Capital and Funding
A further issue to consider is how the joint venture company is to be funded both initially and in the future. The choice of funding method will be influenced by the existing and future cash requirements of the joint venture company and by tax considerations.
The following factors should be considered:
• Straightforward subscription of ordinary shares or possibly of different classes is the simplest and most common method for new ventures coupled usually with the appropriate level of loan capital.
• Consideration for the initial issue of shares by the joint venture capital may be cash but can also be a non-cash consideration - for example, the transfer of assets to the joint venture company.
• Complex funding techniques can emerge where a joint venture involves outside investors who are not involved in the management of the company and are more concerned with the security term and capital growth. Equally this can lead to some form of preference share capital, ordinary share capital or possibly loan stock convertible into shares.
The parties may decide that the initial finance for the joint venture company should be injected substantially as loan capital as shareholding loans from the joint venturers or from lending banks.
The parties must also consider the manner in which any future finance is to be provided. Participants should agree in advance as far as practicable whether or not they are willing to be committed to provide further finance and if so, the time periods and monetary limits for any further finance as well as the conditions under which they are required to implement these commitments. These should generally be spelt out in the shareholders’ agreement and factors to be borne in mind include:
• If there is to be no commitment on a joint venturer to provide future finance, this should be expressly stated.
• In international joint ventures the possibility of exchange control in one or other country affecting the execution of these commitments must be properly considered.
• Banks may require guarantees from shareholders and there should normally be provisions in the shareholders’ agreement governing the scope and extent of any such guarantees and stating whether or not they should be given severally. If future financing commitments are central to the joint venture, for example in a start up venture involving significant planned capital expenditure, appropriate default procedures should be considered.
