Joint venture corporate model options

1. Joint venture corporate model options Stephen Matthew Partner T +44 (0)20 7524 6301 s.matthew@nabarro.com

2. Local authority powers to establish or invest in joint venture vehicle trading powers - section 95 LGA 2003 and SI 2009/2393 limited liability companies function related activities blanket authorisation to do for commercial purposes that which would otherwise be authorised pursuant to some other statutory provision requires preparation of a business case well being powers – section 2 LGA 2000 entities for commercial purposes Brent v. LAML using LPs or LLPs as a vehicle - caution funders, local authority officers and auditors all need to be satisfied scheme is “intra vires”

3. Rewind - do you need a joint venture vehicle?

4. joint venture vehicle sharing risks joint management of risk sharing benefits complementary objectives alignment of interest contract JV • clearly defined outputs • limited scope • no potential for growth or diversification • risk is transferred • want to crystallise a cash sum

5. HMT Joint Venture Guidance (draft) “1.2.3 A JV involves risk sharing; it is suitable where a jointly owned and managed business offers the best structure for the management and mitigation of risk and realisation of benefits whether they involve asset exploitation, improved public sector services or revenue generation. It should not be seen as a delivery model in which the public sector seeks to transfer risk to the private sector through the creation of an arm’s length relationship.” “1.4.1 JVs are usually established because the parties have complementary objectives and share a view of the nature and scope of its activities and the JV’s longer term objectives and benefits. This will need to be tested through the business case development and competitive procurement processes. If this alignment of interests is not present, a JV is unlikely to be the best structure to use.”

6. HMT Joint Venture Guidance (draft) “1.4.2 If the public sector wishes to conclude arrangements which are clearly defined and limited in scope and with little or no potential for growth and diversification, or where risk transfer rather than risk sharing is sought, the public sector’s objectives may be achieved more easily through a more straight forward contractual mechanism or through PFI.”

7. characteristics can look very similar to any other JV structure, but without the vehicle can be simple no supporting body of law – therefore all matters need to be clearly set out pros and cons tax transparent cannot raise debt and grant security need to be comfortable with balance sheet of counterparty contract joint venture

8. vehicle joint venture options include: company limited by shares company limited by guarantee (may also be a charity) limited liability partnership limited partnership general partnership Industrial and Provident Society community interest company hybrid - find the best option for your scheme

9. conceptual starting point LA contract/ land interests Investment/capital LA Vehicle Funding PSP Other entities Supply Chain

10. conceptual starting point (your thought process) • the meaning of “limited recourse” • “thinly capitalised” (or not) • the need for “ring-fencing” • “group structure” (or not) • “tax treatment” may be important • “funding” – debt, equity, revenues, distributions, etc. • “exit and termination” • “control”- of what?

11. private company limited by shares Local Authority PSP simple on paper but no so efficient for tax Limited Company SPV 1 SPV 2 SPV 3 “PSP = Private sector partner“SPV” = Special purposes vehicle

12. characteristics governance in shareholders’ agreement and articles of association investors own voting shares run by board of directors subject to Companies Act 2006 pros and cons simple governance structure universally accepted able to raise third party debt and grant security creates tax inefficiency allows exit and third party investment corporate JV

13. LLP newer alternative structure Local Authority PSP LLP SPV3 LLP SPV1 LLP SPV2 LLP

14. characteristics each investor is a member of the LLP governed by members’ agreement Limited Liability Partnerships Act 2000 need two members pros and cons uncertaintly as to trading powers new vehicle has only recently become used as a real estate investment vehicle tax transparent allows exit and third party investment unattractive to pension funds as investment vehicle LLP

15. limited partnership tax efficient vehicle PSP Local Authority PSP SPV Limited Partner LA SPV Limited Partner General Partner SPV LIMITED PARTNERSHIP subsidiary LP1 subsidiary LP2 subsidiary LP3

16. characteristics investor holds LP interest (economic interest) and shares in general partner (to exert control) governed by a partnership deed shareholders’ agreement for general partner assets held by general partner governed by Limited Partnerships Act 1907 pros and cons complications regarding uncertainty as to trading powers structure requires more involved management tax transparent allows exit and third party investment institutionally acceptable limited partnership

17. funding considerations • senior debt • limited recourse • refinancing risk • cross indemnities • direct agreements • equity funding • timing of when required • sources • risk capital • investment return project alternative sources • grant funding • triggers for claw back • revenue recycling

18. funding considerations always keep and open mind and retain flexibility for new funding structures over time senior debt should be limited recourse to assets of SPV or group avoid/restrict shareholder guarantees refinancing considerations: when will funds need to be repaid and out of what source direct agreements with Contractor/Local Authority Local Authority termination and step-in rights

19. the check-list – whatever structure is deployed “business case” commercial “entity”? powers, approvals, consents procurement, State Aid, etc. accounting, governance, etc. contract governance documents

20. closing thoughts the law is there to be used form should follow function focus on your objectives from the beginning be prepared to see the landscape change keep an open mind to all options contractual flexibility a JV vehicle can be made to look like a contract a contract can have characteristics of a joint venture vehicle 40895963

21. Joint venture corporate model options Stephen Matthew Edward Craft Partner Senior Associate T +44 (0)20 7524 6301 T +44 (0)20 7524 6760 s.matthew@nabarro.come.craft@nabarro.com