1. JOINT-VENTURE COMPANIES – WHAT ARE THEY? Pekka Puolakka, Managing Partner 16 March 2012 Riga

2. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com What is it? ▪A classic joint-venture company (“JV”) is a company in which the two participating shareholders have equal rights ▪50-50 ownership, presentation in the management bodies, shareholders’ meeting and all decision-making in the JV ▪It is different from other corporate holding structures as no single shareholder has larger rights than the other shareholder(s) ▪It requires very detailed governance principle in comparison to “ordinary” companies and special situations to work properly

3. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com How the law steps into the picture for JVs? ▪Extremely rarely any company law establishes particular provisions for JVs ▪In great majority of cases the JV regulation is left for the shareholders to decide – to decide on how to govern a JV ▪The most the company laws normally regulate, is to set rules for decision-making principles in cases the votes are tied at a meeting of management board and/or supervisory board ▪That is why it is very important to regulate JVs through their articles of association, business plan and, especially, through a shareholders’ agreement

4. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com When could it be used as a vehicle of business operations? ▪JVs are often used in large construction projects, infrastructural development projects, and “passive” investment operations ▪It is also a useful vehicle when two strategic investors invest into a region where neither one of them has operated before ―I have done that in, for example, ground-handling business

5. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com When could it be used as a vehicle of business operations? ▪It might also be a tool for competitors to carry out joint business without being subject to the negative consequences of concentration regulations ▪It is also used, to certain extent, when foreign investors invest into a new region through acquiring an existing entity, but being unwilling to take operational charge

6. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com Pros and cons of it? ▪No party reigns over the other ▪It is possible to avoid consolidation of a JV (sometimes this is a very important issue to investors) ▪It is easier to dissolve if it has been created for one particular project only ▪It requires rather heavy set of governance principles the parties need to agree upon ▪Decision-making might get “dead-locked” ▪Exit from JV

7. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com What to agree upon? ▪Normally JV is a “locked” vehicle ▪The parties need to agree on how they can alienate their shares in the JV, pledge them or otherwise dispose of them ▪The parties need to agree on which decisions are to be passed on a unanimous basis and which not ▪The parties need to agree on how to sell the JV, its assets, its shares, and on how to dissolve the JV ▪The parties need to agree on how to solve a dead-lock situation, i.e. a situation in which a material decision cannot be passed because of dissenting views of the parties

8. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com How to manage a JV? ▪As an unanimity principle is strong in respect with JVs, the parties need to have a very clear and detailed view on the business plan and objectives of the JV – before setting it up ▪Above all, the parties need to establish those material matters that are essential for the management of the JV ―Material matters on operational, management and shareholders level ―Material financial matters ▪Not reaching a consensus on those material matters will trigger the dead-lock procedure

9. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com How to solve a dead- lock? ▪There will always be surprises in business, and for those situations the unanimity principle might turn out to be a problematic principle ▪Dead-locks can be solved by a way of settlement agreement, by way of one party leaving the JV (i.e. shoot-out model), or the JV being dissolved in its entirety (i.e. the Swiss model) ▪The threat of dissolving the JV is so great that it often forces the parties to settle on their differences ▪The shoot-out model might also open paths to abuse the JV arrangement ―i.e. one party “driving” the JV into a dead-lock

10. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com Case studies I ▪A ground-handling JV ▪Parties could not decide on a new investment for which a dead-lock notice was given by one party ▪The JV had a Swiss model dead-lock clause, which meant the JV would have been dissolved if the CEOs of the JV shareholders did not come to an agreement within 60 days as of servicing the dead-lock notice ▪An agreement was reached on the day 58 ―Teaching: pressure of losing all is better tool than the opportunity to win all

11. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com Case study II ▪Automobile industry JV ▪The JV parties had been equally strong (also financially-wise) at the time of establishing the JV; later on the other run into financial trouble ▪The parties were required to invest new money into the JV, but the other party could not do that ▪A dead-lock notice was served by the stronger party who then got the shares of the financially troubled party at 60% price ―The win-all opportunities are rare and need significant changes in the positions of the JV parties in comparison to the initial positions

12. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com Case study III ▪Telecommunications JV ▪The JV parties had a poorly drafted shareholders’ agreement and articles of the JV ▪There were several material matters the JV parties could not decide ▪The fight became that of a principal one and the operational performance of the JV worsened by the day ▪At the end of the day both JV parties exited the JV with some serious losses and lost business opportunities ―Document, document and document; what once was a happy marriage can turn out to be an ugly divorce

13. ESTONIA LATVIA LITHUANIA BELARUS www.sorainen.com What to remember? ▪First establish if a JV is the best option for a given business transaction/operations ▪Carefully study the strengths and weaknesses of both potential JV parties ▪Take the effort of hammering down decisive JV documentation (articles, SHA, business plan, etc.) ▪Avoid “indirect” change in the JV shareholding ▪Quickly react to a potential dead-lock situation – always keep the control in negotiations ▪When deciding to act upon a dead-lock situation, make a decisive war plan and stick to it!

14. Estonia Pärnu mnt 15 10141 Tallinn phone+372 6 400 900 fax+372 6 400 901 estonia@sorainen.com Latvia Kr. Valdemāra iela 21 LV-1010 Riga phone+371 67 365 000 fax+371 67 365 001 latvia@sorainen.com Lithuania Jogailos 4 LT-01116 Vilnius phone+370 52 685 040 fax+370 52 685 041 lithuania@sorainen.com Belarus ul Nemiga 40 220004 Minsk phone+375 17 306 2102 fax+375 17 306 2079 belarus@sorainen.com www.sorainen.com ESTONIA LATVIA LITHUANIA BELARUS 14 Contacts Thank You! Pekka Puolakka Managing Partner phone +371 67 365 000 mobile +371 22 040 408 pekka.puolakka@sorainen.com 14