulations and guidelines.
The Company Law adopts the ultra vires concept and
therefore care is needed to ensure that the company’s
objectives are stated appropriately. The Company Law also
provides that an Indonesian company may be established
for a finite or indefinite period as stipulated in its articles
of association. Where a company is stipulated to be
incorporated for a finite period, such time period has to be
expressly stated in the articles of association of the company
and, in the absence of amendment, the company must be
liquidated once the prescribed finite period has lapsed.
Pursuant to Article 29 of the Anti-Monopoly Law, mergers,
consolidations and acquisitions are subject to post-merger
control clearance by the KPPU if they meet certain asset
or turnover thresholds. Under Regulation No. 57/2010 on
the Notification of Mergers and Acquisitions, transactions
meeting either of the following thresholds must be notified to
the KPPU within 30 working days of their completion:
• the parties’ combined asset value exceeded IDR2.5 trillion
during the last financial year (or IDR20 trillion for the
banking sector) or
• the parties’ combined turnover exceeded IDR5 trillion
during the last financial year.
The above thresholds refer to the value of sales or assets in
Indonesia calculated at group level, irrespective of the place
of incorporation of the transaction parties. According to the
KPPU’s implementation guidelines, at least one party to the
transaction would need to have a presence in Indonesia (for
example, through a subsidiary) and another would need to
have (at least some) sales in Indonesia for the KPPU to have
jurisdiction over foreign transactions.
Minority share acquisitions conferring control over
an existing business are also subject to a notification
requirement if the above thresholds are met. For minority
share ownerships, the notion of control refers to the ability to
influence or determine the management of a business entity.
It would however appear that green field joint ventures are
not caught under the merger control rules.
Tax
Minority shareholders should be aware that any transaction
carried out by the majority shareholders of the company,
notably, when both purchaser and seller are non-resident
52 Norton Rose Fulbright
Objectives and termination
It is common practice for an Indonesian company to
stipulate, in its articles of association, that the life of the
company is indefinite. Any detailed provisions regarding
the objectives and termination of the company should be
stipulated in the shareholders’ agreement.
Typically a shareholders’ agreement will provide that it will
cease to bind a shareholder when such shareholder ceases
to hold any shares (or a stipulated minimum percentage
of shares) in the company. It may also stipulate other
“default” termination events such as a change of control of
a shareholder, insolvency events affecting a shareholder,
and material breach of the joint venture arrangement. The
defaulting shareholder will typically be required to sell its
shares to the non-defaulting shareholder at a prescribed
price or in accordance with a prescribed price formula.
Alternatively, the non-defaulting shareholder may be entitled
to sell its shares to the defaulting shareholder.
Governing law
Foreign court judgments are not enforceable in Indonesia
unless a reciprocal enforcement treaty exists between
Indonesia and the country in which the foreign judgment
is handed down. No such treaties are currently in force.
Accordingly, the most practical choice of law and jurisdiction
in agreements would be the laws and courts of Indonesia.
However, the judicial process in Indonesia can be protracted,
expensive and on occasions unpredictable. As an alternative
to Indonesian law and jurisdiction, it is possible to state that:
Indonesia
• the laws of Indonesia govern the agreement but
• that disputes are to be referred exclusively to foreign
arbitration and may not be referred to Indonesian courts
for resolution.
If an agreement is governed by Indonesian law, certain
standard provisions need to be included (for example, an
express waiver of certain provisions of the Indonesian Civil
Code would be required to prevent the need for a court order
to allow early termination of an agreement).
Although theoretically possible, in practice, Indonesia courts
are reluctant to apply foreign law. There are some cases
where an Indonesian party to an agreement governed by
foreign law has referred a dispute to an Indonesian court
despite the governing law clause, and the judge has accepted
jurisdiction but gone on to apply Indonesian law.
In contrast to foreign court judgments, which are not
enforceable in Indonesia, an arbitral award handed down
overseas may be enforced under the New York Convention on
the Recognition and Enforcement of Foreign Arbitral Awards
(New York Convention) provided that:
• the country in which the award is handed down is also a
party to the New York Convention
• the award does not contravene a national order
• the District Court has provided an execution order in
relation to the award.
The likelihood of the District Court refusing to provide an
execution order in relation to a foreign arbitral award is
reduced where the agreement in question is governed by
Indonesian law.
When a new investor proposes to purchase or take over an
existing shareholder’s share ownership in the PT PMA or PT
Joint Venture, the remaining shareholders (provided they do
not exercise their right of first refusal (ROER)) should always
consider the “home” jurisdiction of the new investor or its
vehicle, to avoid any unnecessary taxation risk exposures. If
there is such a risk, the remaining shareholder may wish to
consider exercising its buyout rights under Article 62 of the
Company Law.
It is also very important to note that not only is it essential to
analyse the jurisdiction of the investors’ vehicle for investing
in Indonesia to avoid exposure to taxation risks, it is also
important to analyse the shareholding structure of such
investment, particularly as the Investment Law prohibits
the use of a trusteeship/nominee structure in any direct
investment in Indonesia. Any declaration of trust on shares
or any similar arrangement will be void.
Managing the investment
Veto rights, reserved matters and weighted voting
rights
The Company Law allows companies to have different classes of
shares including among others (Article 53):
• shares with or without voting rights
• shares with special rights to nominate members of the
BOD and/or BOC
• shares that after a certain period of time can be
expropriated back or replaced by other share classes
• shares giving the holders cumulative or non-cumulative
preferential dividend rights
Indonesia is also a signatory member of the International
Centre for Settlement of Investment Disputes.
• shares giving the holders preferential rights to returns on
capital on the liquidation of the company and
Offshore structures
• any combination of the above.
One of the main drivers for the use of offshore structures is
often taxation considerations. In the absence of any double
taxation avoidance agreements (DTAAS) in place with
Indonesia, a tax exposure may arise for a PT PMA or PT Joint
Venture as a result of M&A transactions involving parties
who are non-resident taxpayers. As a preliminary structuring
issue, when choosing a proposed offshore vehicle,
consideration should be given to whether it is located in a
jurisdiction or country that has a DTAA with Indonesia.
It is possible for a minority shareholder to have negative or veto
rights and these rights are enforceable under Indonesian law.
A shareholders’ agreement conferring weighted voting rights
on a minority shareholder is enforceable, as it is not against
the Company Law and will provide greater protections than
the statutory buy-out rights given by the Company Law.
Norton Rose Fulbright 53
Joint ventures – protections for minority shareholders in Asia Pacific
Typically, veto rights may extend over strategic management
decisions, capital calls and share issues as well as major
asset acquisitions and disposals. In addition, the position
of a minority shareholder may be significantly safeguarded
by having shares which carry the right to appoint and/or
remove members of the BOD and BOC.
Governance
Board representation
Indonesian companies are required to have two boards of
management: a BOD and a BOC. The Company Law provides
for the general nature of the responsibilities of the BOD and
the BOC. It is stipulated that the BOD is to be responsible
for the management of the company, whereas the BOC is
to be responsible for the supervision of the BOD’s duties
and actions as well as to provide advice to the BOD. Subject
to each company’s business activities and/or status, the
minimum number of members of the BOD and of the BOC is
one person.
Save for the director of human resources position, there is no
formal requirement concerning the nationality of members
of the BOD or the BOC in a PT Joint Venture and/or PT PMA.
However, the Minister of Manpower (MOM) recently issued
a new regulation stipulating the list of positions prohibited
to be occupied by non-Indonesian nationals. The list
mostly comprises of positions related to human resource
management and development, included in the list is the
Chief Executive Officer (CEO) position. Although there is
no specific regulation governing the coverage of the CEO
position, in Indonesia the CEO position is often associated
with the president director position. Until the implementing
regulation is issued, it remains unclear whether the CEO
position is classified as the president director position and
whether such position is strictly for Indonesian nationals
only.
It is to be noted that a person responsible, such as the
president director of a PT PMA, is required to be domiciled
in Indonesia. With regard to a non foreign or domestic
investment company, known as a PT Biasa, a foreign national
may be a member of the BOD but not of the BOC.
It should be noted that there are prevailing regulations that
prohibit common directorships and commissionerships in
companies in specific industries.
Even more recently (on 29 March 2012) the Minister of Stateowned Enterprises issued Regulation No. PER-03/MBU/2012
regarding the Appointment of Members of the Board of
54 Norton Rose Fulbright
Directors and Board of Commissioners of State-owned
Enterprise Subsidiaries, which sets out detailed nomination
and selection procedures for appointments to the BOD and
BOC of state-owned enterprise subsidiaries.
Information and audit rights
The Company Law confers a statutory duty upon the BOD
to carry out numerous internal obligations including
maintaining a register of shareholders, preparing annual
work plans and preparing the company’s annual report.
The information contained in such documents must be made
available to every shareholder, including minority
shareholders. Where there is a dispute involving an allegation
of unlawful action by a company and/or its BOD and BOC, one
or more shareholders having at least a ten per cent
shareholding in the company are entitled to request an audit
of the company to obtain data or information.
Directors’ Duties
The Company Law provides that directors and
commissioners are required to carry out their duties in
good faith and with full responsibility in the interests of the
company and in accordance with its objective and purpose
as set out in the articles of association. The Company
Law stipulates that each member of the BOD and BOC is
prohibited from representing a company, should he or she
have a conflict of interest or be involved in a judicial dispute
with the company.
Each member of the BOD and BOC will be fully and
personally liable for misconduct or negligence in carrying
out their duties. Such misconduct may trigger derivative
actions by shareholders representing at least ten per cent of
the issued voting shares.
However, the business judgment rule provides a statutory
defence to a misconduct action. Pursuant to the Company
Law, the business judgment rule defence is available to the
members of the BOD and BOC of a company that suffered
detriment or insolvency where the relevant director(s) and/or
commissioner(s):
• have performed their duties or supervisory functions
in good faith and prudently in accordance with the
company’s objective and purpose as set out in its articles
of association
• had neither a direct nor indirect conflict of interest with
respect to the course of action which the BOD adopted on
behalf of the company and
Indonesia
• sought to take mitigating actions to prevent the
bankruptcy of the company on being advised of the
necessity of taking such actions.
Capital calls and pre-emption rights
Article 43 of the Company Law provides existing
shareholders with statutory pre-emption rights in respect
of any new share issuance by the company. A difficulty
commonly encountered with a PT PMA is an inability to
exercise pre-emption rights on account of foreign ownership
restrictions. Pursuant to Article 6 of the Negative List, if
the share issue causes the total ownership of the foreign
investor to exceed the approved shareholding limitations
then within two years after that capital injection, the foreign
investor must divest and adjust its shareholding accordingly.
The Negative List is silent on whether a failure to comply
with this divestment requirement is subject to any sanction.
In practice, this divestment requirement has not yet been
implemented, pending the issuance of a new implementing
regulation on divestment.
Non-compete undertakings
Notwithstanding its common use in shareholders’
agreements, the concept of a non-compete clause is
not specifically recognised under the laws of Indonesia
other than as a contractual right recognised under the
Indonesian Civil Code. As such, save for the wide powers
of interpretation of the Indonesian court in case of dispute,
there may be no significant limitations on the enforceability
of non-compete covenants in terms of their territorial scope
and length of time.
Realising the investment
Deriving income
The Company Law allows companies to issue shares with
specific or preferential rights, provided the holder of such
shares has the right to receive dividends. The Investment Law
allows investors to make transfers or to repatriate funds, in
foreign currency, on, amongst other things:
• capital
• profit, interest, dividends and other income
• funds required for:
—— purchasing raw material, intermediate goods or final
goods
—— replacing capital goods for the continuation of
business operations, additional funds required for
investment projects, funds for debt payment, royalties,
income of foreign individuals working on the invested
project, earnings from the sale or liquidation of
invested company, compensation for losses, and
compensation for expropriation
—— loan repayments and
—— royalties.
There are no substantive foreign exchange restrictions in
Indonesia. However, transferring banks are required to report
to Bank Indonesia with regard to any transfers of funds of
US$10,000 or more.
Realising capital (transfer restrictions)
The ROER mechanism provided by the Company Law may
also be inserted in the articles of association of a company.
However, the implementation of the ROER can be subject to
the statutory restrictions on the transfer of shares as set out
in the Negative List and such restrictions, as well as other
related foreign direct investment regulations for specific
industries, cannot be excluded contractually.
Save in the case of a public listed company, the price of the
transferred or sold shares can be based on a pre-determined
agreement or in accordance with an agreed formula
stipulated in the shareholders’ agreement.
Deadlock and termination provisions
Drag-along and tag-along rights are fairly common in
Indonesian shareholders’ agreements and are recognised
as contractual rights. However, the exercise of such rights
may be circumscribed by foreign investment regulations,
as set out in the Negative List. Similarly, put and call option
mechanisms are fairly common in Indonesian shareholders’
agreements, with valuations determined by an independent
appraiser.
Norton Rose Fulbright 55
Joint ventures – protections for minority shareholders in Asia Pacific
56 Norton Rose Fulbright
Japan
Joint ventures – protections for minority shareholders in Asia Pacific
Japan
Contributed by Atsumi & Partners
Making the investment
Foreign ownership and control
Japan is a fairly open economy for foreign investment. There
are no generally applicable restrictions on the level of foreign
ownership of Japanese companies or businesses. However,
investment in some business sectors (for example, banking
and insurance) may need authorisation from the relevant
regulatory body.
The following business sectors are subject to restrictions on
foreign investment:
• national security: including the military, nuclear, and
space exploration sectors
• maintenance of public order: including national
infrastructure and utilities sectors such as electricity,
gas, communications, broadcasting, water and railway
services
• public safety: involving the manufacture of biological
products and provision of security services
• sensitive industries: including agriculture, forestry and
fisheries, oil, leather products, air transport and marine
transportation sectors.
Bilateral investment treaties
As of June 2012, Japan has entered into Bilateral Investment
Treaties (BITs) (and Economic Partnership Agreements which
provide the same type of benefits as BITs) with 28 countries.
These BITs, etc contain the following key provisions:
• treatment of foreign investment, which includes National
Treatment, Most-Favoured-Nation Treatment, and fair and
equitable treatment
• observation of obligations which governments assume to
foreign investors
• restriction of expropriation and compensation for
expropriation
• compensation for loss in the event of war or civil
disturbances, which include National Treatment and
Most-Favoured-Nation Treatment
58 Norton Rose Fulbright
• transfer of foreign currency, which normally includes
guaranteeing the prompt transfer of profits out of the host
state
• promulgation of new regulations for foreign investment
promptly
• dispute resolution provisions, which normally refer
to international arbitration, subject to the rules of
the International Centre for Settlement of Investment
Disputes.
Statutory minority protection and conflicts with
shareholder agreements
Generally resolutions at shareholders’ meetings of a joint
stock company (Kabushiki Kaisha) may be adopted by a
simple majority vote. However, certain matters (eg, approval
of mergers, or other structural changes, issuance of shares or
delegation of the right to issue shares to the board, liquidation
or capital reduction) require a special resolution and so must
be approved by a two-thirds majority of shares voted.
The statutory quorum is a majority of the voting rights
eligible to vote on the matter, but this can usually be
altered by the company’s articles, save that it must be
at least one-third of such voting rights with respect to
certain matters such as the appointment or removal of
directors, and voting on a special resolution. Other rights
are conferred on shareholders depending on the level of
their holdings (and in some cases how long the shares
have been held), and can include the following rights:
accessing records, convening a shareholders’ meeting and
instituting an action against a director. Shareholders may,
in their shareholder arrangements, contractually agree
to go beyond (but not below) the minimum standards
imposed by law or provide for further regulation of the
company’s affairs. The company’s articles of association
(Teikan) constitute a contract between the company and its
members, and between the members themselves. An area
of potential conflict is where provisions in a shareholders’
agreement conflict or are inconsistent with the company’s
articles. This is often resolved in practice by stipulating in
the shareholders’ agreement that in the event of any such
inconsistency, the shareholders’ agreement will prevail
and further, that the parties agree to amend the articles
to remove any such inconsistency. If there is a conflict
between the shareholders’ agreement and the provisions of
the articles, the provisions of the shareholders’ agreement
are effective and binding only between the parties to the
agreement. Although there is a debate in this area, if a right
Japan
pursuant to the articles is exercised which is a breach of the
shareholders’ agreement, the exercise of such right may not
be considered “ineffective” and the only remedy is to claim
for damages against the party breaching the shareholders’
agreement.
Issues commonly encountered by a foreign or
domestic minority shareholder
Employment
Where a joint venture partner transfers a business to a
joint venture company, then the employees engaged in the
business do not transfer automatically and their employment
must be separately terminated by the old employer and they
must be re-engaged by the joint venture company. This is a
relatively time-consuming procedure and presents risks in
terms of the ability to transfer the whole workforce to the
new employer.
Competition law and merger control
Some joint ventures will be subject to mandatory merger
control review under the Anti-Monopoly Act (AMA). Mergers,
share acquisitions and other business acquisitions that
substantially restrain competition are prohibited under
the AMA. In addition, Article 13 of the AMA prohibits
interlocking directorates in certain circumstances. The AMA
is enforced by the Japan Fair Trade Commission (JFFC).
Under the AMA, prior approval must be sought from the
JFFC for transactions meeting certain turnover thresholds.
The notification thresholds vary depending on the type of
transaction:
For statutory mergers and joint share transfers, prior
notification is required where:
• one party to the transaction had total group annual sales
in Japan of at least JPY20 billion during the last financial
year
• another party to the transaction had total group annual
sales in Japan of at least JPY5 billion.
For share acquisitions of 50 per cent of total shares with
voting rights (or 20 per cent if there is no shareholder with a
higher equity share and in exceptional circumstances ten per
cent) prior notification is required where:
• the acquiring party had total group annual sales in Japan
of at least JPY20 billion during the last financial year and
• the other party had total group annual sales in Japan of at
least JPY5 billion during the last financial year.
For asset acquisitions, prior notification is required where:
• the acquiring party had total group annual sales in Japan
of at least JPY20 billion during the last financial year and
• the assets being acquired had total annual sales in Japan
of a least JPY3 billion during the last financial year.
For other types of business divestitures and transfers, a
notification may be required as soon as the “business being
transferred” had total annual sales in Japan of at least JPY3
billion during the last financial year.
Special rules apply for banking and insurance institutions.
They are prohibited from acquiring more than five per
cent (for companies engaged in insurance businesses, ten
per cent) of voting rights in a company in Japan, except in
certain special cases, including when approval by the JFFC is
obtained.
Merger notifications must be filed with the JFFC at least 30
days prior to the closing date of the transaction. The JTFC
has 30 days (or 60 days with the agreement of the parties)
to decide whether to clear the transaction or to open an indepth investigation, in which case a decision must intervene
within 120 days from the notification. Implementation of a
notified transaction must be suspended for 30 days following
acceptance of the filing.
Tax
A joint venture partner who transfers Japanese real estate to
a new joint venture company (whether as part of a business
or not) must pay stamp duty on the property transfer or
lease. The maximum duty payable on a transfer or lease
of real property is currently 600,000 JPY (if the contract
amount is over 5 billion JPY).
Financing issues
Most joint ventures are initially financed by shareholders’
equity contributions and shareholder loans. Further issues
of shares will be dilutive unless all shareholders are offered
an allocation pro rata to their existing holdings and are in a
position to take that offer up. It is therefore common for the
parties to agree that a bank loan will be the preferred source
of any further funding.
Norton Rose Fulbright 59
Joint ventures – protections for minority shareholders in Asia Pacific
Objectives and termination
Unless the joint venture is being established for a particular
project, most Japanese joint ventures will not be expressly
limited in duration although they may provide for the parties
to agree to work towards a particular exit route (such as a
trade sale or an IPO) within a certain time frame. In addition,
there may be a point at which one party wishes to exit
the venture (and realise its investment or stem its losses)
while the other would prefer to continue. It is therefore
not uncommon to include in the shareholders’ agreement,
procedures that will apply in those circumstances although
a minority investor’s bargaining position to insist on such
provisions may be limited.
In any event, it would be normal for a shareholders’
agreement to provide that where a party has committed a
material breach of the joint venture agreement, then the
non-defaulting party may be given a put or call option in
these circumstances, sometimes exercisable at a discount to
fair value. Where a party becomes insolvent or undergoes a
change of control, the other party may be given a call option,
giving it a right to acquire the defaulting party’s shares.
Governing law
Japanese courts will uphold the parties’ choice of governing
law of a contract, provided it is made expressly and does
not contradict public policy. The parties are free to specify
whatever law they choose, even if that law has no connection
with the joint venture or its business. However, there are
circumstances where the law which governs a contract will
not determine all issues which arise in connection with it.
For example, certain Japanese statutory provisions relating
to employment, real estate and insolvency cannot be avoided
by choosing a foreign governing law.
A Japanese court may refuse to accept jurisdiction over a
contract even if the parties have agreed such jurisdiction
where the contract has no connection to Japan and the
matter may not be dealt with most efficiently by the Japanese
court.
A judgment of a foreign court may be enforced in a court
of Japan, without further consideration of the merits of the
case, only if all of the following conditions are satisfied:
• the foreign judgment concerned is duly obtained and is
final and conclusive
• the jurisdiction of the foreign court is recognised by the
applicable Japanese law or treaty
60 Norton Rose Fulbright
• service of process has been duly effected on the party
other than by public notice (koujisoutatsu) or some other
similar method or that party has appeared in the relevant
proceedings in the foreign jurisdiction without receiving
service of the proceedings
• the foreign judgment (including the court procedures
leading to such judgment) is not contrary to public order
or the good morals doctrine in Japan
• judgments of Japanese courts receive reciprocal treatment
in the courts of the foreign jurisdiction concerned
• the dispute resolved by the foreign judgment has not been
resolved by a judgment given by a Japanese court and is
not being litigated before a Japanese court.
It is becoming increasingly common to use offshore
arbitration (commonly Singapore) as the jurisdiction for
disputes in relation to cross-border joint ventures.
Offshore structures
The use of offshore structures is common, particularly, in
financing transactions. Offshore vehicles for cross-border
joint ventures are also used. The most commonly used
jurisdictions are the Cayman Islands and the BVI.
Managing the investment
Veto rights, reserved matters and weighted voting
The use of veto rights and weighted voting rights in respect
of “reserved matters” is common. Whereas Japanese law may
prescribe a certain threshold for passing of various corporate
actions, shareholders may contractually agree on higher
thresholds or additional requirements (for example, the
inclusion of the minority shareholder’s vote) that would give
rise to a breach of contract claim if such requirements were
not complied with.
Governance
The mostly commonly used corporate vehicle for a joint
venture in Japan is a joint stock corporation, or Kabushiki
Kaisha; a Kabushiki Kaisha can be established with or
without a Board of Directors. If it does not have a Board of
Directors, each director may represent the company and at
least one director must be resident in Japan (but can be a
foreign national). If the company does have a Board of
Directors it will be represented in day-to-day matters by a
Representative Director and must have at least one
Japan
Representative Director who is resident in Japan (but can be
a foreign national). A corporation cannot be a director of a
Kabushiki Kaisha.
There is no automatic right to appoint a director by reason of
a party’s shareholding but such a right may be granted to a
class of shares in the company’s articles.
Directors of a Kabushiki Kaisha owe a duty of care to
the appointing company, being a duty to act as a “good
manager”; the duty is also referred to as a “fiduciary duty”.
The duty is to act with the level of care that is normally
expected to be taken by a person in the same position and,
if relevant, with the same expertise as the director, and
applies to all directors, whatever their title or status. In
determining whether a director has satisfied that standard
in any particular case, a court would consider (a) process,
and (b) reasonableness, ie, was the process of reaching
the decision reasonable (eg, whether there was proper
enquiry and deliberation) and would the decision have been
unreasonable for a person in the same position; a court will
not make a determination based on whether the decision
was reasonable or sound from a business standpoint.
A director may be relieved in whole or in part from his
liability to the company for breach of duty on a case-by-case
basis, the basis of the relief depending on whether or not the
director acted with wilful misconduct or gross negligence
and subject to statutory limitations.
Where a director has been appointed to represent the
interests of a particular shareholder (the appointor), the
nominee director owes the same duties as any other director.
In particular, a nominee director may not prefer the interests
of his appointor over the interests of the company. A nominee
director may, however, take into account the interests of his
appointor if such interests do not conflict with the interests
of the company.
A Kabushiki Kaisha does not have a supervisory board, but if
it has a board of directors it must have a “statutory auditor”
whose duties include monitoring the activities of the board
and making certain reports to shareholders.
Shareholders holding three per cent or more of the
company’s total voting rights are entitled to inspect and copy
the company’s books, records and accounts.
There are no restrictions on giving shareholders a contractual
entitlement to information about financial and business
matters of the company.
In practice, it is not uncommon for potential conflicts of
interest involving directors to be, firstly, disclosed and
secondly, referred to the board of directors and/or the
shareholders of the company. This does not negate a
director’s duties vis-à-vis the company but does provide
evidence that the relevant transaction or act, having been
approved by the board or shareholders meeting, is in the
company’s best interest.
Capital calls and pre-emption rights
A Kabushiki Kaisha can issue and allot new shares to all
existing shareholders on a pro rata allocation based on
their existing shareholding, or to only some of the existing
shareholders. However, further capital contributions may be
excluded contractually as a source of funding, particularly
where one of the parties is financially weaker than the other,
with priority given to bank funding. However, if further
capital contributions are envisaged, the articles and/or
the shareholders’ agreement should specifically entitle the
existing shareholders to apply for a pro rata allocation of any
new shares, based on their existing shareholding.
Non-compete undertakings
In principle, non-compete covenants are valid. However,
Article 21(2) of the Companies Law states that in the case of
transfer of business, if the non-compete covenant is set
without geographical scope, it is valid only for 30 years. And,
generally, non-compete covenants are void if their contents
are too strict in the context of the purpose of covenants.
Realising the investment
Deriving income
There are currently no exchange control restrictions in Japan,
though payments may be subject to withholding tax.
The only legal restriction on the payment of dividends is the
Companies Law requirement that they must be made out
of “profits available for distribution”, as prescribed by law.
However, it is fairly common to see a provision in the articles
or shareholders’ agreement which obliges the joint venture
company to pay out dividends to the extent that it has
adequate working capital and is legally able to do so.
Although companies may issue two or more classes of shares
with different dividend or voting rights, or different rights on
a return of capital, this is not common for commercial joint
ventures in Japan and is usually only found in private equity
type investments.
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Joint ventures – protections for minority shareholders in Asia Pacific
Realising capital (transfer restrictions)
Transfer of shares in a “small” Kabushiki Kaisha will by law
require the consent of the directors; this restriction can be
disapplied by the company’s articles.
A transfer of shares in breach of the company’s articles is
invalid as against the company; if a transfer is in accordance
with the articles but in breach of any shareholders’
agreement it would be difficult to challenge the effectiveness
of the transfer.
Deadlock and termination provisions
Shareholder disputes are usually subject to escalation
processes, referring matters to senior management of the
parties for resolution before invoking a formal termination
process.
It would be normal for a shareholders’ agreement to provide
that where a party has committed a material breach of the
joint venture agreement, then the non-defaulting party
may be given a put or call option in these circumstances,
sometimes exercisable at either a premium or a discount to
fair value. Where a party becomes insolvent or undergoes a
change of control, the other party may be given a call option,
giving it a right to acquire the defaulting party’s shares.
If there are no termination procedures in the shareholders’
agreement, a shareholder may be able to require the
company to purchase its shares (or find a purchaser for
them) or seek to have the company dissolved, though it
would not be advisable to rely on either procedure.
Drag and tag provisions are not common in Japan outside of
private equity type transactions. However, if agreed to, they
would be enforceable.
62 Norton Rose Fulbright
Malaysia
Joint ventures – protections for minority shareholders in Asia Pacific
Malaysia
Contributed by Zaid Ibrahim & Co
Making the investment
Foreign ownership and control
The Malaysian Government has, over the past years,
announced a number of liberalisation measures with the
aim of attracting foreign investments and strengthening
Malaysia’s economic ties with other economies. In April
2009, as part of a liberalisation of the services sector,
the Malaysian Government announced the immediate
liberalisation of 27 service sub-sectors, with no equity
condition imposed. These sub-sectors are in the areas of
computer and related services, health and social services,
tourism services, transport services, sporting and other
recreational services, business services, rental/leasing
services without operators and supporting and auxiliary
transport services. In its Budget for the year 2012, the
Malaysian Government announced its proposal to further
liberalise another 17 service sub-sectors in phases
throughout 2012 to allow up to 100 per cent foreign equity
participation in selected sub-sectors. These sub-sectors
include private hospital services, medical and dental
specialist services, architectural, engineering, accounting
and taxation, legal services, courier services, education and
training services, as well as telecommunications services.
The Malaysian Government also announced a liberalisation
plan for the financial services sector in 2009. The
liberalisation package for the financial sector includes,
among other things, the issuance of new commercial
banking licences and Islamic banking licences, the increase
in the foreign equity limits in respect of investment banks,
Islamic banks, insurance companies and Takaful operators,
enhanced operational flexibility to foreign institutions
operating in Malaysia in the financial services sector and
greater flexibility for Labuan offshore entities and in the
employment of expatriates in specialist areas.
The new Financial Sector Blueprint 2011–2020 launched
in December 2011 focuses on achieving nine areas of
improvement which include the effective intermediation for
a high value-added and high income economy, development
of deep and dynamic financial markets, greater shared
prosperity through financial inclusion, strengthening
regional and international financial integration,
internalisation of Islamic finance, safeguarding the stability
of the financial system, achieving greater economic efficiency
through electronic payments, empowered consumers and
talent development for the financial sector. The blueprint
64 Norton Rose Fulbright
supersedes the Financial Sector Master Plan for the 2001
to 2010 period and it outlines the direction of the domestic
financial sector in the next 10 years to 2020. The Malaysian
Government has started rolling-out certain liberalisation
measures as part of its continuous efforts to achieve the focus
of the blueprint. For example, in January 2012, the central
bank of Malaysia, Bank Negara Malaysia (BNM) announced
certain liberalisation measures to contribute towards
increasing the liquidity, depth and participation of a wider
range of players in the financial market.
Prior to 30 June 2009, the acquisition of interests in most
Malaysian companies required the approval of the Foreign
Investment Committee (FIC) of the Economic Planning Unit
of the Malaysian Prime Minister’s Department (EPU), under
the Guidelines on Acquisition of Interests, Mergers and
Takeovers by Local and Foreign Interests (FIC Guidelines).
The FIC would generally impose equity conditions on
the Malaysian companies concerned, with the standard
condition being that foreign ownership of the Malaysian
company be limited to 70 per cent, with the remaining 30
per cent being held by Bumiputeras. The term “Bumiputera”
generally refers to a Malay individual or aborigine as defined
in the Malaysian Federal Constitution.
In conjunction with deregulation, the EPU reissued the
Guideline on the Acquisition of Properties (effective from
30 June 2009), which continues to apply (with revisions) in
relation to the acquisition of properties (ie, commercial units,
agricultural land, industrial land and/or residential units).
With the deregulation of the FIC Guidelines, the acquisition
of interests by foreign entities will only be regulated by the
respective sector regulators, which impose their own equity
conditions. For example, banks and insurance companies
are regulated by the Minister of Finance and BNM,
stockbroking companies are regulated by the Malaysian
Securities Commission (SC), manufacturing companies are
regulated by the Ministry of International Trade and Industry
and telecommunications companies are regulated by the
Malaysian Communications and Multimedia Commission.
Bilateral investment treaties
Malaysia has concluded, signed or implemented bilateral
Free Trade Agreements (FFA5) with Japan, Pakistan, New
Zealand and Chile. At the regional level, Malaysia and its
ASEAN partners have established the ASEAN Free Trade
Area. ASEAN has also concluded FFAs with Australia, China,
India, Japan Korea and New Zealand.
Malaysia
One major benefit from Malaysia’s FFAs is that investors
will be able to enjoy a more transparent and predictable
investment regime. Investors enjoy fair and equitable
treatment and enhanced investment protection and security
with regard to their investments as well as effective dispute
resolution processes. Investors will be allowed to transfer
profits, capital gains, dividends, royalties, interests, earnings
and remuneration freely and without delay in any freely
usable currency.
Statutory minority protections and conflicts with
shareholder agreements
Generally, a shareholder who holds more than 50 per cent of
the voting rights and the right to control the composition of
the board of directors is capable of controlling the company.
However, shareholders may, pursuant to a shareholders’
agreement or the articles of association of the company,
accord minority shareholders weighted voting rights, the
right to appoint directors or the requirement of the minority
shareholders’ approval in certain matters (reserved matters).
Minority shareholders must be aware of their rights to enable
them to negotiate better protection under the shareholders’
agreement. Typically, the articles of association of the
company will be amended to reflect the terms of the
shareholders’ agreement. In most cases, the shareholders’
agreement will stipulate that the terms of the shareholders’
agreement will prevail in the event of any inconsistency with
the articles of association. The shareholders’ agreement may
be amended by the parties without having to obtain a special
resolution which is required for any amendment to the
articles of association.
Apart from protections provided in shareholders’ agreements
and the articles of association, the Malaysian Companies
Act 1965 (Companies Act) also provides certain minority
protection measures, including:
• the right to written notice of general meeting, which can
only be waived in the following circumstances:
—— for annual general meeting, by all the members
entitled to attend and vote and
—— for any other meeting, by a majority in number of the
members having the right to attend and voters who
hold not less than 95 per cent of the voting rights or 95
per cent of the shares carrying such rights
• the right to attend, speak and vote on any resolution at the
meeting
• the right to requisition the convening of an extraordinary
meeting if the shareholders hold not less than ten per cent
of the voting rights or ten per cent of shares carrying
such rights
• the right for two or more members holding not less than
ten per cent of the issued share capital (or not less than
five per cent in number of the members of the company
or such lesser number as provided by the articles of
association if the company does not have a share capital)
to call a meeting of the company
• the requirement of a special resolution (passed by a
majority of not less than three-fourths of members entitled
to vote) on certain matters such as alteration of the
memorandum or articles of association, reduction of the
issued share capital of the company, change of name of a
company, voluntary winding up of the company
• the right to inspect the minute book, registers, auditor
report, memorandum and articles of association and the
accounts of the company
• the ability of shareholders holding not less than ten
per cent of such class of issued shares with variation
or abrogation rights attached to it to apply to court to
have the variation or abrogation of that class of shares
cancelled and the ability for any member to apply to
the court to restrain the directors from entering into
a transaction for the acquisition of an undertaking or
property of a substantial value, or the disposal of a
substantial portion of the company’s undertaking or
property, if the arrangement or transaction has not been
approved by the company in a general meeting.
Section 181 of the Companies Act provides the statutory
remedies for shareholders who suffer from “oppression”,
“disregard of interests”, “unfair discrimination” and “unfair
prejudice” to pursue personal action for relief against the
company or those responsible for such acts. The remedies
afforded under this section are court orders to:
• direct or prohibit any act or cancel or vary any transaction
or resolution
• regulate the conduct of the affairs of the company in
future
• provide for the purchase of the shares or debentures of the
company by other members or holders or by the company
itself
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Joint ventures – protections for minority shareholders in Asia Pacific
• in the case of a purchase of shares by the company,
provide for a reduction of the company’s capital or
• provide that the company be wound up.
In addition, the Companies Act also provides the power to
order the company to be wound up where the directors of
the company have acted in their own interests, or where
the court is of the opinion that it is just and equitable to
give such order. As the grant of a winding-up order is a very
drastic remedy, the Malaysian courts are generally reluctant
to grant a winding-up order if the other remedies in section
181 are sufficient to remedy the shareholders’ damage.
The minority shareholders may take a derivative action in the
name of the company against the wrongdoers if the wrong
is done to the company (such as breach of fiduciary duty by
the directors). On the other hand, a minority shareholder
may seek to enforce a personal right, when the wrong is done
by the company against him (such as deprivation of a right
conferred under the articles of association).
Issues commonly encountered by a foreign or
domestic minority shareholder
Employment
The Malaysian Government promotes the training and
employment of Malaysians. Therefore companies will be
allowed to bring in expatriates if there is a shortage of
trained Malaysians on a two-stage process. Firstly, approval
from the relevant authorised body must be obtained. The
relevant body is determined by the nature of the business
and each body will have their own relevant guidelines. To
illustrate, for an expatriate post in a manufacturing industry,
approval must be obtained from the Malaysian Industrial
Development Authority (MIDA). Under MIDA’s Guidelines
on the Employment of Expatriate Personnel, manufacturing
companies with foreign paid-up capital of US$2 million and
above can obtain automatic approval for up to ten expatriate
posts. On obtaining the relevant approval, the company must
then apply for an employment pass from the Immigration
Department.
When a joint venture partner transfers a business to a joint
venture company, the employees engaged in the business do
not transfer automatically and must obtain a release letter
from the previous employer and re-apply for approval from
the relevant body and an employment pass.
66 Norton Rose Fulbright
Tax
Companies can be subject to corporate income tax, service
tax, sales tax, withholding tax, real property gains tax,
import duties, export duties, excise duty and stamp duty.
Corporate income tax is 25 per cent on all income for
resident companies. For resident companies with a paid-up
capital of RM2.5 million and below, the first RM500,000 of
chargeable income will only be subject to a rate of 20 per
cent with the balance being taxed at 25 per cent.
All income tax in Malaysia is territorial, that is to say, tax
is imposed only on income that has a Malaysian source.
Foreign-source income is not taxable unless the company
is carrying on a business in the banking, insurance, air
transport or shipping sectors. Taxable income comprises all
earnings derived from Malaysia, including gains or profits
from a trade or business, dividends, interest, rents, royalties,
premiums or other earnings.
In relation to withholding tax, Malaysia does not levy
withholding tax on dividends. A withholding tax of 15 per
cent applies to interest paid to non-residents, which may
be reduced under an applicable tax treaty. A withholding
tax often per cent applies to royalties, rentals of movable
property, technical fees for services rendered in Malaysia and
certain one-time income paid to non – residents, which may
also be reduced under an applicable tax treaty.
A wide range of incentives is available for certain industries,
such as manufacturing, biotechnology, energy conservation
and environment protection. Available incentives include
tax holidays (pioneer status), investment tax allowances and
double deductions.
A joint venture partner who transfers property (including
shares in a company) to a new joint venture company will
be liable to pay stamp duty on the property transfer or lease
(in the absence of a contrary agreement between the buyer
and seller of the property who may otherwise provide for
stamp duty liability to be apportioned between them if they
so wish). For the transfer or sale of shares in a real property
company or real property and any interest, option or other
right in or over such land to a new joint venture company the
transfer may also be liable to real property gains tax (RPGT) if
the property increased in value and is disposed of within five
years from the date of acquisition. Save for RPGT, there is no
capital gains tax in Malaysia.
Malaysia
Access to information
Although the Companies Act gives all shareholders the
right to inspect the minute books, registers, auditor’s report
and the accounts of the company, the information may not
be sufficient for the minority shareholder to monitor the
operations of the company as the day-to-day control of the
company is typically delegated to the board of directors. As
such, it is advisable for a minority shareholder to negotiate
for the right to appoint directors to the board or the right to
receive more detailed or regular reports on the operations of
the company. In most cases, the right to receive more detailed
or regular reports will come with an obligation to keep the
information confidential and the shareholder will have to
agree not to disclose such information to any third parties
save as may be necessary for compliance with any statutory
or other legal requirements.
Competition law and merger control
The Competition Act 2010 (Competition Act) which
came into force on 1 January 2012 introduces a general
competition regime in Malaysia for the first time. The
Competition Act prohibits horizontal and vertical anticompetitive agreements and abuses of market dominance
but does not include a comprehensive competition merger
control regime. However, the absence of competition merger
control does not preclude the prohibition of anti-competitive
agreements and abuses of market dominance from being
applicable to certain mergers and acquisitions, including
joint ventures. In May 2012, final versions of the Guidelines
on Chapter 1 Prohibition (in relation to anti-competitive
agreements), Guidelines on Market Definition and Guidelines
on Complaint Procedures were issued by the Competition
Commission to clarify the application of provisions of the
Competition Act. The Guidelines on Chapter 2 Prohibition
(in relation to abuse of dominant position) are expected to be
issued soon.
Existing sector-specific competition provisions under
Energy Commission Act 2001 and the Communications and
Multimedia Act 1998 will remain effective as the Competition
Act does not apply to commercial activity regulated by these
laws.
The Energy Commission Act 2001 contains a general
provision entrusting the Energy Commission with the task of
promoting and safeguarding competition as well as fair and
efficient market conduct, or in the absence of a competitive
market, preventing the misuse of monopoly or market power
in respect of the generation, production, transmission,
distribution and supply of gas and electricity.
The Communications and Multimedia Act 1998 (CMA)
contains competition law provisions applicable to its
licensees, including the prohibition of anti-competitive
agreements and conduct that would result in a substantial
lessening of competition in a communications market. The
Malaysian Communications and Multimedia Commission, in
charge of enforcing the CMA, has issued several guidelines
to clarify its scope of application, including the Guidelines
on Substantial Lessening of Competition (RG/ SLC/00(1))
and Dominant Position (RG/DP/00(1)) and an information
paper describing the process for assessing allegations of anticompetitive conduct (IP/Competition/i/00(i)).The Securities
Commission (SC) is the authority regulating takeovers and
mergers of public companies (whether listed or unlisted),
foreign companies or real estate investment trusts listed on
Malaysia’s stock exchange. The Malaysian Code on Takeovers
and Mergers 2010 (Code) introduced by the SC applies to a
takeover offer howsoever effected, which includes by way
of scheme of arrangement, compromise, amalgamation or
selective capital reduction. However, the Code does not apply
to private companies and there is currently no merger control
regime in Malaysia relating to private companies.
Financing issues
Common methods of funding joint ventures are through
loans, and issuance of ordinary or preference shares. For
issuance of new shares, there is typically an agreement that
such shares be allotted pro rata to existing shareholders.
Minority shareholders face the risk of their shareholding
being diluted in the event of failure to take up the offered
shares (eg, if the minority shareholder is not financially able
to do so).
Other types of financing can include financing by a financial
institution which is guaranteed by the joint venture parties.
Objectives and termination
Joint ventures are not usually limited in duration unless
entered into for a specific project. Even if the joint venture
is not for a finite period, it would be advisable for the joint
venture parties to agree on exit strategies or termination
events (such as change of control of one of the joint venture
parties or breach) and the consequences of termination.
Common forms of exit mechanisms include put option
agreements, negotiated buyouts and voluntary winding up
after the project has been completed. It is advisable for joint
venture parties to agree on the mechanism for determining
the price of the shares and the procedures for the transfer of
shares in the event of termination.
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Joint ventures – protections for minority shareholders in Asia Pacific
Governing law
The Malaysian courts will generally uphold the parties’
choice of governing law, unless such choice is not made in
good faith, or with a view of avoiding certain mandatory
legal provisions which would otherwise govern the
arrangement or is contrary to public policy of Malaysia.
However, there are certain Malaysian laws that must be
complied with even if a foreign law is chosen to govern the
contract. These include the following:
• laws governing the corporate entity, including the
Companies Act
• immigration laws
• employment laws, including provisions specifying terms
for employees under the Employment Act 1955 and laws
governing unfair dismissal
• prohibitions against restraint of trade in the Contracts Act
1950 and
• statutory provisions under the Consumer Protection Act
1999.
Offshore structures
Malaysia encourages offshore companies to be incorporated
or registered by giving them preferential tax treatment.
From 2010, a Labuan company is given the flexibility to
elect to be taxed under the Labuan Business Activity Tax Act
1990 (LBATA) or under the Malaysian Income Tax Act 1967
(MITA). Under the LBATA, a trading Labuan company can opt
to pay three per cent tax on chargeable profit or a lump-sum
of RM20,000. On the other hand, a Labuan company can
also elect to be taxed under the MITA so as to have a secure
access to all Malaysia’s double tax agreements with other
countries. There is no withholding tax imposed on payments
of dividend, interest, royalties, management or technical fees
and lease rental.
As a Labuan company is allowed (subject to certain
restrictions) to carry on business with a resident of Malaysia
and may hold ringgit denominated investments in a domestic
company, using a Labuan incorporated company is proving
increasingly attractive. This is especially so as Labuan has
also recently introduced protected cell companies, in which
assets as well as liabilities can be segregated into “cells”.
A protected cell company is structured with core capital,
cellular capital, core assets and liabilities and cellular assets
and liabilities. The various businesses within each cell are
68 Norton Rose Fulbright
ring-fenced, and insolvency of one cell should not affect
the solvency of the whole entity or the performance of the
other cells. For any contract, the protected cell company
discloses which cell is contracting, or whether it is a “core”
contract. Cellular or non – cellular shares may be issued,
depending on whether they represent an equity interest in a
specific business cell or in the core assets. Only companies
conducting insurance business or companies conducting the
business of a mutual fund may operate as Labuan protected
cell companies.
Other offshore jurisdictions can carry on business with
Malaysian parties. The biggest hurdle for foreign investors,
regardless of which jurisdiction the party is from, are the
respective sector regulator requirements on foreign ownership.
Managing the investment
Veto rights, reserved matters and weighted voting
Veto rights and weighted voting rights are prevalent in
shareholders’ agreements in Malaysia to give the minority
shareholder a level of control over certain matters concerning
the operations of the joint venture. This is usually seen
in the form of either a requirement that all approvals
be unanimously approved by all shareholders or the
requirement to obtain the particular minority shareholder’s
approval to pass a resolution.
Governance
The Companies Act requires at least two directors and the
company secretaries of a company to have their principal
or only place of residence within Malaysia. Depending on
the sector, certain business or regulatory licences require
the appointment of Bumiputera director(s) as a prerequisite
of the licence, such as the licence for distributive trade in
Malaysia which requires the appointment of at least one
Bumiputera director.
A director of a Malaysian company owes both fiduciary
duties under common law as well as statutory duties
under the Companies Act to the company. The fiduciary
duties under common law have generally been statutorily
incorporated into the Companies Act. Broadly, the fiduciary
duties are:
• a duty to act bona fide in the best interests of the company
as a whole and not for any collateral purpose
Malaysia
• a duty to exercise reasonable care, skill and diligence
with the knowledge, skill and experience which may
reasonably be expected of a director having the same
responsibilities and any additional knowledge, skill and
experience which the director in fact has
• a duty to exercise due care and skill in his business
judgment
• a duty to exercise powers for a proper purpose and in
good faith in the best interest of the company
• a duty to avoid conflicts of interest.
Malaysian law requires a director to act for the best interests
of the company and not for the interest of the shareholder
who appointed him. In addition, there are statutory
provisions under the Companies Act for:
• disclosure of an interest, whether directly or indirectly,
in a contract or proposed contract with the contract and
such interested director is not to participate or vote on the
contract or proposed contract
• the prohibition against:
The parties may expressly exclude further capital
contributions. On the other hand, parties may stipulate that
further capital contributions require the unanimous consent
from both parties. It is also common to stipulate that any
increase in capital be allotted pro rata to each shareholder.
There is no statutory provision to provide for such matters in
Malaysia, hence, it is commonly regulated by the articles of
association or the shareholders’ agreement.
Non-compete undertakings
Non-compete undertakings restraining anyone from exercising
a profession, trade or business of any kind in a contract are
void in Malaysia. There are three exceptions to this:
• if the non-compete undertaking is in relation to the
carrying on of a business of which goodwill is sold
provided that any person deriving title to the goodwill
from the seller carries on a like business. This noncompete undertaking is limited to what is reasonable
having regard to the nature of the business
• if it is in anticipation of a dissolution of the partnership,
the partners may agree that some or all of them will
not canyon a business similar to that of the partnership
provided that it is reasonable
—— improper use of company’s property, any information
acquired by virtue of his position as a director, his
position as such director and corporate opportunity
• if it was in an agreement between partners not to carry on
any business other than that of the partnership during the
continuance of the partnership.
—— competing with the company and
Malaysian case law has determined that non-compete
undertakings which restrain a party from carrying on his
trade/profession are only void if they apply in the postcontract period, and not if they apply during the currency of
the contract. It is also advisable for such an undertaking to
be geographically limited.
—— loans to directors or persons connected with the
directors.
Though the duties of the director require him to act in the
best interest of the company, in practice, there is always
the issue of balancing the interest of the company and the
interest of the shareholder appointing such director.
Capital calls and pre-emption rights
It is common for a shareholders’ agreement in a joint venture
to stipulate that additional funding for the joint venture
will be by way of bank loans or loans from the parties to
the agreement to avoid dilution of each of the shareholder’s
interest.
In addition, the validity of non-compete provisions may
also be assessed under the provisions of the Competition
Act. It may be expected that non-compete provisions
among the parents of joint ventures may be considered to
contravene the Competition Act if they are not necessary to
bring about the benefits of the joint venture. For example,
a non-compete among shareholders who are competitors
with respect to a product or within a geographic area that
exceeds the activities of the joint venture may be considered
to significantly restrict competition.
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Joint ventures – protections for minority shareholders in Asia Pacific
Realising the investment
Deriving income
The Companies Act stipulates that no dividend can be
payable to shareholders except out of profits and the
amount is typically recommended by the directors. Minority
shareholders face the risk of dividends not being declared
even though profits were made. To avoid this risk, it is
advisable for minority shareholders to stipulate the dividend
policy in the shareholders’ agreement.
Under Malaysian exchange control rules, foreign investors
are allowed to invest freely in the equity market and to
repatriate their investments (including capital, profits,
dividends and interest).
Licensed institutions (such as banks and finance companies)
are not allowed to pay any dividend on their shares until all
capitalised expenditure (including preliminary expenses,
organisation expenses, shares selling commission,
brokerage, amount of losses incurred and any other item of
expenditure not represented by tangible assets) has been
completely written off. Further, before they can declare any
dividend, they must apply for approval from BNM.
Other than companies which may be statutorily regulated
(such as licensed institutions and prescribed institutions
gazetted under the Development Financial Institutions Act
2002), the only legal requirement on dividends is that they
must be paid out of profits.
There are no particular legal issues regarding different
classes of shares, as shares with different voting rights
or preference shares are allowed in Malaysia. However, a
Malaysian company is only allowed to issue preference
shares if the rights of the holders of those shares are set out
in the articles of association of the company.
A non-resident who has an investment in a Malaysian
company can receive payment from such a company by way
of dividend, reduction of the paid-up capital of the company
or a distribution in the course of the liquidation of the
company. None of the three types of payment are subject to
tax on the part of the non-resident (dividends are paid out of
the paying company’s taxed income, so no further liability
arises on the non-resident).
70 Norton Rose Fulbright
Realising capital (transfer restrictions)
Malaysian law imposes no restrictions on the transfer of
shares except in relation to certain regulated industries
where approval of the regulator may be necessary. The
parties are free to impose whatever restrictions they wish by
contract (such as a shareholders’ agreement) or through the
articles of association of the company.
Deadlock and termination provisions
Malaysian law does not specifically address deadlock
situations which may occur in joint ventures. Therefore, it
is advisable for the shareholders to set out deadlock and
termination provisions in the shareholders’ agreement or
joint venture agreement.
Deadlock procedures are typically set out in detail in a
shareholders’ agreement and may include a party serving
a conciliation notice to the other party to attempt to resolve
the deadlock within a specified period. Certain shareholders’
agreements will stipulate that it is only after the deadlock
procedures have been exhausted that parties can commence
legal or arbitration proceedings or proceed with the buyout
of the other party.
Common termination events are breach, insolvency, windingup or cessation of business. In most cases, termination by a
non-defaulting party will give rise to the right (but usually
not an obligation) of the non-defaulting party to purchase
the shares of the defaulting party and hence the ability to
carry on with the business or venture either by itself or with
another partner.
Put and call options do not raise any particular issues under
Malaysian law for private companies in Malaysia (as private
companies are not subject to the Code). Although drag-along
and tag-along provisions are not prohibited, practically,
they may not work if they would result in a breach of foreign
shareholding restrictions or a Bumiputera requirement
imposed by the relevant regulatory body.
Mongolia
Joint ventures – protections for minority shareholders in Asia Pacific
Mongolia
Contributed by MDS & Associates LLP
Making the investment
Foreign ownership and control
Mongolian joint-ventures are usually incorporated joint
ventures, rather than contractual, and use a limited liability
company (LLC) structure. The Company Law of Mongolia
(the Company Law) also provides for the establishment of
joint stock companies (JSCs) which are public companies and
usually listed and traded on the Mongolian stock exchange.
A company is a legal person with shareholders’ capital
divided into a specified number of shares, with its own
separate assets and with basic for-profit goals. The Civil Code
of Mongolia defines incorporated joint ventures as legal
persons. A legal person is an organised entity with defined
objectives and which is engaged in regular activities. Legal
persons are entitled to own, possess, use and dispose of their
own property and to acquire rights and create liabilities in
their own name.
The Foreign Investment Law of Mongolia (FIL) provides that
a Mongolian company with paid-up capital of US$100,000
or more, of which 25 per cent or more is contributed from
foreign sources, is deemed to be a business entity with
foreign investment (BEFI). In addition to registering with the
Mongolian State Registration Office of Legal Persons (SRO), a
BEFI must register with the Foreign Investment Department
of the Ministry of Foreign Affairs and Trade (FID) (formerly
known, and still often referred to, as the Foreign Investment
and Foreign Trade Agency or FIFTA). When founding a BEFI,
the procedure is to first register with the FID followed by
registration with the SRO. The new company’s legal existence
commences as of the date of registration with the SRO.
Practically speaking, the fact that a company qualifies
as a BEFI under the FIL has a limited impact as domestic
companies and BEFIs are essentially treated the same,
with the notable exception of land use rights and the new
foreign investment laws referred to below. The FIL provides
that Mongolia should not give less favourable conditions to
foreign investors than Mongolian investors in respect of the
use, possession and disposal of investments. This is similarly
provided for in a number of bilateral investment treaties
to which Mongolia is a party. The Mongolian Constitution
also provides for the protection of private property rights
and requires any taking of property by the State to be in
accordance with law and subject to the payment of fair
compensation.
72 Norton Rose Fulbright
On 18 May 2012, the Mongolian Parliament passed the “Law
on Foreign Investment Regulation of Strategically Significant
Business Entities” together with amendments to related
laws. Pursuant to this law, in certain circumstances foreign
investors require permission from the Government to invest
in Mongolian entities operating in specially protected sectors
(BESIs), being mining, banking and finance, and media and
telecommunication. Specifically, foreign investors require
approval from the Government in respect of the following
types of transactions:
• a transaction to acquire one third or more of the total
shares of a BESI
• a transaction that gives a right to elect the executive
management, the majority of executive management or
the majority of the board of directors of a BESI without
any preconditions
• a transaction providing the right to veto decisions of
management of a BESI
• a transaction that would give the right to exercise the role
of management of the BESI, determine the decisions of the
BESI and determine the BESI’s business activities
• a transaction likely to give rise to a monopoly (for
either the seller or buyer) in the commercialization of
raw minerals and their products in international and
Mongolian markets
• a transaction likely to impact directly or indirectly on the
market or the price of Mongolian mining products for
export and
• a transaction that has the consequence of diluting
shareholdings in a BESI through agreements between others
and the relevant BESI, or affiliated entities or third parties.
In addition, Mongolian Parliamentary approval (as compared
to Government approval) is required where a foreign investor
proposes to acquire an equity interest in a BESI of more than
49 per cent and the value of the proposed transaction is at
least 100 billion Mongolian Togrog (MNT) (approximately
US$76 million). A foreign state-owned entity requires
Mongolian Government approval to make any investment or
conduct any business operations in Mongolia.
Subject to the foreign investment provisions introduced by
the new foreign investment regime, a foreign investor may
make the following types of investment:
Mongolia
• invest using MNT or another currency and freely convert
currency and income earned in MNT as a result of such
investment
• movable and immovable property and related property
rights and
• intellectual and industrial property rights.
The Law on Licensing of Business Activities of Mongolia
(Licensing Law) lists certain business activities that are
prohibited and others which require a special licence,
such as banking, financial services, non-banking financial
activities, asset valuation, nuclear power, exploration and
mining of minerals, medical services, etc. If an activity is not
identified in the Licensing Law, no special licence is required.
Bilateral investment treaties
Mongolia has entered into more than 20 bilateral
investment treaties with most of its business partners. They
provide for equal treatment of foreign investment to the
treatment afforded to domestic investment. Further, should
expropriation or nationalisation take place, foreign property
may only be requisitioned in the public interest and only in
accordance with due process of law on a non-discriminatory
basis and on the basis of full compensation.
Statutory minority protection and conflicts with
shareholder agreements
A meeting of shareholders is the highest governing authority
of a company and may be either an ordinary or a special
meeting. The Company Law requires a quorum of the
presence in person or by proxy of the holders of a simple
majority of the common shares of the company in order to
form a shareholders’ meeting. If this quorum is not present,
the meeting may be rescheduled and at the rescheduled
meeting the required quorum will be 20 per cent of the
holders of common shares of the company. These quorum
percentages can be increased in the charter of the company,
but may not be decreased. Unless the charter of the
company requires a higher percentage, most decisions of the
shareholders must be approved by the holders of a simple
majority of the common shares present at the meeting and
entitled to vote on the matter. The Company Law requires,
however, that certain major decisions must be approved
by the holders of two-thirds of the common shares of the
company present at the meeting and entitled to vote on the
matter. In addition, the charter of a company may require a
larger number of votes to approve any matters and additional
matters may be added to the list of major decisions.
A LLC may have a board of directors, or the shareholders may
elect not to have a board and manage the company directly.
If a board of directors is created, the Company Law provides
for a minimum quorum of two-thirds of such directors for all
meetings, and for all decisions of the board to be made by a
two-thirds vote of the directors present and entitled to vote at
the meeting.
In certain circumstances, a shareholder who votes against
certain decisions at a meeting of the shareholders, or who
does not participate in voting for such decisions, has the
right to require the company to redeem its shares at a price
(market) to be determined in accordance with provisions of
the Company Law. Such decisions include:
• reorganisation of the company
• conclusion of a “major transaction” or
• amendments to the charter of the company, which limit
shareholders’ rights.
The key document to be prepared in connection with
the formation of a new LLC is its charter. The company’s
charter must comply with the Company Law. If a company
is established by more than one founder, the founders
may enter into a founders’ cooperation agreement. That
agreement will contain the procedure with respect to
cooperation among the founders, the obligations of
each founder, how the business will be operated, the
classification, number, price, and date of purchase of each
class of shares and other securities to be acquired by such
founders, future funding arrangements, the number of
representatives that each founder can appoint to the board
of directors and any other matters deemed necessary.
This agreement is not considered to be an incorporation
document.
Issues commonly encountered by a foreign or
domestic minority shareholder
Language
The Mongolian Constitution states that the Mongolian
language is the official language of the State. According
to the Law on Official Language of the State, companies
(including all incorporated joint-ventures) are obliged to
communicate with state organizations in the Mongolian
language and use the Mongolian language on financial,
taxation and labour documentation.
Norton Rose Fulbright 73
Joint ventures – protections for minority shareholders in Asia Pacific
Foreign exchange
There is no restriction on a Mongolian entity transferring
money to, or receiving money from, a foreign shareholder
so long as the money is transferred through commercial
banks, which have permission from the Mongolbank (Law on
Currency regulation, 1994, para 12.1).
The Law of Mongolia on Implementing Payments in National
Banknotes (9 July, 2009) provides that:
• all posted tariffs and contracts between two parties within
the territory of Mongolia must be stated in MNT
• all payments made between two parties within the
territory of Mongolia must be made in MNT and
• parties within the territory of Mongolia are prohibited
from including an adjustment mechanism in the terms
of a contract that adjusts the agreed MNT price based on
changes in foreign exchange rates.
Employment
Mongolia’s labour laws provide substantial rights and
protections to employees. The termination of an employee
requires the employer to comply with certain substantive
and procedural rules, which employers often find difficult
to meet. Mongolia’s courts typically apply the law in a rigid
manner which can make it difficult to terminate employees.
Under the Law of Mongolia on Sending Labour Force Abroad
and Receiving Labour Force and Specialists From Abroad,
an employer must pay workplace payments monthly in an
amount equal to two times the minimum wage (currently,
MNT 280,800, approximately US$215) approved by the
Government of Mongolia per foreign citizen for providing the
foreign employee with a workplace.
Tax
The general income tax rate applicable to business entities
with Mongolian sourced income is ten per cent on the first
3 billion MNT (approximately US$2.2 million) of taxable
income and 25 per cent on amounts in excess thereof. These
rates are applicable to operating and certain other types
of income such as capital gains on the sale of shares and
equipment. Other types of income, such as capital gains
on the sale of real property, interest, royalty and dividend
income are subject to other varying rates of tax.
74 Norton Rose Fulbright
Taxable operating income of a Mongolian business entity
is determined by taking into account operating income
received less permitted deductions. Mongolian tax law does
not permit all items of expense incurred in the furtherance
of the business purpose of the enterprise (as such concept
would be understood in more developed jurisdictions) to be
fully deducted when determining taxable operating income.
The Economic Entity Income Tax Law (the EEITL) includes a
limited operating loss carry-forward provision. An operating
tax loss may be carried forward and deducted from taxable
income for two subsequent years, but such deduction is
limited to 50 per cent of the taxable income calculated
for any one tax year. No similar provision was included in
prior law, and therefore any operating losses incurred by a
Mongolian business entity for tax years prior to 2007 cannot
be carried forward and are not recoverable for Mongolian
income tax purposes. Effective from 1 January 2010, the
EEITL has been amended to allow for an operating loss to be
carried forward and deducted from taxable income for up to
eight subsequent years in respect of companies operating in
the mining and infrastructure sectors, and such companies
are entitled to offset up to 100 per cent of their taxable
income calculated for any one tax year.
Mongolian employers are required to withhold income
tax and social insurance fees owed by their employees
from salaries payable to such employees, and to make
an additional employer payment to the Mongolian social
insurance fund. Participation by foreign citizens in the
pension, unemployment, workers compensation and
social benefits plans is mandatory. Participation in the
health insurance plan remains optional for foreign citizens,
although the practice of the social insurance authorities
is to attempt to force participation by all foreign citizens.
Participation by Mongolian citizens and independent
contractors in each of the plans is mandatory. Payments
to the social insurance fund are to be made in respect of
all salary, bonus and benefit payments (eg, housing and
transportation allowances) received by the individual.
Employees must pay ten per cent of such total compensation
package (to be withheld by the employer), but such
percentage will be applied to a maximum compensation
amount which is adjusted annually but which is currently
set at 1,404,000 MNT (approximately US$1,060) per month
(income in excess of this amount is not subject to the ten
per cent assessment). The employer must pay an additional
11-13 per cent (13 per cent in respect of employees engaged
in dangerous occupations, such as mining) to the social
insurance fund.
Mongolia
Companies operating in Mongolia will be obliged to make
other regular payments which do not fall under the abovenoted tax laws of Mongolia. For example, fees will be payable
in respect of foreign citizens employed in Mongolia, water
use fees, lease payments in respect of land surface rights and
annual vehicle taxes.
Competition law and merger control
Under the Authority for Fair Competition and Consumer
Protection of Mongolia law (AFCCP), dominant companies
must submit an application to the AFCCP if they intend to
restructure through a merger and acquisition, to purchase
more than 20 per cent of common shares or more than 15
per cent of preferred shares of a competitor. The AFCCP must
review the application and issue an assessment within 30
days from receiving it. This period could be extended by up
to 30 days. While the definition of a “dominant company” is
still unclear under the new law, a company was deemed to
hold a dominant position under the previous regime where
it had a market share exceeding one third in the relevant
market.
Financing issues
The FIL requires the paid-up capital of a BEFI to be no less
than US$100,000 (or the Mongolian equivalent thereof).
The paid-up capital may be contributed directly in foreign
currency. If at any time the owner’s equity of a BEFI
falls below the Mongolian equivalent of US$100,000 for
two consecutive years, on a balance sheet test, then the
shareholders must consider liquidation of the company. If
the shareholders do not vote to liquidate the company, then
creditors holding more than ten per cent of the company’s
outstanding debts may apply to a court for an order to
liquidate the company.
Objectives and termination
A company’s objects cannot go beyond the scope allowed
under the Company Law. The Company Law provides
that a Mongolian company may be established for a finite
or indefinite period as stipulated in its charter. Where a
company is stipulated to be incorporated for a finite period,
that period must be expressly stated in the charter of the
company and in the absence of amendment, the company
must be liquidated once the period has elapsed. It is common
practice for a Mongolian company to stipulate in its charter,
that the life of the company is indefinite. Any detailed
provisions regarding the objectives and termination of the
company can be stipulated in the founders’ cooperation
agreement. However, most founders’ cooperation agreements
will deal with circumstances where a shareholder wishes to
exit the joint venture. This may include put and call options
or drag-along and tag-along rights.
Governing law
Mongolian parties are free to agree to foreign law governing
their contracts. Mongolian law would apply in determining
the validity or effectiveness of any security interest taken or
created over property located within Mongolia. In general, it
is advisable to make the governing security law the same as
that of the jurisdiction in which the asset is located.
Offshore structures
We understand that the Dutch Antilles, Singapore,
Luxembourg, Malaysia, the Cayman Islands and the British
Virgin Islands are often used by foreign investors setting up
special purpose vehicles for investing in Mongolia. A case
by case analysis needs to be carried out to determine which
location is optimal from a tax perspective for any investment
in Mongolia.
Managing the investment
Veto rights, reserved matters and weighted voting
Companies must issue common shares and may issue
preferred shares. The charter of a company must authorise a
certain number of shares (common and, if needed, preferred)
and establish their par value. Such shares may not be sold
for less than the stated par value. A company need not issue
all of its authorised shares. Preferred shares can be used
to separate voting rights from the economic benefits of a
company (eg, by the use of non-voting preferred shares).
Common shares must be of only one class, and each common
share must carry the same rights as to voting and dividends
as each other common share.
In terms of minority protection rights, the Company Law
provides a list of issues that the shareholders have exclusive
authority to determine. In general, the holder of a simple
majority of the common shares of a company can make most
shareholder decisions. A list of key decisions that must be
approved by an “overwhelming majority” is provided for
in the Company Law. An overwhelming majority means a
vote of holders of two-thirds of the issued and outstanding
common shares present at the relevant shareholder meeting
and entitled to vote on the matter.
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Joint ventures – protections for minority shareholders in Asia Pacific
Key decisions requiring at least two-thirds approval under
the Company Law are:
• amendments to the company’s charter or the adoption of
a new version of the charter
• reorganisation of the company by consolidation, merger,
division, or transformation
• an exchange of the company’s debts for shares, issuing
additional shares
• certain reorganisations of the company
• liquidation of the company and the appointment of a
liquidation committee and
• a split or consolidation of the company’s shares.
The charter of a company may require a larger number of
votes to approve any matters, or additional matters may
be added to the list of key decisions. The charter may also
contain detailed provisions pertaining to the holding of
shareholder and/or board meetings. Any shareholder
who voted against certain decisions at a meeting of the
shareholders, or did not participate in voting for such
decisions, has the right to require the company to redeem its
shares at a market price to be determined in accordance with
provisions of the Company Law.
Governance
As noted above, an LLC may have a board of directors, or
the shareholders may elect not to have a board and manage
the company directly. If a board of directors is created,
the Company Law provides for a minimum quorum for all
meetings of two-thirds, and for all decisions of the board to
be made by a two-thirds vote of the directors present and
entitled to vote at the meeting. This approval requirement
cannot be reduced, it can only be increased. There are no
nationality or residence requirements for company directors
and others.
The Company Law requires that each company has a
minimum of one corporate officer with the title of Executive
Director. The Executive Director is treated as having broad
authority to operate the company and represent it before
third parties. The shareholders (or the board of directors, if
one exists) may, however, limit the powers of the Executive
Director through the employment contract. The shareholders
may also provide for additional corporate officers.
76 Norton Rose Fulbright
Although the use of a corporate seal to sign contracts and
important documents is not a general legal requirement
(other than in certain specified cases), in practice, it is widely
accepted in the business community as proof of authenticity
and corporate power.
The Company Law provides for the personal liability of
“governing persons” of Mongolian companies. Governing
persons include officers (including the chief executive officer,
the chief financial officer, general accountant and other
senior staff) and directors of a company and, in the case of
an LLC, shareholders who, together with affiliated persons,
own more than 20 per cent of the common shares of the
company. Governing persons are made personally liable for
a list of “intentional” actions, such as using the company’s
name for personal benefit, supplying false information
to shareholders, failure to inform the company that the
governing person is an affiliated person of the company,
and failure to “act in good faith and in the best interests of
the company.”
As regards the liability of shareholders, in principle,
shareholders are not liable for the obligations of a company
and shall only bear risk of loss to the extent of the shares
held. However, a shareholder who, together with its affiliated
persons, holds more than ten per cent of a company’s shares,
or who otherwise has the power to control the management
of the company, shall be liable to the extent of its own assets
for any material loss incurred by the company resulting from
the unlawful exercise of such power.
Capital calls and pre-emption rights
Various provisions of the Company Law provide a preemptive right to existing shareholders to acquire shares
or securities related to shares (securities) issued by the
company or offered for sale by the other shareholders to third
parties. Shareholders of a JSC may waive their pre-emptive
right to purchase such shares at a shareholders’ meeting by
an overwhelming majority of votes of shareholders eligible
to vote who attend the meeting. There is no provision in the
Company Law allowing for the waiver in the charter
of an LLC of pre-emptive rights in respect of an issue of
new shares.
Realising the investment
Deriving income
The Company Law provides that a company may pay
dividends at any time if the company is still solvent after
Mongolia
the payment of the dividend and the owner’s equity, on a
balance sheet test, is no less than the minimum required
amount stipulated in the charter (for a BEFI US$100,000)
and the company has redeemed all securities that it is
obliged to redeem. It is not necessary for a company to have
earnings to be able to distribute dividends. If the payment
of a dividend results in a reduction in the owner’s equity of
the company by more than 25 per cent, the company must
notify the creditors of the company, in writing, within 15
business days following the payment of the dividend. This is
a notification requirement only, so that creditors’ approval is
not required for the payment of the dividend.
There are no restrictions on the repatriation of dividends
offshore using foreign currency.
The board of directors typically authorises the distribution of
dividends, although the charter of a company may provide
this right to the shareholders.
In the absence of a tax treaty, dividends, interest and
royalties received by a non-resident legal entity from a
Mongolian source are subject to Mongolian income tax at
a rate of 20 per cent. The Mongolian legal entity making
such payments is obliged to withhold income tax from such
payments. Mongolia has entered into double tax conventions
with a number of countries, which conventions provide for
lower rates of taxation in certain circumstances.
Realising capital (transfer restrictions)
The shareholders of an LLC have a pre-emptive right to
acquire shares or securities related to shares that are offered
for sale by the other shareholders of such company. These
pre-emptive rights can be waived in the charter of an LLC. If
the shareholders desire to retain these pre-emptive rights,
this should be stipulated in the charter of the company.
Deadlock and termination provisions
Deadlock and termination issues must be addressed in the
founders’ cooperation agreement of a company and are a
matter of contract among the shareholders. It is common for
founders’ cooperation agreements to include put and call
options or drag-along and tag-along rights.
Norton Rose Fulbright 77
Joint ventures – protections for minority shareholders in Asia Pacific
78 Norton Rose Fulbright
Philippines
Joint ventures – protections for minority shareholders in Asia Pacific
Philippines
Contributed by Romulo Mabanta Buenaventura
Sayoc & de los Angeles
following major provisions (which are not necessarily related
to the protection of minority shareholders):
Making the investment
• a general provision encouraging cross-border investment
and encouraging trade between the contracting parties
Foreign ownership and control
The Foreign Investment Act of 1991, as amended (FIA),
generally governs foreign investments in the Philippines.
The extent of allowable foreign ownership depends on the
business or activity in which the investment vehicle will
be engaged. Save for the activities listed in the Foreign
Investment Act Negative List (the Negative List), foreign
investors may own up to 100 per cent of a domestic
enterprise in the Philippines.
The Negative List sets out the permissible percentage
of foreign equity ownership in particular businesses
or activities and is divided into List A and List B. These
restrictions apply to all companies in the Philippines,
whether listed or unlisted. List A details those foreign
investment activities that are restricted under the Philippines
Constitution and/or by specific laws. List B details areas of
investment where foreign ownership is restricted as a result
of risks to security, defence, health and morals, or protection
of local small and medium – size enterprises. The Negative
List is amended from time to time. However, List B cannot be
amended more often than once every two years. The National
Economic Development Authority is responsible for the
formulation of the Negative List, subject to the approval of
the President.
In addition to the Negative List, foreign investors must have
regard to “Commonwealth Act No.108, An Act to punish
acts of evasion of the laws on the nationalisation of certain
rights, franchises or privileges”, commonly referred to as
the Anti – Dummy Law (ADL). The ADL does not further
restrict foreign investment but penalises the use of trusts
and other devices intended to circumvent nationality
restrictions and limitations on foreign participation. Criminal
and civil penalties are imposed on persons who violate
nationalisation laws. The ADL however contains a carve out
which allows foreigners to act as “technical personnel” with
the prior approval of the Department of Justice (DOJ) (which
is the governmental body that supervises the enforcement of
the ADL).
Bilateral investment treaties
The Philippines has entered into at least 34 bilateral
investment treaties (BITs) with the same number of
countries. The treaties are more or less similar, with the
80 Norton Rose Fulbright
• treatment of foreign investments, usually encompassing
the following levels: fair and equitable treatment, mostfavoured nation treatment, and national treatment.
Note that not all the BITs provide for national treatment.
Exceptions are also provided for
• expropriation, which is generally precluded by the
treaties, subject to certain exceptions and usually for
“just” compensation which under Philippine law has a
settled technical meaning
• compensation for losses incurred by investors, due to war,
civil disturbances, or similar incidents. These provisions
usually include most – favoured nation treatment
• repatriation or transfer of foreign currency and
investments without undue delay
• subrogation of the contracting parties who have granted
insurance or guarantee agreements against noncommercial risks in respect of investments made by their
own investors in the territory of the other party
• provisions for the enforcement of these protections in a
neutral forum
• dispute resolution, covering disputes between and
among investors, between a contracting party and
investors of the other contracting party and between
the contracting parties themselves. For investor-related
disputes, the treaties usually prescribe negotiation before
submission to international arbitration, usually through
the International Centre for the Settlement of Investment
Disputes or the Permanent Court of Arbitration. In other
instances, there are also provisions for conciliation under
the Conciliation Rules of the United Nations Commission
on International Trade Law
• disputes between the contracting parties, usually arising
out of interpretation of the terms of the BIT, are usually
settled through diplomatic channels before resorting
to international arbitration which may necessitate the
intervention of organs of the United Nations, in particular
the International Court of Justice and
Philippines
• other provisions sometimes included may pertain to
the free entry and sojourn of personnel employed by
companies of the contracting parties and choice of law
provisions for the investments.
Statutory minority protection and conflicts with
shareholder agreements
The primary source of shareholder rights is B.P. BIg. 68,
as amended, otherwise known as the Corporation Code of
the Philippines (Corporation Code). The Corporation Code
contains several provisions for the protection of shareholder
rights, including those shareholders holding a minority
interest in the company. Shareholders may, pursuant to a
shareholders’ agreement, or in the articles of incorporation
or by-laws, grant minority shareholders greater protection
than that afforded by the Corporation Code.
Where minority protection is not modified by contract,
the Corporation Code includes minimum shareholder
rights designed to protect a minority shareholder. In
particular, there is a minimum director and shareholder vote
requirement for the approval of certain corporate actions
which cannot be altered by shareholder agreement. Such
matters include the following:
• amendment of the articles of incorporation — by a
majority of the board of directors and a vote or written
assent of two-thirds of the outstanding capital stock
• election of directors — by a majority of the outstanding
capital stock entitled to vote
• removal of directors — by two-thirds of the outstanding
capital stock
• increase or decrease of capital stock — by a majority of
the board of directors and two-thirds of the outstanding
capital stock
• incurring, creation or increase of bonded indebtedness —
by a majority of the board of directors and two-thirds of
the outstanding capital stock
• sale, lease, exchange, mortgage, pledge or otherwise
disposition of all or substantially all of the corporate
assets — by a majority of the board of directors and twothirds of the outstanding capital stock
• issuance of stock dividends — by a majority of the quorum
of the board of directors and two-thirds of the outstanding
capital stock
• amendment or repeal of by-laws or adoption of new bylaws — by a majority of the board of directors and majority
of the outstanding capital stock
• merger or consolidation — by a majority of the board of
directors and two-thirds of the outstanding capital stock
of the constituent corporation
• dissolution — by a majority vote of the board of directors
and two-thirds of the outstanding capital stock.
The Corporation Code requires corporations to allow
shareholders to inspect, for a legitimate purpose, corporate
books and records including minutes of Board meetings,
stock registers, journals, ledgers, tax returns, vouchers,
receipts, contracts, and all papers pertaining to the operations
of the corporation of interest to its stockholders, and to
provide shareholders with an annual report, including
financial statements, without cost or restrictions.
Shareholders have the right to receive dividends once these
are declared by the Board of Directors and in the case of
stock dividends, approved by at least two-thirds vote of
shareholders. A corporation is required to explain in its
financial statements the reason for its failure to declare
dividends when its retained earnings are in excess of 100 per
cent of its paid-in capital stock, except: (a) when justified by
definite corporate expansion projects or programs approved
by the Board; or (b) when the corporation is prohibited under
any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without
its consent, and such consent has not been secured; or (c)
when it can be clearly shown that such retention is necessary
due to special circumstances relating to the corporation,
such as when there is a need for special reserve for probable
contingencies.
Importantly, shareholders enjoy an “appraisal right” under
the Corporation Code. This is the right to demand payment
of the fair value of the shares held by the shareholder after
dissenting from a proposed corporate action involving
certain fundamental changes. Such appraisal rights may be
exercised in the case of:
• any amendment to the articles of incorporation that
has the effect of changing or restricting the rights of
any shareholders or class of shares, or of authorising
preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term
of corporate existence
Norton Rose Fulbright 81
Joint ventures – protections for minority shareholders in Asia Pacific
• the sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Corporation Code
or
• a merger or consolidation.
Minority shareholders also have the right to bring a derivative
suit against the corporation and its board of directors in cases
where the latter have committed a breach of trust either by
their fraud, ultra vires acts, or negligence, with the corporation
unable or unwilling to institute suit to remedy the wrong.
Issues commonly encountered by a foreign
or domestic minority shareholder
Employment
The transfer of a business does not include the transfer of
the employees of the business being transferred. Where an
investor seeks to transfer its employees to a joint venture
company as a consequence of the transfer of a business,
the employees must first resign or otherwise agree to
terminate their employment and must agree to take up
employment with the joint venture company. Termination
of employment, unless by the resignation of the employee
concerned, generally triggers an obligation to pay separation
or severance pay.
Foreigners to be employed by the joint venture company
must secure a pre-arranged employee visa, known as a 9(g)
visa, from the Bureau of Immigration, as well as an Alien
Employment Permit from the Department of Labour and
Employment. Where the joint venture company is engaged
in a partly nationalised business or activity, the employment
of such foreigner is limited to “technical” positions and must
have been specifically authorised by the DOJ.
Transfer of business or assets
The transfer of assets consisting of real property and shares
of stock generally gives rise to documentary stamp tax (DST)
and capital gains tax (CGT). On a share transfer, DST of Php
0.75 is payable on each Php 200 (or fractional part thereof)
of the par value of the shares being transferred. On an asset
transfer DST, on deeds of sale or conveyance of real property
is Php 15 where the consideration or value received (or
contracted to be paid) does not exceed Php 1,000 and an
additional Php 1,000 for every Php 1,000, of the higher of
the consideration or fair market value of the real property.
DST is also payable on the grant and assignment of leases,
mortgages and pledges.
82 Norton Rose Fulbright
If the requirements under Republic Act No. 8424, or the
National Internal Revenue Code of 1997, as amended (the
Tax Code) are met, a merger or consolidation may be exempt
from CGT and DST in respect of any shares of stock or real
property transferred pursuant to the merger or consolidation.
However, the original issuance of shares pursuant to the
merger or consolidation will still be subject to DST.
CGT is payable by the seller on the sale of real property
classified as a capital asset at a rate of six per cent on the
presumed gain based on the higher of the selling price and
the fair market value of the real property (in addition to DST).
CGT is also payable on the sale of shares held as a capital
asset. If the shares being sold are unlisted or if the shares are
listed but the sale is effected off market (outside the facilities
of the Philippine Stock Exchange), CGT will be payable by
the sellers at a rate of five per cent on any gain not exceeding
Php 100,000 and ten per cent on any gain that exceeds
Php 100,000 (in addition to DST). The gain is the difference
between the acquisition cost and the higher of the selling
price and book value.
Permits and licences issued by regulatory authorities may
be freely transferable, transferable with the consent of the
regulator, or not subject to transfer. A transfer of a business
will generally involve due diligence on the permits and
licences held by such business to determine whether they
can be transferred and, if so, whether the transfer must
comply with any formalities.
Nationality restrictions
Where the joint venture company is engaged in a partly
nationalised activity, it is not uncommon for a minority
foreign shareholder, through a preferred share structure,
to contribute more capital to a joint venture company than
that contributed by the majority Philippine shareholder.
Notwithstanding the greater economic interest of the
minority shareholder, control over the joint venture company
remains with the Philippine shareholder as required by law
(the ADL) and as dictated by its majority shareholdings. It
is often a challenge negotiating a shareholders’ agreement
that affords the minority shareholder sufficient protection
and that, at the same time, allows effective control to remain
vested with the majority shareholder.
Competition law and merger control
The Philippines does not currently have any overarching
or developed anti-trust legislation although there are bills
pending before the legislature relating to anti-trust and
monopoly matters. The Constitution of the Philippines
Philippines
nonetheless prohibits unfair competition and combinations
in restraint of trade. Further, under the Revised Penal Code,
any person who enters into any contract or agreement or
takes part in any conspiracy or combination in the form of a
trust or otherwise in restraint of trade or who monopolises
any merchandise or object of trade or commerce or combines
with another for that purpose, is guilty of a criminal offence
punishable by imprisonment, the imposition of a fine or
both. There are other rules pertaining to anti-trust issues but
in practice all such rules are not very rigorously or effectively
enforced given the absence of a central enforcement agency
and the lack of any comprehensive or integrated competition
policy among other reasons.
Governing law
Absent any public policy considerations that would compel
a local court to ignore the law chosen by the parties, the
court should apply the choice of law provision. Local courts
have denied the applicability of foreign law on the basis of
public policy considerations. For instance, where the choice
of foreign law affords less protection to the employees than
what they would have been entitled to under Philippine
employment law.
Offshore structures
It is common to encounter domestic corporations partly or
wholly owned by entities incorporated in other jurisdictions.
The Philippines has existing tax treaties with several
countries, including the United States, Singapore, Japan, the
Netherlands and the United Kingdom.
Shares in domestic corporations held by offshore entities will
be classified as foreign owned for purposes of determining
whether such domestic corporation is qualified to engage in
nationalised or partly nationalised activities.
Managing the investment
Veto rights, reserved matters and weighted voting
Under the Corporation Code, no share may be deprived of
voting rights except those classified and issued as preferred
or redeemable shares. In addition, there must always be a
class or series of shares with complete voting rights.
Where the articles of incorporation provide for non-voting
shares in the cases allowed, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
• amendment of the articles of incorporation
• adoption and amendment of by-laws
• sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property
• incurring, creating or increasing bonded indebtedness
• increase or decrease of capital stock
• merger or consolidation of the corporation with another
corporation or other corporations
• investment of corporate funds in another corporation or
business in accordance with the Corporation Code
• dissolution of the corporation.
The Corporation Code provides for a class of shares known
as founders’ shares, which have certain rights and privileges
not enjoyed by the holders of other shares. The most
common right given to founders’ shares is the right to elect
and appoint directors. SEC approval is required to create
founders’ shares (since the SEC must approve the company’s
articles of incorporation which set out the rights attached to
the founders’ shares). Where a right to vote for the election
of directors is granted to the holder of such founder shares, it
cannot be for a period of more than five years.
As mentioned above, the Corporation Code prescribes a
minimum shareholder vote requirement (generally twothirds of outstanding capital stock entitled to vote) for the
approval of certain reserved matters, and shareholders are
not permitted to agree on a lesser number. Consequently, to
the extent that a minority shareholder holds over one-third of
a corporation’s capital stock, such shareholder will have an
effective veto power over such reserved matters.
While shareholders may generally agree between themselves
on the manner by which the corporation shall be managed;
and, in consideration of its investment, a minority foreign
shareholder may be given the benefit of minority protection
provisions, such contractual stipulations should not
effectively be a ceding of management or operational
control to the foreign shareholder. For instance, where even
the most basic corporate actions are classified as reserved
matters, requiring the affirmative vote of the minority foreign
shareholder or its representative on the board of directors, it
could be argued that this constitutes a complete cession of
management or operational control in violation of the ADL.
Norton Rose Fulbright 83
Joint ventures – protections for minority shareholders in Asia Pacific
Governance
Companies incorporated in the Philippines are generally
governed by their constitutional documents in the form of
the articles of incorporation and by-laws and the provisions
of the Corporation Code. The Revised Code of Corporate
Governance issued by the Securities and Exchange
Commission (SEC) applies to Philippines incorporated (ie,
domestic) companies and branches of foreign corporations
that (a) sell equity and/or debt securities to the public that
are required to be registered with the SEC, or (b) have assets
in excess of Php50 Million and at least 200 stockholders
who own at least 100 shares each, or (c) whose shares are
listed on an exchange, or (d) are grantees of secondary
licenses from the SEC. Where the company is engaged in a
regulated activity, there may also be industry specific laws
or regulations which also impose corporate governance
requirements, such as the General Banking Law in relation
to banks and the Insurance Code in relation to insurance
companies.
The board of directors is the body through which managerial
decisions of the company are made. Their duties and
the procedure for their appointment and removal are
generally set out in the Corporation Code and the articles of
incorporation and by-laws of the company. All directors must
each hold at least one share in the capital of the company to
which they are appointed.
A majority of the directors and the company secretary of a
Philippines incorporated company must be resident in the
Philippines. In addition, the company secretary must also be
a citizen of the Philippines.
Where foreign ownership of a company is restricted to a
certain percentage, non-Filipino citizens may be elected as
members of the board of directors but only in proportion
to their allowable shareholding or interest in the capital of
such entity. Therefore, in practice, if foreign ownership of
the company is restricted to 40 per cent, then the number of
foreign directors is also restricted to 40 per cent of the board
(provided that non-Filipinos do not participate or intervene
in the management, operation, administration or control of
such company, as prohibited under the ADL).
The Corporation Code of the Philippines imposes civil
liability on directors who wilfully and knowingly vote for
or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such
84 Norton Rose Fulbright
directors. The Corporation Code also prescribes requirements
for the validity of contracts between a corporation and its
directors or officers (also known as self-dealing contracts),
and contracts between two corporations with associated
directors.
Capital calls and pre-emption rights
As mentioned above, all shareholders enjoy pre-emptive
rights to subscribe to all issues or dispositions of shares
in proportion to their respective shareholdings, unless
such right is denied by the articles of incorporation or an
amendment thereto. The pre-emptive right, however, does
not extend to shares to be issued in compliance with laws
requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with
the approval of the stockholders representing two-thirds
of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously
contracted debt.
Non-compete undertakings
A non-compete clause in a contract runs the risk of being
declared void when it is in undue or unreasonable restraint
of trade, and therefore against public policy. There is no
fixed rule applied, and validity of a non-compete clause is
determined by its intrinsic reasonableness by reference to
whether the restraint is considered to be no greater than is
necessary to afford a fair and reasonable protection to the
party in whose favour it is imposed.
In determining whether the contract is reasonable or not,
courts will consider the following factors: (a) whether the
covenant protects a legitimate business interest; (b) whether
the covenant creates an undue burden; (c) whether the
covenant is injurious to the public welfare; (d) whether the
time and territorial limitations contained in the covenant are
reasonable; and (e) whether the restraint is reasonable from
the standpoint of public policy.
Realising the investment
Deriving income
The remittance of dividends by a domestic corporation
to its shareholder (if a non-resident foreign corporation)
is generally taxed at 30 per cent. This, however, may be
reduced to 15 per cent if the country in which the foreign
shareholder corporation is domiciled either: (a) grants a tax
sparing credit of 15 per cent, or (b) does not at all impose
any tax on such dividends received.
Philippines
The rate of withholding tax on dividends is subject to further
reduction under an applicable tax treaty.
Realising capital (transfer restrictions)
Philippine law generally does not impose restrictions (other
than nationality restrictions and pre-emptive rights) on
the transfer of shares. Nevertheless, where the corporation
whose shares are being transferred is a public utility or
otherwise engaged in a regulated activity, the transfer of the
shares may require notice to or consent of the legislature or
the relevant regulator.
Failing internal resolution, shareholders’ agreements
commonly allow shareholders to exercise put or call options
at a fair valuation, which, unless the shares are publicly
traded, is often left to the determination of an independent
expert.
Rights of first refusal, tag along rights, and drag along rights
are common provisions in shareholders’ agreements and
generally do not present problems in their implementation.
Where a corporation distributes all of its assets in complete
liquidation or dissolution, the gain realised or loss sustained
by the stockholder, whether individual or corporate, is
taxable income or a deductible loss, as the case may be.
Liquidating gains, while characterised as gains from the sale
or exchange of shares, is subject to the ordinary income tax
rates provided under the Tax Code, depending on the status
of the shareholder. A non-resident foreign corporation is
subject to a 30 per cent tax on gross income, subject to tax
treaty relief.
Foreign investments into the Philippines must be registered
with Bangko Sentral ng Pilipinas (BSP), the Central Bank, if
capital or profits are to be repatriated using foreign exchange
sourced from the Philippines banking system, namely either:
• authorised agent banks or
• subsidiary or affiliate foreign exchange corporations of
authorised agent banks.
If foreign investments are not registered with the BSP, the
foreign investor cannot use the Philippines banking system
to convert any profits and/or earnings from Philippines Pesos
into other currencies.
Deadlock and termination provisions
Other than the appraisal right described above, Philippine
law does not address deadlock situations that may be
encountered in a joint venture company. It is common
therefore for shareholders’ agreements to contain provisions
setting out a procedure for internal resolution of deadlocks,
which, after going through one or more stages, usually
culminate in a submission of the matter to the most senior
executive of each shareholder.
Norton Rose Fulbright 85
Joint ventures – protections for minority shareholders in Asia Pacific
86 Norton Rose Fulbright
Singapore
Joint ventures – protections for minority shareholders in Asia Pacific
Singapore
Making the investment
Foreign ownership and control
There are generally no restrictions on the level of foreign
ownership of Singapore companies or businesses (whether
listed or unlisted). Restrictions on foreign ownership exist
only in very few business sectors. For example, foreigners
cannot own certain classes of residential property (such
as landed property in the form of detached houses, semidetached houses and terrace houses) and there is a 49 per
cent cap on foreign ownership of a broadcasting company.
Statutory minority protection and conflicts with
shareholder agreements
One form of statutory protection accorded to minority
shareholders in Singapore is reflected in the need for
shareholder special resolutions (ie, passed by a 75 per cent
majority) for certain corporate actions such as the alteration
of the company’s constitution, a reduction of share capital
and winding-up. Other forms of minority protection are the
oppression remedy provided by section 216 of the Singapore
Companies Act and the Court’s ability to order a company to
be wound up where it is “just and equitable” to do so, under
section 254 of the Singapore Companies Act.
Bilateral investment treaties
Under section 216(1), any member of a company (whether
listed or unlisted) may apply to court for an order on the
grounds that: (a) the affairs of the company are being
conducted, or the powers of the directors are being exercised,
in a manner oppressive to one or more of the members
(including himself) or in disregard of his or their interests
as members of the company; or (b) some act of the company
has been done or is threatened, or some resolution of the
members has been passed or is proposed, which unfairly
discriminates against or is otherwise prejudicial to one or
more of the members (including himself).
Under the CECA, for instance, investment benefits extend to
citizens and enterprises based in Singapore or India. National
treatment is accorded to investors from both countries
subject to the commitments (India) and reservations
(Singapore) undertaken. In addition, both countries cannot
expropriate investments, directly or indirectly, without
proper legal safeguards. Any expropriation must be premised
on public purpose and compensation based on fair market
value. Further, both countries will allow investors to freely
transfer funds related to their investments, such as capital,
profits, dividends and royalties.
The four grounds in section 216(1) for bringing a claim
have been interpreted as alternative expressions of a single,
composite ground based on commercial unfairness. The
courts have found commercial unfairness, for example,
where majority shareholders (who are often also directors)
used their powers to divert corporate assets and/or
opportunities to themselves or to parties in which they
are interested. Once the elements of section 216(1) are
established, the court may, with a view to bringing to an
end or remedying the matters complained of, make such
order as it thinks fit, including directing or prohibiting
any act, cancelling or varying any transaction, authorising
a derivative action or providing for the purchase of the
aggrieved member’s shares by other members or by the
company itself, normally at a fair value assessed by an
independent valuer.
Singapore has signed 18 regional and bilateral Free Trade
Agreements (FTAs) with 24 trading partners, which have
been instrumental in easing investment rules. Bilateral FTAs
include the 2008 China-Singapore Free Trade Agreement, the
2005 India-Singapore Comprehensive Economic Cooperation
Agreement (CECA), the 2003 Singapore-Australia Free Trade
Agreement (which was reviewed in 2011), the 2003 USSingapore Free Trade Agreement (USSFTA) and the 2002
Agreement between Japan and the Republic of Singapore for
a New-Age Economic Partnership Agreement.
Similarly, under the USSFFA, each country will permit all
transactions relating to a relevant investment to be made
freely and without delay into and out of its territory. Such
transactions include contributions to capital as well as
profits, dividends, capital gains, and proceeds from the
sale of the relevant investment. Moreover, both countries
will grant fair market value in the event of expropriation
and undertake not to impose any unfair performance
requirements as a condition for the investment. The USSFFA
also provides for an investor-to-state dispute mechanism,
whereby investors aggrieved by government actions in
breach of obligations under the investment provisions can
refer the dispute to an international arbitration tribunal for
resolution.
88 Norton Rose Fulbright
In 2009, a comprehensive review of the Singapore
Companies Act was undertaken. One of the matters
considered was the possible introduction of a minority
buyout right or appraisal right as an alternative remedy
for minority shareholders. This would permit a minority
shareholder dissenting to fundamental changes to the
enterprise or to the alteration of certain shareholder rights
to require the company to buyout its shares at fair value.
Singapore
Although a draft of the Companies (Amendment) Bill has not
yet been published, the Steering Committee did not support
the introduction of such a right. It did, however, recommend
giving the Courts an ability to order a buyout of shares as
an alternative remedy on an application for winding up
of the company made under section 254 of the Singapore
Companies Act.
Shareholders may, in their shareholder arrangements,
contractually agree to go beyond minimum standards
imposed by law or provide for further regulation of the
company’s affairs. The company’s articles of association
constitute a contract between the company and its members,
and between the members themselves. An area of potential
conflict is where provisions in a shareholders’ agreement
conflict or are inconsistent with the company’s articles. This is
often addressed by stipulating in the shareholders’ agreement
that in the event of any such inconsistency, the shareholders’
agreement will prevail and further, that the parties agree to
amend the articles to remove any such inconsistency.
Issues commonly encountered by a foreign or
domestic minority shareholder
Competition law and merger control
Singapore’s Competition Act 2004 prohibits anti-competitive
agreements, abuses of a dominant market position, as well
as mergers leading to a substantial lessening of competition
within any market in Singapore. The creation of a joint
venture which is to perform on a lasting basis all the
functions of an autonomous economic entity will qualify as
a “merger” where joint control among shareholders can be
established based on the nature and scope of the minority
protections obtained.
Despite the general prohibition of anti-competitive mergers,
there is no mandatory merger notification requirement in
Singapore. Parties are free to perform their own assessment,
or voluntarily notify their merger for review and approval by
the Competition Commission of Singapore (the CCS) before
or after completion. The CCS adopts a two – phase approach
in evaluating voluntary merger notifications. It first carries
out a preliminary assessment of the merger (Phase 1 review),
normally within 30 working days. If the CCS is unable to
conclude whether the merger raises competition concerns, it
will carry out a more detailed assessment (Phase 2 review)
which it will endeavour to complete within 120 working
days. However these timelines are flexible and there is no
implicit approval of the merger should the CCS fail to make a
decision within the specified time limits.
According to the Guidelines on Merger Procedures (effective
1 July 2012), the CCS is unlikely to challenge a merger –
either on its own initiative or following a notification – that
falls within any of the following circumstances:
• in the preceding financial year, each transaction party’s
turnover in Singapore was below S$5 million and their
combined worldwide turnover below S$50 million
• the merged entity will have a market share of less than 20
per cent or
• the merged entity will have a market share of between
20 and 40 per cent in a post-merger market where the
combined market share of the three largest firms is less
than 70 per cent.
The CCS analyses a particular merger from both the
perspective of its competitive effect on the Singaporean
market and the perspective of any ensuing economic
efficiencies. If the economic efficiencies outweigh the adverse
effects due to a substantial lessening of competition, the
relevant merger will be excluded from the prohibition.
Similarly, mergers approved by, or under the jurisdiction of,
another regulatory authority in Singapore are also excluded
from the merger control rules.
For mergers not excluded from review, the CCS may issue
directions or accept commitments by the parties to remedy
any competition concerns. Where there is no reasonable or
practical remedy to the competition concerns, the directions
may prohibit the anticipated merger from being carried
into effect, or require a completed merger to be dissolved
or modified in such manner as the CCS may direct. The CCS
may also impose financial penalties for an intentional or
negligent infringement of the Competition Act.
It is worth noting that the Competition Act will be relevant
to joint ventures incorporated in Singapore as well as those
incorporated abroad but with activities in Singapore. Parties
should also keep in mind that the same applies in foreign
competition law regimes: joint ventures incorporated
in Singapore may be subject to merger control rules in
jurisdictions outside of Singapore where sales are made
or assets are located. For example, the European Union
and China have far-reaching merger control regimes which
require pre-merger notification even where the joint venture
has no activities or assets but where the parents have
significant sales.
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Joint ventures – protections for minority shareholders in Asia Pacific
Employment
The employment law regime in Singapore is generally
favourable towards employers to the extent that the statutory
minimum conditions of employment under the Employment
Act are mostly only applicable to employees who do not
perform professional, managerial or executive roles. Where
a joint venture involves the transfer, by reason of sale,
amalgamation, merger or reconstruction, of a business or part
thereof to another entity, employees of the business who fall
under the purview of the Employment Act would be ensured
of the continuity of their employment to the new employer.
The mechanism of transfer is fairly straightforward save
for certain prescribed obligations on the part of the former
employer to give reasonable notice to the affected employees
and any trade unions representing those employees, and to
ensure that the terms of employment with the new employer
are not less favourable than with the former.
Tax
Generally, there are no major taxation concerns particular
to minority shareholders under Singapore law. There is no
tax imposed on capital gains arising from a sale of shares,
however, tax is imposed on income gains. All Singapore
companies are subject to a one-tier corporate tax system
under which the tax paid by a company on its normal
chargeable income constitutes the final tax.
Objectives and termination
Joint ventures may, but are not required to have a finite
life. Most shareholders’ agreements typically provide for
termination in circumstances of the breach or insolvency
of a shareholder. Such events often also trigger other
consequences such as the requirement for a defaulting
shareholder to transfer its shares to the other shareholder.
Governing law
Parties to a joint venture agreement are free to choose the
governing law of their contract. Their express choice of
law will be given effect to, even if the transaction has no
connection with the country whose law is chosen. The only
exceptions are where the choice of law is illegal, contrary to
public policy or not made bona fide.
The enforcement of foreign judgments in Singapore is
statutorily provided for under the Reciprocal Enforcement of
Commonwealth Judgments Act (RECJA) and the Reciprocal
Enforcement of Foreign Judgments Act (REFJA). The RECJA
extends to judgments made in Commonwealth countries
whose laws provide for reciprocal enforcement of Singapore
judgments. Apart from the United Kingdom, the RECJA
90 Norton Rose Fulbright
currently extends to ten other countries (Brunei Darussalam,
Sri Lanka, Hong Kong (for judgments obtained on or before
30 June 1997), India (except for the States of Jammu and
Kashmir), Malaysia, New Zealand, Pakistan, Papua New
Guinea, Windward Islands, and Australia). The REFJA
empowers the Singapore Minister for Law to extend its
application to judgments made in any foreign country which
has assured substantial reciprocity of treatment as respects
the enforcement in that foreign country of judgments made
in Singapore. To date, Hong Kong is the only jurisdiction to
which the REFJA has been extended.
The RECJA and the REEJA impose certain conditions for the
enforcement of a foreign judgment as follows:
• the foreign judgment must be final and conclusive
• the original court must not have acted without jurisdiction
• the foreign judgment must not have been obtained in
breach of due process and/or contrary to the rules of
natural justice
• the judgment must not have been obtained by fraud
• enforcement of the judgment must not be contrary to the
public policy of Singapore.
It should be noted that under section 3(1) of the RECJA,
the Singapore courts have a discretion not to enforce a
foreign judgment if such enforcement would not be just and
convenient in all the circumstances of the case.
Under the RECJA, judgments include arbitral awards if the
award has, pursuant to the law where it was made, become
enforceable in the same manner as a judgment given by a
court in that place. Accordingly, foreign arbitral awards may
be enforced in Singapore under the RECJA. Alternatively, if
the awards were made in a state that is a signatory to the
New York Convention 1958, they may be enforced under
the International Arbitration Act, which incorporates the
Convention. The conditions for enforcing a foreign award
are largely similar to those for enforcing a foreign judgment,
although the court may refuse enforcement on the grounds
set out in section 31 of the International Arbitration Act.
Offshore structures
Offshore structures are permitted in Singapore and indeed,
Singapore’s favourable taxation and investment environment
makes Singapore itself an attractive offshore jurisdiction for
foreign investors.
Singapore
Managing the investment
Veto rights, reserved matters and weighted voting
The use of veto rights and weighted voting rights in respect of
“reserved matters” is common. Whereas Singapore law may
prescribe a certain threshold for passing of various corporate
actions, shareholders may contractually agree on higher
thresholds or additional requirements (for example, the
inclusion of the minority shareholder’s vote) that would give
rise to a breach of contract claim if such requirements were
not complied with.
Governance
Every company incorporated in Singapore must have at
least one director who is “ordinarily resident in Singapore”.
The “resident” director could be a Singaporean, permanent
resident or foreign national holding a valid employment
pass. There are no rules governing the nationality of
directors.
There is no automatic right to appoint a director by reason of
a party’s shareholding but such a right may be provided for
in the company’s articles.
Directors’ duties may be classified into four main duties,
derived from both statute and the common law. These
stipulate that a director:
• must act bona fide in the company’s interests in
discharging the duties of his office. This constitutes both
a fiduciary duty and the statutory duty of honesty under
section 157(1) of the Companies Act
• must not place himself in a position where the interests of
the company come into conflict with either his personal
interest or the interest of a third party for whom he acts
Where a director has been appointed to represent the
interests of a particular shareholder (the appointor), the
nominee director owes the same duties as any other director.
In particular, a nominee director may not prefer the interests
of his appointor over the interests of the company. A nominee
director may, however, take into account the interests of his
appointor if such interests do not conflict with the interests
of the company.
Management powers are vested in the directors and the
directors may exercise the Company’s powers except to the
extent that any matter is reserved to the shareholders of the
company by the provisions of the Singapore Companies Act
or the constitutional documents of the Company. Singapore
company law does not require an additional “supervisory”
structure at any level.
Pursuant to sections 203, 189, 192, 173, 88 and 164
respectively of the Companies Act, shareholders have the right
to access company documents such as financial statements;
minutes of all proceedings, including general meetings, board
meetings and managerial meetings; the register of members;
the register of directors, managers, secretaries, and auditors;
the register of substantial shareholders; and the register of
directors’ shareholdings.
By virtue of section 158 of the Companies Act, a nominee
director may disclose to the shareholder whose interests
he represents, information obtained in his capacity as a
director if: (a) the director declares at a board meeting the
name and office held by the shareholder and the particulars
of the information to be disclosed; (b) the director receives
prior authorisation by the board of directors to make the
disclosure; and (c) the disclosure is not likely to prejudice the
company.
• must employ the assets and powers entrusted to him for
their proper purposes, and not for any collateral purpose
There are no restrictions on giving shareholders a contractual
entitlement to information about financial and business
matters of the company.
• owes a duty to exercise care, skill and diligence in
performing his functions. The standard of care and
diligence owed by a director is that reasonably expected
of a person in the director’s position. This standard will
not be lowered to accommodate any inadequacies in the
individual’s knowledge or experience; however, it will be
raised if the director holds himself out to possess or in fact
possesses some special knowledge or experience.
In practice, it is not uncommon for potential conflicts of
interest involving directors to be, firstly, disclosed and
secondly, referred to the board of directors and/or the
shareholders of the company. This does not negate a
director’s duties vis-à-vis the company but does provide
evidence that the relevant transaction or act, having been
approved by the board or shareholders meeting, is in the
company’s best interest.
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Joint ventures – protections for minority shareholders in Asia Pacific
Capital calls and pre-emption rights
There is no statutory right of participation in additional
equity issues, nor any statutory preemption rights on the
issue of new shares. Both rights are, however, commonly
provided for in a company’s articles or in a shareholders’
agreement.
Non-compete undertakings
The legality of non-compete covenants in the context of joint
ventures will be assessed under both common law principles
and the Competition Act.
The general principle at common law is that non-compete
covenants are void and unenforceable as being in restraint
of trade, unless they are found to be reasonable both as
between the parties and with respect to the interests of the
public. To be reasonable as between the parties, the noncompete covenant must seek to protect some legitimate
interest of the party relying on it and be reasonably necessary
in all the circumstances. “Reasonableness” is a question of
fact to be determined in each case; the geographical scope,
time period and subject-matter of the restraint are often
examined to determine whether the restraint is broader than
necessary to protect a party’s legitimate interest. A noncompete clause would be unreasonable with regard to the
interests of the public where, for instance, enforcing the clause
would create or maintain a monopoly in the relevant business.
Under the Competition Act, non-compete covenants will
generally be considered legal between joint venture partners
if their scope does not extend beyond the current or planned
activities of the joint venture in terms of geographic area (the
territories in which it operates) and subject matter (the types
of products or services sold by the joint venture).
The CCS has yet to provide formal guidance concerning the
duration of non-compete covenants that it will consider
legitimate. In one case, it has considered that a five year noncompete clause entered into by one joint venture parent was
legitimate. It could, however, be argued that non-compete
covenants entered into for the lifetime of the joint venture
should be valid, consistent with the view under the EU
competition rules, on which the Competition Act is modelled.
Caution should however be exercised when designing noncompete obligations the duration of which extends beyond a
shareholder’s exit, as their validity will be assessed in view
of the scope of operations of the joint venture and of the
other shareholders at the time of the exit.
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Realising the investment
Deriving income
There are currently no exchange control restrictions in
Singapore.
It is possible for a company’s share capital to be divided into
different classes, with different rights attached to each class
and specified in the company’s memorandum and articles
or in the resolution of the company authorising the issue
of shares of that class. Section 70(1) of the Companies Act
specifically provides that a company may, if so authorised
by its articles, issue preference shares which are liable to be
redeemed. Pursuant to section 75(1) of the Companies Act,
a company may not issue preference shares or convert any
issued shares into preference shares unless its memorandum
or articles set out certain rights attached to those preference
shares. Such rights include rights relating to repayment
of capital, participation in surplus assets and profits,
cumulative or non-cumulative dividends, voting and priority
of payment of capital and dividend in relation to other
classes of shares.
Realising capital (transfer restrictions)
Shares are freely transferable unless restrictions are imposed
by the company’s memorandum or articles or by agreement.
Deadlock and termination provisions
Drag and tag provisions are commonly encountered in
Singapore, and there are no restrictions on their use. Parties
are also free to stipulate in a shareholders’ agreement
the circumstances under which that agreement should
terminate.
South Korea
Joint ventures – protections for minority shareholders in Asia Pacific
South Korea
Contributed by Lee & Ko
Making the investment
Foreign ownership and control
Foreigners can freely make investments in the Republic of
Korea (Korea) and in practice they have actively invested.
The Foreign Exchange Transactions Act (FETA) regulates
transactions in Korea involving foreign exchange,
including the acquisition of shares of a Korean company by
foreigners. The Foreign Investment Promotion Act (FIPA)
was enacted to stimulate foreign investment which meets
certain requirements. Under the FIPA, the procedures
for such foreign investment are simplified and when
certain requirements are met, various benefits such as tax
exemptions or reductions are given to the foreign investor.
However, in some industry sectors, certain specified restrictions
are placed on foreign investment or governmental approval is
required. Foreign ownership restrictions concerning voting
shares are applicable in some cases — for example in the
energy industry (including the power business), transportation
industry (including aviation) and telecommunications and
broadcasting industry (including newspaper and cable TV
businesses). In other cases, such as the national defence
industry, prior approval from the competent authority is
required for a foreigner to acquire shares of a Korean company
above a prescribed shareholding ratio. In other words,
although in principle freedom of foreign investment is ensured
in Korea, due to the possibility of restrictions in certain industry
sectors it would be advisable to check relevant procedures and
requirements in advance of making an investment.
The following is a summary of foreign investment in a Chusik
Hoesa (a joint stock company, the most typical form of
company in Korea) that is privately-held, unless otherwise
specified.
Bilateral investment treaties
As of June 30, 2012, Korea has entered into bilateral investment
treaties (BITs) with 91 countries (consisting of 35 in Europe, 22
in the Middle East/Africa, 16 in Asia, and 17 in America) which
are still in effect.
BITs are very similar to one another in substance, including
the most-favoured-nation-treatment clause and a nationaltreatment clause applicable to investors, guarantee
against investment loss caused by war, civil war and so on,
guarantee of remittance of returns on investment, resolution
of disputes between an investor and the country in which
94 Norton Rose Fulbright
investment is made, and compensation in the case of
nationalisation and expropriation.
Statutory minority protection and conflicts with
shareholder agreements
A meeting of shareholders of a Chusik Hoesa (Shareholders’
Meeting) has the highest decision – making authority of
the corporation on such matters as prescribed by law or its
articles of incorporation (AOI).
A general resolution such as for the appointment of
directors/statutory auditors or the approval of financial
statements, requires the affirmative vote of a simple majority
of voting shares present or represented at the Shareholders’
Meeting. On the other hand, a special resolution (eg, for
dismissal of directors/statutory auditors, capital reduction
and merger) requires the affirmative vote of two-thirds of
voting shares present or represented at the Shareholders’
Meeting. Thus, control over a matter can be ensured by
securing one share plus 50 per cent of all voting shares, if
it requires a general resolution, and two-thirds of all voting
shares, if it requires a special resolution.
Following amendment of the Korean Commercial Code
(KCC), which came into force on April 15, 2012, a company
may issue classes of shares with no voting rights or with
limited voting rights for certain resolutions as provided by
the AOI. However, following the principle of “one vote for
one voting share”, shares with weighted voting rights or a
casting vote are not permissible in Korea. Since in practice
most material decisions are made at a meeting of the board
of directors (Board), it is important to control the Board
in order to exercise management control effectively. The
representative director of a corporation has the authority to
represent it and conduct all business on its behalf. Generally,
the representative director is appointed at the Board meeting
while the AOI confer such authority on the Shareholders’
Meeting.
The requirement for a quorum at a Board meeting is satisfied
by the presence of a majority of all directors of the company
and a Board resolution requires the affirmative vote of a
simple majority of all directors present at the meeting. It
is permissible for shareholders to agree in a shareholders’
agreement higher requirements for a Board resolution
than prescribed by law, and to impose sanctions (eg,
compensation for damages) for violation of the shareholders’
agreement.
South Korea
The KCC guarantees certain rights of minority shareholders.
Some of the statutory minority protections are as follows:
• a shareholder holding one share of a company may
exercise his right against the company to inspect and
copy corporate documents (eg, the AOl, minutes of
Shareholders’ Meetings, etc) and bring a claim in a
court against the company for rescission of a resolution
adopted at the Shareholders’ Meeting, or to seek
court’s confirmation that a resolution adopted at the
Shareholders’ Meeting is invalid
• shareholders holding one per cent or more of all issued
and outstanding shares of a company may demand the
suspension of illegal action by a director of the company
• shareholders holding three per cent or more of all issued
and outstanding shares of a company may call for a
Shareholder Meeting, propose an agenda item for a
Shareholder Meeting, request the dismissal of a director/
statutory auditor and exercise a right to inspect and copy
the accounting books of the company and
• minor shareholders may request controlling shareholders
owning at least 95 per cent of the stock of a company to
purchase their shares, and the controlling shareholder
shall purchase those shares within two months of
receiving the request.
Issues commonly encountered by a foreign or
domestic minority shareholder
Employment
Korea has an enhanced legal system for the protection
of employees. The Labour Standard Act (LSA) and other
employment-related laws and regulations provide for strict
standards for labour conditions and reasons for termination
of employment, to protect employees.
Tax
In Korea, corporate tax is imposed with respect to income
of a corporation, while income tax is imposed with
respect to income of an individual. In addition, in relation
to transactions involving stock, capital gains tax and
securities transaction tax can be imposed, and in the case of
acquisition/registration of specific properties (most typically,
real properties), acquisition/registration tax may also be
imposed.
Competition law and merger control
Under the Monopoly Regulation and Fair Trade Act, certain
business combinations involving joint ventures may be
subject to mandatory pre-merger (ie, before the closing of the
business combination) or post-merger (ie, after the closing
of the business combination) clearance by Korea’s Fair Trade
Commission (KFTC). These merger clearance requirements
apply to a variety of business combinations, including
minority share acquisitions.
The following transactions constitute “business
combinations” under the Act:
• the acquisition of the shares of another company, when
such acquisition leads to the holding of at least 20 per
cent of total shares, or 15 per cent in the case of listed
companies
• the transfer of the whole or a substantial part of the
business of another company; or the transfer of the whole
or a substantial part of the fixed operating assets of
another company
• participating in the establishment of a new company and
becoming the largest shareholder thereof
• mergers or
• the establishment of an interlocking directorate of a
large-scaled company (ie, company with a total revenue or
assets exceeding KRW2 trillion).
A situation where a joint venture is formed through the
acquisition of shares of an existing company or the participation
in the establishment of a new company will fall within the first
type of business combination listed above if the equity
thresholds are met, irrespective of whether the joint venture
constitutes an autonomous business in economic terms.
Business combinations are subject to post-merger clearance
by the KFTC if all of the following conditions are met:
• one party to the transaction had total worldwide assets
or annual sales of at least KRW200 billion during the last
financial year
• another party to the transaction had total worldwide
assets or annual sales of at least KRW20 billion during the
last financial year
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Joint ventures – protections for minority shareholders in Asia Pacific
• in the case of business combinations between foreign
businesses, each of the foreign entities achieved turnover
within South Korea of at least KRW20 billion during the
last financial year.
Business combinations that meet the above thresholds are
subject to pre-merger clearance by the KFTC if one of the parties
to the business combination had total assets or achieved
annual sales over KRW2 trillion during the last financial year
(except for the establishment of an interlocking directorship,
which is subject to a post-closing notification).
Certain companies and investment funds are exempt
from notification requirements if they fall within specific
exemption conditions.
Post-merger notifications must be made within 30 days after
the business combination is formed. The starting date for
the 30-day period differs depending on the type of business
combinations. Pre-merger notifications can be made at any
time after the signing of the transaction documentation but
before the closing of the business combination.
The KFTC has 30 days to decide whether or not to approve
the business combination, but may shorten or extend this
review period by an additional 90 days.
Objectives and termination
A Chusik Hoesa may have a finite term of existence. If so, the
term of its existence must be registered with the commercial
registry, and expiry of the term serves as a reason for
dissolution of the corporation. However, in practice a
corporation seldom pre-sets its life term.
In addition, a corporation may be dissolved:
• upon occurrence of any event provided in the AOI
• upon merger or bankruptcy
• upon spin-off
• pursuant to a court’s order or decision for dissolution of
the company or
• by special resolution adopted at the Shareholders’
Meeting.
Thus, it is permissible to provide for special reasons for
dissolution in the AOI. Once a corporation is subject to
96 Norton Rose Fulbright
dissolution, the procedures for its liquidation will begin to
wind up all of its rights and obligations.
The KCC does not provide for a deadlock, which thus needs
to be resolved under a shareholders’ agreement. The parties
may agree how to handle the occurrence of a deadlock — for
example, it is possible to allow a party to exercise a put or
call option (ie, right to sell its shares to another shareholder
or purchase shares of another shareholder) upon the
occurrence of a deadlock. In many cases, the exercise price of
a put or call option is calculated based on a fair market value
of underlying shares. However, controversy often arises over
how to calculate the exercise price. It is advisable to have a
shareholders’ agreement expressly and specifically provide
for the procedures and method of evaluation of the stock in
the case of exercise of a put/call option.
In principle a shareholder may freely transfer stock held by
him. However, it is also possible to require approval from
the Board in the case of transfer of stock if so provided in
the AOI. No statutory right of first refusal is recognised.
However, it is permissible to grant a right of first refusal,
tag-along rights and the drag-along rights to shareholders
under a shareholders’ agreement. It should be noted that
such rights are just contractual rights to the parties to a
shareholders’ agreement and cannot be enforced against
a third party. Thus, transfer of stock in violation of a
shareholder agreement itself cannot be invalidated but there
only remains an issue of compensation for damages against a
party to the contract for the violation thereof.
Governing law
Parties to a joint venture agreement and a shareholders’
agreement can freely agree to the governing law, the method
of dispute resolution, jurisdiction and venue. However,
regardless of which law is agreed to be the governing law, the
mandatory laws of Korea — eg, the MRFTA, the LSA, tax laws,
etc — will apply, where applicable. Though separate review
would be required on a case-by-case basis, in many cases the
foreign arbitration awards and decisions are enforceable in
Korea — because Korea is a signatory to the United Nations
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards and because the Korean court takes a very
generous stance in this respect.
Offshore structures
While in the past special purpose companies (SPC) were
formed in tax havens, such as the Cayman Islands to reduce
taxes arising from investment in Korea, the regulatory
framework of the tax law of Korea now covers foreign
investment through SPCs in tax havens, mainly by looking
South Korea
through the SPCs to find the real investors (the beneficial
owners of the shares held by SPCs). Accordingly, investment
through SPCs in tax havens may not enjoy the benefits
previously available.
Managing the investment
Veto rights, reserved matters and weighted voting
The KCC provides for the principle of “one vote per voting
share” and no veto right or weighted voting is recognised by
operation of law. However, it is permissible to enhance the
requirements for a resolution adopted at the Shareholders’
Meeting on certain matters, if so reflected in the AOI in
advance.
As for to what extent it is permissible to enhance the
requirements, there still is controversy among legal
scholars and commentators and there is no precedent. In
practice, occasionally a veto right is in substance granted
to a particular shareholder or director by enhancing the
requirement for a resolution adopted at the Shareholders’
Meeting or by the Board on certain specified matters.
Governance
The Shareholders’ Meeting of a Chusik Hoesa has the highest
decision-making authority of the corporation on such
matters as are prescribed by law or in its AOI. A company
must hold an ordinary general meeting of shareholders
(Ordinary Meeting) once a year, and may hold extraordinary
general meetings of shareholders (Extraordinary Meetings)
when necessary. Matters requiring a general resolution by
shareholders require the affirmative vote of a simple majority
of shares present or represented at the Shareholders’
Meeting, and one-fourth of all issued and outstanding shares
of the corporation. Thus, a shareholder holding one share
plus 50 per cent of all issued and outstanding shares of the
corporation may alone adopt a general resolution for the
appointment of directors/statutory auditors, the approval of
financial statements, and the like.
A special resolution requires the affirmative vote of twothirds of voting shares present or represented at the
Shareholders’ Meeting, and one-third of all issued and
outstanding shares of the corporation. Thus, in general, a
shareholder holding two-thirds of all voting shares of the
corporation may alone adopt a special resolution for the
dismissal of directors/statutory auditors prior to expiry of
their respective terms, capital reduction, merger, and so on.
Directors are appointed by a general resolution at a
Shareholders’ Meeting, while material decisions of the
company are made by the Board. The quorum of the Board
meeting is satisfied by the presence of a majority of all
directors of the company and a Board resolution requires
the affirmative vote of a majority of all directors present at
the meeting. Under the KCC, it is permissible to have more
stringent requirements for a Board resolution, if so provided
in the AOI. However, it is still controversial and there is
no precedent, as to what extent the requirements can be
enhanced. Although there are commentaries to the effect
that requiring unanimous affirmative votes or granting
a veto right to a certain director is invalid, due to lack of
precedents expressly on the point it would be difficult to
render a definitive conclusion on this issue. However, under
the principle of “freedom of contract” it is permissible for
shareholders to agree (a) higher requirements for a Board
resolution than prescribed by law and (b) the effect of
violation of the shareholders’ agreement. On the other hand,
it is not permissible under the KCC to grant any weighted
voting right (eg, multiple voting rights) to a particular
director.
There is no restriction on the nationality or residence of a
director of a corporation. The KCC recognises three categories
of directors, namely “inside directors”, “outside directors”
and “non – standing directors” (who are inside directors
but are not involved in the daily affairs of the company).
Thus, the KCC categorises directors first into inside directors
and outside directors, and then further categorises inside
directors into ordinary inside directors (who engage in the
daily affairs of the company) and non-standing directors
(who do not engage in the daily affairs of the company).
Outside directors are similar to independent directors under
US corporate law.
Under the KCC, certain requirements need to be met in
order to qualify as an outside director and to maintain their
independence from management. For example, persons who
fall under any of the following categories (among others)
may not be an outside director of a company:
• a director or employee of the company currently engaged
in the daily affairs of the company, or a director, statutory
auditor or employee of the company who has engaged in
the daily affairs of the company during the previous two
year period
• if the largest shareholder is a natural person, that person,
his/her spouse, parent or child or
Norton Rose Fulbright 97
Joint ventures – protections for minority shareholders in Asia Pacific
• if the largest shareholder is a company, a director,
statutory auditor or employee of such company.
Each director of a company owes a duty of care as a good
manager, to the company. If a director violates any law or
regulation or any AOI, or neglects his duties intentionally
or by gross negligence, he is liable in damages to the
company. This liability may be released with the consent of
all shareholders. Following the April 2012 amendments to
the KCC, the company may exempt a director from liability
in accordance with the provisions of the AOI, where the
amount of the liability exceeds more than six times the
director’s last year’s annual remuneration. However, this is
not permitted where the director has caused damage to the
company intentionally or by gross negligence, violated the
prohibition on competing with the company or been involved
in self-dealing or using a corporate opportunity (which are
both prohibited by the KCC). Shareholders holding one per
cent or more may demand that the company brings a lawsuit
against a director for his liabilities. If a director of a company
neglects his duties intentionally or by gross negligence, the
director is personally liable for damages to any third parties.
A director must submit a financial statement to the
statutory auditor of the company at least six weeks prior
to the Ordinary Meeting, and submit the audited financial
statement to the Ordinary Meeting for approval. Minority
shareholders may exercise their right to inspect and copy
accounting books of the company, they can inspect certain
accounting books with due cause, so that they can monitor
major issues concerning corporate management.
Capital calls and pre-emption rights
A corporation may raise new funds by way of a capital
increase. In principle, the KCC ensures that shareholders
of a Chusik Hoesa are entitled to pre-emptive rights to
new shares on a pro rata basis based on their respective
shareholding ratios, whenever it increases its paid-in capital
with consideration. However, the corporation may issue new
shares to a third party by Board resolution, if:
• permitted under the AOI and
• required for management reasons.
98 Norton Rose Fulbright
The allocation and issuance of new shares to a third party
(Third Party Allocation) is often utilised as a means of
diluting shareholding ratios of the other shareholders and
increasing management control of the incumbent Board, and
thus in many such cases, the validity of capital increase by
the Third Party Allocation is challenged and disputed.
The KCC does not allow a majority shareholder to compel
minority shareholders to sell their shares, or otherwise
squeeze them out. Thus, if there are minority shareholders,
it is very difficult for a majority shareholder to acquire a
100 per cent equity interest in the corporation. Although
indirect routes can be taken — such as a tender offer, merger,
comprehensive stock exchange or transfer, capital reduction,
business transfer, and reverse split (consolidation of shares)
— none of these are perfectly straight forward, from a legal
perspective, as a method of squeezing out the minority
shareholders.
In addition, a corporation may be financed through
borrowing funds from a financial institution. In practice, in
many cases, a financial institution in Korea requires a debtor
to provide either security interests (eg, mortgage over real
property) with a value equivalent to at least 130 per cent of
the principal of a loan, or a personal guarantee of payment
under which the representative director or the majority
shareholder of a company is jointly and severally liable for
the debt owed by the company.
In addition, a company may take another route of debt
or equity financing — eg, issuing bonds, special types of
debentures (such as convertible bonds, bonds with warrants,
exchangeable bonds) or preferred stock without voting
rights.
Non-compete undertakings
Generally, Korean law does not have provisions prohibiting
competition in the context of joint ventures. However, under
the principle of “freedom of contract” parties to a joint
venture contract may agree to non-compete undertakings,
which will in principle be effective unless they violate the
mandatory laws of Korea.
South Korea
On the other hand, a director of a company cannot,
without the approval of the Board, be engaged in any
business competing with the company’s business, or serve
as a director of its competitor. In respect of non-compete
undertakings by an employee whose employment with the
company is terminated, if the scope of prohibition is too
broad or if the term of the non-compete undertakings is
too long, the undertakings may be found to be invalid, for
unfairly infringing the employee’s interests. Thus, it would
be advisable to check in advance whether the substance and
term of such undertakings are appropriate under Korean law.
Realising the investment
Deriving income
Deadlock and termination provisions
The KCC does not specifically provide for a deadlock. Parties
are free to agree what steps are to follow on the occurrence
of a deadlock. They also have freedom to agree to the
termination or cancellation of a joint venture agreement in
whatever manner they choose.
Further, an agreement to grant drag-along or tag-along rights
are recognised as being valid under Korean law. However,
those rights are just contractual rights, binding upon and
enforceable against the parties to the agreement only. Thus,
even if the AOI of the company, reflecting such agreement,
provide for tag-along or drag-along rights, such restrictions
on transfer of stock cannot have any legal effect binding
upon or be enforceable as against a third party.
Korean law does not place any restriction on transferring
dividends earned in Korea to recipients outside Korea.
A Chusik Hoesa can distribute its distributable profits
to shareholders by a general resolution adopted at the
Shareholders’ Meeting, under the KCC. Following the April
2012 amendments to the KCC, a company may also decide
to pay dividends by a resolution of the board of directors, if
the AOI make provision for it to do so. It is also permissible
to return investment through a capital reduction approved
by a special resolution adopted at a Shareholders’ Meeting.
Moreover, it is permissible to dissolve a company to return
remaining assets to the shareholders through liquidation.
Further, under the KCC, it is permissible to issue preferred
stock. Holders of such stock may have preferential rights to
dividends or distribution of remaining assets as are set out in
the AOI.
Realising capital (transfer restrictions)
There is no restriction on realising investments by way
of a transfer of shares held by a foreign investor to any
other person. However, it may be necessary to file a
business combination report in relation to such transfer, or
government approval may be required in some cases (such as
transfer of stock issued by a financial institution).
In relation to transfers of stock, it is permissible for the
parties to agree a right of first refusal or a put/call option,
and such an agreement is recognised as being valid in Korea.
However, in some cases, prior reporting to the Bank of Korea
is required. The Bank of Korea will rarely refuse to approve
such an arrangement.
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Joint ventures – protections for minority shareholders in Asia Pacific
100 Norton Rose Fulbright
Thailand
Joint ventures – protections for minority shareholders in Asia Pacific
Thailand
Making the investment
Foreign ownership and control
There are no generally applicable limitations on the level
of foreign ownership of shares in companies incorporated
in Thailand. However, there are wide ranging limitations
on activities conducted by non Thais including foreign
individuals and companies where at least half of the shares
are held by non Thais. The majority of the restrictions on
activities being undertaken by non-Thais are contained in the
Foreign Business Act B.E.2542 (1999) (FBA).
The FBA prescribes a wide range of business activities as
restricted businesses which are reserved for Thai nationals
and therefore cannot be carried out by “foreigners” (as
defined in the FBA) at all or without an appropriate licence
or exemption. These restricted businesses are further
categorised into three annexes attached to the FBA,
depending on the level of protection accorded to the relevant
business.
least 50 per cent of its total issued shares or investing
at least 50 per cent in its total capital.
In addition to the FBA, there are also other Acts which
restrict foreign investments in Thailand. These include:
• the Telecommunications Business Act B.E. 2544 (2001),
which prohibits aggregate foreign shareholdings
in excess of 49 per cent of the issued shares in a
telecommunications business operator
• the Life Insurance Act B.E. 2535 (1992) and the Non-Life
Insurance Act B.E. 2535 (1992), which prohibit aggregate
foreign shareholdings in excess of 25 per cent less one
share of the total issued shares in an insurance company
• the Financial Institution Business Act B.E. 2551 (2008),
which prohibits aggregate foreign shareholdings in excess
of 25 per cent of the total issued shares in a financial
institution
The restricted businesses in annex 1 cannot be carried out by
foreigners at all. The restricted businesses in annex 2 can be
carried out by a foreigner with a licence from the Minister of
Commerce and an approval from the Cabinet. The restricted
businesses in annex 3 can be carried out by a foreigner with
a licence from the Director-General of the Department of
Business Development and an approval from the Foreign
Business Committee.
• the Land Code, under which ownership of land in
Thailand by companies where less than 51 per cent
of their shares are held by Thais or a majority of the
shareholders (by number) are not Thai nationals, is
generally prohibited subject to certain exemptions. One
such exemption is permission to own land (as part of a
package of investment incentives) which may be granted
by the Thai board of investment to foreign companies
which have received investment promotions.
Under the FBA, a “foreigner” means:
Bilateral investment treaties
• an individual person who is not Thai national
• a juristic person which is not registered in Thailand
• a juristic person registered in Thailand, which:
—— has a person described in one of the first two bullets
above holding at least 50 per cent of its total issued
shares or investing at least 50 per cent in its total
capital or
—— is a limited partnership or a registered ordinary
partnership whose managing partner or manager is not
a Thai national and
• a juristic person registered in Thailand with a person
described in one of the first three bullets above holding at
102 Norton Rose Fulbright
Thailand is a party to the Thai-US Treaty of Amity (Treaty),
under which a US national or corporation is, generally,
accorded the same treatment as Thai nationals for the
purposes of carrying on most businesses in Thailand. The six
businesses which are specifically excluded from the scope of
the Treaty are: (a) transportation; (b) logistics; (c) custodian;
(d) deposit-taking banking business; (e) exploitation of
land or other natural resources and (f) domestic trading of
agriculture products (each an Excluded Business).
Other than in respect of an Excluded Business, a US national
or corporation which has received a certificate under the
FBA from the Ministry of Commerce (verifying its entitlement
to the privileges under the Treaty) is able to conduct any
restricted business under the FBA without reference to
the restrictions which would apply to other foreigners. For
the purposes of conducting any Excluded Business, a US
national or corporation is subject to the restrictions under
FBA, like any other foreigner.
Thailand
Statutory minority protection and conflicts with
shareholder agreements
Statutory minority protection for a private company and a
public company are set out in the Civil and Commercial Code
of Thailand (CCC) and the Public Limited Company Act B.E.
2535 (1992) (PLCA), respectively.
Minority protection provisions under the CCC include:
• any shareholder can demand an inspection of the
minutes of all proceedings, resolutions of meetings of the
shareholders and the board of directors
• any shareholder can bring an action against the directors
on behalf of the company for damage caused by the
directors to the company, if the company refuses to do so
• any shareholder can request the court to cancel a
resolution of the shareholders passed in contravention
of the law or the articles of association of the company
(within one month of the date of the resolution)
• any shareholder can require the company to provide a
copy of the share register book
• five or more shareholders can request the court to
appoint and fix the remuneration of the auditor, if the
appointment of the existing auditor does not comply with
the law
• one or more shareholder(s) holding at least 20 per cent
of the total issued shares can request the company to
convene an extraordinary general meeting to discuss a
specified agenda
• one or more shareholder(s) holding at least 20 per cent
of the total issued shares can request the Minister of
Commerce to appoint inspector(s) to examine and report
on the affairs of the company and
• one or more shareholder(s) holding more than 25 per cent
of the total issued shares can block a special resolution.
Matters which require approval by a special resolution
include:
—— an increase/decrease of the registered capital
—— an amendment to the articles of association or the
memorandum of association (which is required on a
change of company name or its objectives)
—— dissolution
—— amalgamation with another company or
—— issue of shares for non-cash consideration.
Minority protection provisions under the PLCA include:
• one or more shareholder(s) holding at least five per cent of
the total issued shares can request the company to initiate
court action against any director who caused damage to
the company, and (if the company fails to initiate such
court action) to initiate a claim for compensation on
behalf of the company and request that the court removes
the relevant director from office
• one or more shareholder(s) holding at least five per cent
of the total issued shares can request the court to order
the director not to take any action which is likely to cause
damage to the company and/or remove the relevant
director from office
• one or more shareholder(s) holding at least five per cent of
the total issued shares can request the company to initiate
court action against any director for any damage caused
to the company by his or her failure to notify the company
of his or her interest in businesses or partnerships in
competition with or of a similar nature to that of the
company, and (if the company fails to initiate such court
action) to initiate a claim for compensation on behalf
of the company and request that the court removes the
relevant director from office.
• one or more shareholder(s) holding at least ten per cent
of the total issued shares can request the directors to
convene a shareholders’ meeting, but only to replace a
liquidator or auditor
• one or more shareholder(s) holding at least 20 per cent
of the total issued shares or at least five shareholders can
request the court to cancel a shareholders’ resolution
passed in contravention of the articles of association or
the provision of the PLCA (within one month of the date of
the resolution)
• one or more shareholder(s) holding at least 20 per cent
of the total issued shares or at least 25 shareholders
holding at least ten per cent of the total issued shares
are entitled to require the board of directors to convene a
shareholders’ meeting
Norton Rose Fulbright 103
Joint ventures – protections for minority shareholders in Asia Pacific
• one or more shareholder(s) holding at least 20 per cent
of the total issued shares or not less than one-third of
the total number of shareholder are entitled to request
the Company Registrar at the Department of Business
Development (DBD) or the Ministry of Commerce to
appoint an inspector to examine the operations and
financial conditions of the company and the conduct of
the board of directors and
• one or more shareholder(s) holding more than 25 per cent
of the total issued shares can block a special resolution.
Matters which require approval by a special resolution
include:
—— an increase/decrease of the registered capital
—— an amendment to the articles of association or the
memorandum of association (which is required on a
change of company name or its objectives)
—— dissolution
—— amalgamation with another company
—— the sale or transfer of the whole or important parts of
the business
—— the purchase or acceptance of transfer of the business
of another company
—— making, amending or terminating of contract with
respect to the granting of the whole or important parts
of business or
—— the issue of shares to creditors to set-off against debts
of the company as part of its debt restructuring.
In addition to the statutory provisions, it is common for the
articles of association of the private company and/or the
shareholders’ agreement to provide for additional minority
protection provisions. The articles of association of the
company are subject to review and approval of the DBD. The
DBD can refuse to register any provisions of the articles of
association which it considers to be contrary to law or public
policy. The PLCA requires that the articles of association of
a public company shall not contradict to the provisions of
the PLCA. However, shareholders’ agreements are private
contractual arrangements which are not required to be
submitted to the DBD for registration.
104 Norton Rose Fulbright
The registered articles of association of a company are public
documents and, after reference to the articles of association
is published in the Government Gazette, the articles of
association are deemed to be known to third parties. On the
other hand, shareholders’ agreements are private contractual
arrangements and, accordingly, binding on only the parties
to such agreements.
In the event of inconsistency between the articles of
association and the shareholders’ agreement, as a matter
of law, the articles of association will prevail. However, any
action in breach of the shareholders’ agreement (but not
contrary to the articles of association) can still give rise to an
action for breach of contract.
Matters typically reserved for minority veto in the articles of
association and/or the shareholders’ agreement in Thailand
include:
• change in the nature of the company’s business
acquisition or disposal of business and assets approval of
the annual budget or business plan
• appointment and removal of the directors and/or other
key management personnel
• notice periods for convening a board meeting and a
shareholders’ meeting
• quorum of a board meeting and a shareholders’ meeting
• approval of any material, major or high value transaction
• approval of connected transactions
• borrowing or utilising credit facilities or creation of
encumbrances over assets
• merger, amalgamation or joint venture with another
company or business
• increase or decrease of capital
• dissolution and liquidation
• creation, increase or decrease of any class of shares, offer
or issuance of other securities
• listing the company’s shares on the Stock Exchange of
Thailand or the Market for Alternative Investment
Thailand
• appointment or a change of the auditor
• declaration of dividend or the adoption or change of a
dividend policy
• entering into, defending, or instituting any material
litigation and/or arbitration and
• corporate restructuring activities.
Issues commonly encountered by a foreign or
domestic minority shareholder
Employment
A foreigner working in Thailand is required to obtain a
visa and a work permit. To apply for a work permit, the
foreigner is required to hold a Non-Immigrant B visa, which
can only be obtained from any Thai Embassy or Consulate,
irrespective of the nationality of the applicant.
Tax
The principal Thai taxation law is the Revenue Code, which
regulates the collection of income tax (both personal and
corporate), value added tax, specific business tax and stamp
duties. There are other acts which govern the collection of
other specific indirect taxes, such as the Customs Act (which
regulates the collection of custom duties), and the Excise Act
(which regulates the collection of excise tax).
The Revenue Department of the Ministry of Finance
administers the collection of taxes under the Revenue Code.
Generally, Thailand applies a self-assessment system with
taxpayers paying tax according to the income they declare.
Domestic corporations are taxed on their worldwide income,
while foreign corporations are taxed on income generated in
Thailand. The income tax rate is, generally, 30 per cent and the
same rate applies to both domestic and foreign corporations
(which have their permanent residence in Thailand). Pursuant
to the Royal Decree dated 14 December 2011, the corporate
income tax rate will be reduced from 30 per cent to 23 per cent
for the 2012 financial year and to 20 per cent for the 2013 and
2014 financial years. Generally, taxable income includes
business income, dividends, interests, royalties and service
fees. Capital gain is treated as ordinary income and subject to
the same corporate income tax rate.
Withholding taxes are also applied to specific categories
of income paid to or by corporations, including dividends,
interests, royalties, capital gains and certain service/
professional fees.
Thailand’s consumption tax is value added tax (VAT,
collected on the sale of goods and provision of services. The
standard rate of VAT under the Revenue Code is ten per cent.
However, under Cabinet resolution relating to the concession
VAT rate, seven per cent applies until 30 September 2012.
Individuals resident in Thailand are taxed on their income
derived in Thailand and income derived from outside
Thailand and brought into Thailand in the same year in
which the income is earned, while non-resident individuals
are taxed only on income derived from sources in Thailand.
Personal income tax rates are progressive, ranging from five
per cent to 37 per cent, with a tax free threshold of Baht
150,000 per year. Employers are required to withhold tax on
payments of salary based on the projected tax payable for
the year and remit the tax to the Revenue Department on a
monthly basis.
Competition law and merger control
The Trade Competition Act 1999 (TCA) prohibits agreements
between business operators which reduce or restrict
competition in a market for particular goods or services. The
TCA also prohibits abuses of market power by dominant
businesses. With respect to mergers, Section 26 of the TCA
subjects takeovers or mergers “which may result in monopoly
or unfair competition” to the prior approval of the Thai
Competition Commission. However, the Government has yet
to publish implementing regulations that would specify the
merger notification thresholds. Accordingly, the TCA’s merger
control rules have not yet been brought into effect.
Financing issues
Generally, joint ventures in Thailand are initially financed by
shareholders’ equity. Some shareholders’ agreement/joint
venture agreements also provide for continued shareholder
support, while others envisage third party loans.
Objectives and termination
In most cases, the shareholders’ agreement would specify
the main objectives of the joint venture company to ensure
that it will operate according to the agreed objectives.
In most cases, the joint venture company is established
without a fixed term. However, it is common for the
shareholders’ agreement to contain provisions dealing
with exit mechanisms from the joint venture. These include
put and call options, drag-along and tag-along rights and
liquidation of the company. It is not uncommon for some or
all of the exit mechanisms to be reflected in the articles of
association of a private company.
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Joint ventures – protections for minority shareholders in Asia Pacific
Governing law
It is possible for the shareholders’ agreement to be governed
by foreign law. Such a choice of law is recognised by the
Conflict of Law Act B.E.2481 (1938) and such contract would
be enforceable by a Thai court to the extent that the relevant
foreign law is not contrary to the public order or the good
morals of the people of Thailand. The party seeking to apply
any foreign law must prove to the satisfaction of the Thai
court, the content and application of the relevant foreign law.
Offshore structures
Offshore structures are often used for tax purposes. The
shareholders’ agreement will also regulate the offshore joint
venture company. It should be noted that Thailand is not a
party to any convention or treaty the effect of which would
be to allow for an automatic enforcement of a judgment of a
foreign court in Thailand. Accordingly, a judgment obtained
from a foreign court would not be enforced by the Thai court
without a re-examination of the merits of the case. However,
Thai courts will, generally, recognise and enforce an
arbitration award made in a foreign country which is a party
to an international convention, treaty or agreement to which
Thailand is also a party.
Managing the investment
Veto rights, reserved matters and weighted voting
Veto rights, reserved matters and weighted voting rights
are commonly included in shareholders’ agreements and
the articles of associations in Thailand. These veto rights,
reserved matters and weighted voting rights can be at both
board meeting level and shareholder meeting level. These
mechanisms are used to provide minority shareholders
with control over certain matters relating to the company,
including the acquisition or disposal of major business and
assets, annual budget or business plan, capital increase
and decrease, change of a dividend policy, corporate
restructuring activities and company dissolution.
Governance
The CCC and the PLCA prescribe duties of directors of a
private limited company and a public limited company,
respectively, which include:
• the duty to manage the business of the company in
accordance with the law and the company’s objectives,
articles of association and shareholders’ resolutions and
exercise due care in the management of the company
106 Norton Rose Fulbright
• a prohibition against a director from (either for his own
benefit or for the benefit of others) operating (or having
an interest or involvement in) any business which is of
the same nature and competes with the business of the
company, without the approval of the shareholders
• a duty to maintain records, accounts and minutes
of meetings; properly distribute dividends; properly
implement shareholders’ resolutions; convene a general
meeting of shareholders as required by law; register
all changes to the corporate registration within the
time prescribed by law; and file the audited financial
statements and the list of shareholders at the time
prescribed by law.
A director who acts without proper authority or beyond the
scope of his authority (and such act is not ratified by the
company) will be personally liable to any third party unless the
director can prove that the third party knew that he was acting
without proper authority or beyond the scope of his authority.
Capital calls and pre-emption rights
The company’s articles of association and the shareholders’
agreement usually include provisions dealing with capital
increases and capital calls. The CCC requires private
companies to offer (and issue) new shares to all existing
shareholders on a pro rata basis. Under the PLCA, a public
limited company may offer new shares: (a) (by a rights issue)
to its existing shareholders on a pro rata basis; (b) (by a
private placement) to certain of its shareholder(s); or (c) (by
public offer) to the public. Private placement offers can be
made to shareholders and/or non-shareholders who meet
the prescribed “sophisticated investors” qualifications. In
addition, there are prescribed limitations on the value of a
private placement offer as well as the total number of offerees
to whom a private placement offer can be made.
Non-compete undertakings
Non-compete undertakings are enforceable in Thailand to
the extent that they fairly protect a legitimate interest of
the party seeking to enforce such undertakings. Thai courts
would generally consider the scope, territorial coverage and
the period of such undertakings.
Realising the investment
Deriving income
Foreign exchange regulations in Thailand are contained in
the Exchange Control Act B.E. 2485 (1942). Generally, Thai
Thailand
Baht (THB) is freely convertible and both local and (subject
to certain conditions) foreign currency accounts can be kept
in Thailand. There are, however, restrictions on the transfer
of funds (in local or foreign currency) out of Thailand.
The Bank of Thailand, the exchange control authority, has
authorised commercial banks to approve certain specified
transactions on its behalf. For outward remittance for the
purposes of these specified transactions, the remitting
entity must provide relevant supporting documents to the
relevant bank. Repatriation of profits and repayment of
overseas borrowings can, generally, be remitted in foreign
currencies upon submission of supporting evidence of the
profit and repayment obligation. Repatriation of initial
capital investment is permitted in the event of a sale of
the investment, a reduction of capital or liquidation, on
submission of supporting evidence of the sale, the reduction
or liquidation process.
Generally, the inward remittance of foreign currency
into Thailand does not require prior approval, but the
foreign currency must be sold to an authorised agent (ie,
a commercial bank) within a specified period (subject to
certain exceptions).
Realising capital (transfer restrictions)
It is possible and common for a private limited company
to specify certain share transfer restrictions in its articles
of association and the parties may specify the same in
the shareholders’ agreement. For example, the private
company’s articles of association may specify that a transfer
of shares is subject to board approval or a right of first
refusal of other shareholders. A public limited company is
not permitted to include any share transfer restriction in its
articles of association unless the purpose of such restriction
is to preserve the rights and benefits to which the company
is lawfully entitled or for maintaining a specified limit on the
aggregate foreign shareholding.
Deadlock and termination provisions
It is common for shareholders’ agreements and the articles of
association of joint venture companies to include procedures
for the resolution of deadlocks. Mostly, these procedures
will require the parties mutually to negotiate in good faith
to resolve the deadlock. If the deadlock is not resolved
within a specified period, a put and/or call option is usually
triggered. Drag-along and tag-along rights are also common
in shareholder agreements and articles of association of joint
venture companies in Thailand.
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Joint ventures – protections for minority shareholders in Asia Pacific
108 Norton Rose Fulbright
Vietnam
Joint ventures – protections for minority shareholders in Asia Pacific
Vietnam
Contributed by Vision & Associates Legal
Making the investment
Foreign ownership and control
When Vietnam acceded to the WTO in January 2007 it
became a party to the WTO Services Schedule by which
Vietnam agreed to the minimum arrangements for foreign
investment set out in the Schedule. The Schedule covers a
wide range of sectors including engineering, construction,
environmental services, banking, law, accounting, tax,
management consulting, transport, most professional
services, computer services, finance leasing, advertising,
management consulting, services relating to agriculture
and forestry, mining services, maintenance and repair of
equipment, couriers, telecommunications services, motion
pictures, education, insurance, securities, health, tourism,
entertainment and electronic games and transport.
As part of the accession process, new legislation was
introduced to liberalise restrictions on foreign investment.
In many service areas there are no longer any restrictions
on the level of foreign investment, and in those cases, it is
common for a foreign investor to establish a 100 per cent
foreign owned subsidiary. However, some areas, including
the media, telecommunications, transport, mining, ports and
airports, and postal services are still subject to restrictions
with the consequence that foreign investment can only
occur by means of a joint venture company or a business
cooperation contract (BCCs) in which the foreign party
must take a minority interest and control. These areas are
subject to a detailed and discretionary approval process by
the Government authorities which can sometimes prove
protracted.
BCCs are normally required for investment in oil and gas, and
telecommunications.
Other areas, such as foreign investment in Vietnamese
securities firms and banks, are subject to restrictions, being
49 per cent in the case of securities firms and 30 per cent in
aggregate for Vietnamese banks, with lower restrictions for
individual foreign investors in banks.
There are also restrictions on foreign investment in stateowned enterprises (SOEs) that are equitised. Equitisation
is a procedure in which SOEs are partially privatised. In
respect of enterprises in some sensitive areas such as energy
and telecommunications, the Government will continue
to own more than 50 per cent, foreign strategic investors
110 Norton Rose Fulbright
often own about 25-30 per cent, and about 15-20 per cent is
listed on the stock exchange. The foreign strategic investor
is not permitted to sell its shares for five years, subject to an
exemption where there are “special circumstances” (which
are not defined) and approval is obtained from the General
Meeting of Shareholders, which effectively means there must
be Government approval. The Government revises the list of
sensitive industries from time to time.
Legislation introduced in 2009 clarified that foreign
investors can acquire 100 per cent of Vietnamese companies
which are not public companies, unless there are restrictions
in the WTO Schedule or in other legislation (eg, investment
in a Vietnamese bank is subject to an ownership restriction
of 30 per cent in aggregate as mentioned above). In the case
of public companies, foreign ownership must not exceed 49
per cent of the total share capital. Public companies have
100 or more shareholders excluding professional investors
and which have paid-up charter capital of VND 10 billion
(about US$475,000) or more, have made a public share offer,
or are listed on the stock exchange.
In general, foreign invested companies, which are either
established by foreign investors or which achieve at least
49 per cent foreign ownership, either through subscription
or through changes of equity ownership, must obtain an
investment certificate, usually from the local provincial
People’s Committee (the state or provincial government)
through its Department of Planning and Investment.
However, it is important to note that there is a conflict in
legislation and authorities in some of the 63 provinces
and cities take the view that an investment certificate
is required for any foreign ownership. In particular it is
important to note that in Ho Chi Minh City an investment
certificate is required where there is any foreign investment
in a Vietnamese company, regardless of the percentage. (In
Vietnam a subscription by a foreigner for capital is called
foreign direct investment. Equity acquired by a purchase by a
foreigner from another equity holder is called foreign indirect
investment).
The investment certificate permits the company to undertake
operations within the stated business scope and in
accordance with the other provisions of the certificate for the
permitted duration of the investment project. The investment
certificate doubles as the enterprise registration certificate
which is the registration requirement for all companies
in Vietnam. In some cases, the People’s Committee might
seek reports from other Government departments such
as the Ministry of Industry and Trade, which supervises
the implementation of the WTO Schedule, the Ministry
Vietnam
of Planning and Investment, which supervises foreign
investment laws, the Ministry of Finance, the Ministry of
Natural Resources and Environment, the Ministry of Health,
the Ministry of Transport and the Ministry of Construction.
Bilateral treaty protection
The major treaty that affects business in Vietnam is the WTO
Schedule.
Vietnam is a party to the ASEAN-China Free Trade Agreement
(ETA), the ASEAN-Australia-New Zealand ETA, the ASEAN
Free Trade Area Agreement, the ASEAN-South Korea ETA,
the ASEAN-Japan Comprehensive Economic Partnership
Agreement and the ASEAN-India ETA.
Vietnam signed a Bilateral Trade Agreement with the US
in 2000. It does not have a double tax treaty with the US
although it does have them with most other countries that
provide foreign investment into Vietnam.
Statutory minority protection and conflicts with
shareholder agreements
Under the Law on Enterprises there are three types of
corporations. Two of them are limited liability companies
(LLCs) being one member LLCs, and two or more member
LLCs. The other type is joint stock companies (JSCs). JSCs are
similar to companies that are known in jurisdictions like the
UK, the US, Singapore, Hong Kong and Australia. LLCs are
also similar but they do not issue shares. Members subscribe
capital to LLCs. Capital contributions to LLCs can be
transferred in a similar manner to share transfers and can be
used as security. The constitutional document of a company
is its registered charter.
The interests of minority shareholders can be protected
by joint venture agreement, which is often described as a
shareholders’ agreement in the case of a JSC or a members’
agreement in the case of a LLC. In each case the protections
should be recorded in the company’s charter. Although the
Law on Enterprises No.60/2005/QH11 does not provide
for specific statutory relief from oppressive conduct by the
majority, some protective safeguards exist in the form of
rules for meetings, quorums and voting. Minorities with less
than 25 per cent capital interest in aggregate in the company,
and in most cases less than 35 per cent, will not get any
protection on quorum and voting rules unless that protection
is incorporated into the charter of the company.
In the case of JSCs, minority shareholders who have held
more than ten per cent of the ordinary shares for six
consecutive months have the right to nominate persons to
the Board of Management and the Inspection Committee;
the right to review and extract annual and mid-year financial
reports from the Board of Management’s minutes book and
resolutions; the right to request a general shareholders’
meeting where the Board of Management seriously violates
the rights of shareholders, obligations of managers or makes
decisions beyond its authority or where the term of office of
the Board of Management has exceeded six months; and may
request the Inspection Committee to verify issues relating
to the management and operation of the company; or other
contraventions of the company’s charter.
The Inspection Committee is a body overseeing management,
including management by the Board of Management and
executive officers, of the company. Members of the Board of
Management and company managers may not be members of
the Inspection Committee. Inspection Committees are required
for LLCs with more than 11 members, and for JSCs with more
than 11 individual shareholders or where organisations owns
more than 50 per cent of the share capital.
The company’s charter may extend greater protections for
minority shareholders over and above those provided by law.
With respect to companies operating in some service areas
(eg, securities) or listed companies, the company’s charter
must be made on the basis of prescribed templates.
Issues commonly encountered by a foreign or
domestic minority shareholder
Competition law and merger control
The Law on Competition prohibits agreements that are
restrictive of competition as well as abuses of a dominant
market position. Pursuant to the Law on Competition,
enterprises are deemed to hold a dominant position on the
market when they have a market share of 30 per cent or
more, or when they are capable of restricting competition
considerably. The Law on Competition is enforced by the
Vietnam Competition Authority (VCA) and the Vietnam
Competition Council (VCC). The VCA deals with approvals
and applications, and the VCC deals with disputes.
It is important to note that this is a new area of regulation in
Vietnam. Although the Law on Competition was adopted in
December 2004, many fundamental matters remain to be
clarified by the authorities in Vietnam.
Certain transactions, including M&A transactions,
involving joint ventures may fall within the scope of the
Law on Competition. Transactions that meet the following
criteria are subject to a mandatory pre-merger notification
requirement:
Norton Rose Fulbright 111
Joint ventures – protections for minority shareholders in Asia Pacific
• the transaction constitutes an “economic concentration”,
ie, a merger, consolidation, acquisition of control or the
establishment of a joint venture and
• the transaction results in the parties having a combined
market share of more than 30 per cent but less than 50
per cent of any relevant market in Vietnam, unless the
new entity formed as a result of the transaction will be a
small or medium-sized enterprise (SME).
Transactions that result in the parties having a combined
market share of more than 50 per cent of any relevant market
in Vietnam are in principle prohibited, but parties can apply
for an exemption.
Economic concentrations that will result in a market share
of between 30 per cent and 50 per cent must be notified
to the VCA prior to their implementation. The VCA shall
issue a decision within 45 days after receipt of a complete
notification. This review period may be extended by up
to another 60 days. In practice, the review can last for
considerably longer. The VCA will carefully review the
market definition and the market information provided
by the parties. This is often complicated by the limited
availability of reliable market data. The VCA will either agree
that the transaction will not result in a combined market
share in a relevant market above 50 per cent, in which case
the transaction is allowed to proceed, or will decide that
the 50 per cent limit is reached and that an application for
exemption must be lodged.
The Law on Competition is unclear as to the criteria that
the VCA should use when assessing the admissibility of
concentrations, other than to provide that concentrations
leading to a market share over 50 per cent are to be
prohibited unless they fall within one of the exemptions.
Transactions leading to a combined market share of more
than 50 per cent may nonetheless be allowed to proceed if:
• one or more parties is at risk of being dissolved or under
bankruptcy or
• the transaction results in an export extension, or
contributes to the economic-social development of the
country, or an advancement in technology, or results in
the formation of a SME.
The first exemption listed above is granted by the Ministry
of Industry and Trade and the second one by the Prime
Minister. These transactions are subject to evidentiary
112 Norton Rose Fulbright
requirements that are similar to but more extensive than the
regular notification requirements. In practice, the parties will
often proceed first to a notification with the VCA, arguing
that their combined market share remains below 50 per cent.
Tax
There are no stamp duties on sales of shares or transfers of
capital contributions. Capital gains tax at a rate of 0.1 per
cent is payable on the total value of the disposal proceeds on
a sale of shares or bonds by foreign individuals. Tax, at a rate
of 25 per cent for companies and 20 per cent for individual
tax residents is payable on the capital profit on a sale of
other interests in a company. The capital profit is calculated
as the sale price less the purchase price and after deducting
expenses incurred in the sale. Vietnam does impose a
withholding tax, known in Vietnam as Foreign Contractor
Tax. This includes ten per cent FCT on payment of interest
and other income amounts under loans from foreign lenders.
Employment
It is very difficult to dismiss employees in Vietnam in any
circumstances other than during their probation period or
at the end of the term of a labour contract. Most employees
may have definite term labour contracts of between one
and three years, or indefinite term labour contracts. Shorter
contracts are available for project and seasonal workers. A
person may not have more than two definite term contracts.
If the employee remains after the end of the second contract,
the arrangement will be deemed to be an indefinite labour
contract.
Foreigners who work in Vietnam for more than three
months must obtain a work permit. They may also obtain
a temporary resident’s card which alleviates the burden
of having to obtain visas. The foreign workers must be
managers or have particular expertise required for the
activities of the company.
Land use rights
As a general rule, foreigners cannot own land in Vietnam
and although leasehold interests are generally available to
foreign-invested companies, short or medium term leases are
not always suitable for a long term investment. Accordingly,
if a business needs to have a long term interest in a particular
parcel of land, foreign investors may not have a commercial
choice other than to take an interest in a JV company.
Objectives and termination
When a company is established in Vietnam with foreign
investment, it is approved to undertake a “project”. “Project”
Vietnam
has a much wider meaning than in normal usage. Any
business operation by a company in Vietnam with foreign
investment can be a project. The company is licensed to
conduct the project for a limited period of time, usually up
to 50 years. However, the licensing authority may choose to
only issue a licence for a shorter period.
Governing law
Foreign court judgments are generally not subject to
registration. Vietnam is a party to the Convention on
Recognition and Enforcement of Foreign Arbitral Awards
(New York Convention). However, enforcement of foreign
arbitral awards can be difficult as there are there are various
exemptions in the Civil Procedures Law which permit courts
in Vietnam to decline to recognise foreign arbitral awards.
Also there is a risk that an enforcement application can
turn into a re-hearing of the substantive dispute under
Vietnamese law. Courts in Vietnam will not recognise
arbitration awards in respect of land use rights. Such rights
must be litigated within Vietnam.
It is possible to prescribe foreign governing law and foreign
arbitration in agreements. However, the foreign law must
not be inconsistent with Vietnamese law. In practice this
can lead to a position in which the Vietnamese court applies
Vietnamese law regardless of the governing law provision in
the subject agreement.
Offshore structures
All businesses conducted in Vietnam must be done through
companies or other enterprises registered in Vietnam.
The exception to this rule is that foreign companies can enter
into BCCs. Such contracts must be registered in a similar
manner to the registration of a company. As mentioned
earlier, this form of contract is common in the oil and gas and
telecom industries.
Managing the investment
Veto rights, reserved matters and weighted voting
pass resolutions for a MC or a GSM. Certain resolutions,
however, require approval by at least 75 per cent by value
of the members or shareholders attending the meeting.
These include decisions on amendments to the charter, the
sale of assets valued at least 50 per cent of the total value
of assets recorded in the most recent financial statement
of the company, and the restructuring or dissolution of the
company. For JSCs only it also includes decisions on classes
of shares and new shares to be offered. BOM decisions are by
majority vote.
It is possible for the Charter to provide greater protection for
minority shareholders by prescribing higher percentages for
voting approvals.
Under Resolution 71 of 2006 of the National Assembly
regarding Vietnam’s accession to the WTO, provision is made
for companies to provide in their charters for majorities of 51
per cent. However, this is only a resolution. As such it cannot
take priority over a Law and therefore it cannot be effective to
operate as an amendment of the Law on Enterprises.
In the case of JSCs, it is possible to have a voting preference
share which gives the holder more than one vote. However,
this is limited to organisations authorised by the Government
and to the founding shareholders for the period of three
years from the date of the enterprise registration certificate
being issued. Such a share cannot be assigned unless
otherwise duly approved by the GSM.
Governance
In the case of a newly established joint venture company
involving both foreign and Vietnamese investment, a joint
venture contract must be registered together with the charter
when lodging the application for the investment certificate.
In the case of an established company in which a foreign
investor acquires shares, there would usually be an existing
shareholders’ agreement (in the case of a JSC) or a members’
agreement (in the case of an LLC). It is common for the joint
venture agreement to be amended when a new equity holder
becomes the owner of capital.
LLCs are directed by a members’ council (MC). JSCs are
directed by General Meetings of Shareholders (GSM) and
Boards of Management (BOM).
Each company must have a general director, which is the
equivalent of a Chief Executive Officer. If the general director
is a foreigner, he or she must also have a work permit.
Voting at MC meetings and GSMs is proportional to
capital contributions as a matter of law. Under the Law
on Enterprises, a majority of 65 per cent by value of those
attending and entitled to vote will usually be effective to
Companies must also have a legal representative. This role is
often filled by the general director but it can be the chairman.
The legal representative represents the company at an official
level. The duties include being able to sign all documents
Norton Rose Fulbright 113
Joint ventures – protections for minority shareholders in Asia Pacific
on behalf of the company, retaining the company seal, and
representing the company in any court proceedings. The
legal representative must be a resident of Vietnam. If he or
she is absent in Vietnam for more than 30 consecutive days,
he or she must authorise another person to fulfil the role
during his or her absence.
Members of members’ councils of LLCs or boards of
management of JSCs do not need to be residents of Vietnam
nor do they require work permits merely because of holding
such a position.
For JSCs, shareholders with ten per cent equity held for
a prior period of consecutive six months can convene a
meeting. For LLCs the minimum level is 25 per cent.
A GSM of a JSC must have a quorum of 65 per cent of
shareholders failing which a reconvened meeting, within 30
days, must have a quorum of 51 per cent and failing that a
second reconvened meeting within a further 20 days will not
require a quorum.
Similar quorum rules apply for meetings of a MC of an LLC.
The first convening of the meeting must be attended by
members representing 75 per cent of the charter capital
failing which the meeting may be convened for a second time
within 15 days where a quorum of 50 per cent is required,
and if there is no quorum at the second convening of the
meeting it may be convened for a third time within ten days
where there will be no requirement for a quorum.
Failure to comply with the quorum rules may invalidate
decisions taken at the relevant meeting.
Voting at meetings of the BOM is by simple majority with the
chairman having a casting vote.
Voting at MC and GSM meetings requires 65 per cent
approval with 75 per cent approval required for supermajority matters.
Capital calls and pre-emption rights
Subscribers to LLCs must invest their capital within the
agreed time as stated in the charter. If they fail to do so,
the amount of the investment will be a debt owing to the
company.
If a company makes a private placement, the subscribers
cannot subscribe for further shares for a period of 12
114 Norton Rose Fulbright
months. This has the potential to provide some protection for
minority shareholders.
Non-compete undertakings
Non-compete undertakings are not the subject of specific
regulation in Vietnam. They would be regarded as a form
of contract and subject to the standard rules for contracts
prescribed in the Civil Code.
Realising the investment
Deriving income
Exchange control issues: Foreign invested companies
must establish bank accounts with authorised foreign
currency banks. The funds for the investment by foreign
investors must be deposited into that account. They must be
withdrawn in Vietnamese Dong and used for the approved
investment. Dividends, other income and distributions of
capital emanating from the approved investment must be
deposited into that account and remitted offshore from that
account. Such remittances are normally straightforward
provided that they are in accordance with the accounts of the
company, its charter and any joint venture contract.
Classes of shares: LLCs do not issue shares. All capital
contributions to LLCs have the same status and carry voting
rights in proportion to the amount of capital contributed.
Shares in JSCs can be voting preference shares, dividend
preference shares, and other types as specified in the charter
of the company. JSCs can issue bonds and convertible notes
in accordance with the powers in their charters.
Realising capital (transfer restrictions)
Transfers of capital contributions in LLCs are subject to
statutory pre-emptive rights in favour of other members.
Under the Law on Enterprises, shareholders in JSCs have the
right to assign freely their shares to other shareholders and to
non-shareholders. Founding shareholders of JSCs are subject
to restrictions on their ability to transfer their rights within
the first three years of the establishment of the company.
Deadlock and termination provisions
In principle, drag and tag provisions may be provided for
and would be enforceable as a contract. Their operation
may be complicated by the statutory pre-emption rights
described above. The parties are otherwise free to stipulate in
a shareholders’ agreement or a members’ agreement how the
agreement will terminate.
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Joint ventures – protections for minority shareholders in Asia Pacific
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