Cross-border Business Alliance and its International

Business Law Aspect: How to protect your minority

shareholders rights in a joint venture

Haruo Hirano
Institute of Business Law and
Comparative Law & Politics (IBC)
Graduate School of Law
The University of Tokyo

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MITSUI & CO., a global trading & investment company

 In the Legal Department of Mitsui & Co., Ltd. ("Mitsui"), nearly 130
headquarter-employed staff & about 30 foreign qualified attorneys are located in
4 regions - Japan, Americas, EMEA, and Asia-pacific. 2
Starting Point：What is International Business Law?
International Business Law - all about international business activities
of enterprises
 In English, also known as International Trade Law, Law and Practice of
International Trade, or the Law of International Business Transactions

 It includes contract law, company law, competition law, investment law, tort
law, international law, conflict of laws, tax law, labor law, etc.

 Important goals of International Business Law would be:

 To enhance legal stability and predictability of business of enterprises,

 To give solutions for legal issues from time to time emerging in global
business transactions.

 For corporate legal practice and in-house legal practitioners, it is crucial:

 To correctly identify legal issues first, and then consider their lawful and right
solutions,
 From the perspective of business goals, by relying on International Law,
horizontally stabbing traditional, vertically specialized areas of law. 3
4
 How is International Business Law involved?
Investors Perusahaan Listrik Negara
Mitsui: 40.5%
Engie: 40.5%
(2,045MW:
TEPCO: 14.0% Nearly 10% of
PT. Saratoga: 5% Power Sale Agreement total demand in
Investment Java)

Lenders
PT. Paiton Energy
Loan Agreement
IPP：Independent
Power Producer

Other banks

Engineering, Procurement and Construction Contract Coal Purchase Contract

Operation and Maintenance Contract
EPC Contractors
O&M Contractors
Engie

TEPCO 5
Cross-border Business Alliance as Strategic Option
Japanese companies’ investment and doing business active in Asia

 JBIC (Japan Bank for International Cooperation) Annual Survey:

 Japanese manufacturing companies continue expansion of overseas
business operations.
 Especially active in Asia, such as China and ASEAN-5 countries (Indonesia,
Malaysia, Philippine, Singapore, Thailand).

 A typical structure of alliance: joint venture

 A wholly foreign-owned structure is more and more commonly used in
expansion of overseas business operations.
 It includes “green-field” establishment of or “brown-field” acquisition for a
100%-owned subsidiary.
 Structures such as capital alliance, business alliance and management
integration can be commonly seen as well.

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<Chart> TOTO’s business organizations in Asia
（＊Prepared by H. Hirano based on TOTO' annual report and other public information)

Regional Holding Company

TOTO China Ltd.
TOTO
Headquarter
TOTO Dalian Ltd.

Beijing TOTO Ltd.

Nanjing TOTO Ltd.

Ha Noi Branch
DUBAI TOTO VIETNAM CO., LTD. Da Nang Branch
BRANCH
MANILA BRANCH Ho Chi Minh Branch
TOTO India Industries PVT. LTD.
TOTO THAILAND CO., LTD.

TOTO MALAYSIA SDN. BHD.

Singapore
TOTO ASIA OCEANIA PTE.LTD. P.T.SURYA TOTO INDONESIA Tbk
Regional Holding Company

 Cross-border alliance, as well as M&A, is an indispensable option for

enterprise management strategy to promptly acquire and reinforce
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resources for entry and competition in a global market.
Why Joint Venture?
Unless laws of FDI host country set out a mandatory joint venture requirement,
enterprise will decide structure of doing business exclusively by business
reasons, namely, management strategy. So, why Joint Venture (“JV”)?
 Definition:
 “A common enterprise (or undertaking) or business-related activity to
which two or more existing persons or entities contribute certain resources
such as capital, technology, assets, human resources for the purpose of
jointly pursuing business venture with common interests”.
For example, Mitsui & Co., Ltd. established International Leasing Company
Limited in 1986, the first JV company of Mitsui in China.
Mitsui & Co., Ltd. China National Technical China Investment Bank
（三井物産株式会社） Import & Export （中国投資銀行）
Corporation
(中国技術進出口総公司)

３４％ ３３％ ３３％

International Leasing Company Limited

（国際租賃有限公司：Sino-foreign JV） 8
Why Joint Venture?
Unless laws of FDI host country set out a mandatory joint venture requirement,
enterprise will decide structure of doing business exclusively by business
reasons, namely, management strategy. So, why Joint Venture (“JV”)?

 Reasons for joint ventures:

 Reciprocal Complementary Relationship
- To select a form of joint venture to achieve its corporate objectives
quickly by establishing a reciprocal complementary relationship to
mutually contribute its expertise and utilize the other’s.
- Access to technology, expansion of customer base, entry to emerging
economies, entry into new markets, etc.
 Risk & Cost Sharing
- Significant risks, either qualitative or quantitative, are always involved in
undertaking a speculative or capital-intensive project. To buffer these
risks, you may want to have a financially eligible third party to become
your business partner for risk sharing.

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Structure of JV
There are four types of structure of Joint Venture.
 Structure:
 Four types of structure:
a. Contractual joint venture (Consortium, Strategic Alliance, Joint R&D, etc.
b. Unincorporated joint venture (Partnership)
c. Incorporated joint venture (a separate vehicle or legal person created)
d. Hybrid or other structures

Non-Equity Relationship(a, b) Equity Relationship(c)

Contractual JV Partnership
JV Contract
F
L contributions
F F
L Contract L Partnership shares shares
Agreement
JVC
F= Foreign Partner L=
Local Partner "K&O Associates"
"F&L Co., Ltd."
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Incorporated JV Commonly Used
Incorporated JV = Corporation or Company (“JVC”), a legal person

 Incorporated joint venture, also called as a

corporate joint venture, takes a form of a
separate legal entity established by joint
Equity Relationship(c)
venture partners under their umbrella.
 Joint stock company, corporation or private
limited company is commonly utilized as a JV Contract
legal form of incorporated JV. F
 This structure is widely used for cross-border L
contributions
business alliance by Japanese enterprises
shares shares
and, of course, globally.
 Three pros as an independent legal person: JVCo.
 Act as independent of its investors
 Not to constitute a taxable PE* "F&L Co., Ltd."
 Corporate veil
 Usually, a joint venture contract (JVC) or
shareholders agreement is concluded.

*PE: a permanent establishment

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What is JVC?
Joint Venture Contract (or Shareholders Agreement) : “atypical” or non-defined
contracts” (非典型契約) that set out the basic structure and framework of
creation and operation of a common vehicle, i.e., a joint venture enterprise.

 Nature:
 It is also named “shareholders agreement” if the vehicle is a joint stock
corporation or company.
 It includes: scope of business, management structure, rights and obligations
of the JV parties, funding, termination (exit strategy), etc.
 JVC will be generally not be a public document, while an article of
association will be in public. Usually, JVC is not directly regulated by
Company Act of the jurisdiction where JVC will be established (Exception: P.
R. China).

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Why you need JVC?
“Collective” nature of cross-border alliance related
 Compulsory?
 No. Usually, it is not compulsory for JV parties to conclude JVC.
Theoretically, it is possible to establish and operate JVC solely based on
Company Act as a default rule.

 Why do you need JV contract on top of rules of local company law under
which JV will be established?
 Main characteristics of cross-border alliance – its “collective” nature. As the
parties collectively manage the venture, some unique rules governing
relationship between the parties are necessary.
 Commercial arrangement between the parties are likely to require contractual
terms for joint venture business and operation which will inevitably go beyond
purely constitutional matters.
 Genuine Contractual: Contract Law - free to modify by agreement, easy to
end by simple termination.
 Incorporated: Company Law - rigid and compulsory nature, dissolution of a
company separately required.
 To detach JVC from unknown, unpredictable or too much rigid local company
law as much as possible. 13
Why you need JVC? "Minority Protection"
Importance for minority shareholders to secure “minority protection” by
expanding rights of minority shareholders on top of statutory ones.
 Necessary?
 Yes. It is critical for the JV parties (among others, Minority Shareholder) to
secure its rights and benefits (against Majority Shareholder) which are
expected to enjoy through the joint venture.
 A company law does not satisfactorily work for this purpose as it prescribes
shareholders rights based on the shareholding ratio, therefore, a majority
shareholder will have a strong power to decide almost all of the JVC’s affairs
and disrupt a minority shareholders interests.
Minority Shareholder Rights under Indonesian Company Law
Available for all shareholders:
Pre-emptive Right / First Right of Refusal in Sale of Shares (Art. 57(1)(a))
Buyback Rights (Art.62(1))
Right to Bring Claim against Company(Art. 61)
Available for Shareholders of more than 10%:
Initiate the annual or other GMS (Art. 79)
File Claim against Members of the BOD for Wrongdoing or Negligence (Art. 97)
Initiate Audit on Company (Art. 138)
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Initiate Company’s Dissolution (Art. 144) ….. Protections enough for you?
Why you need JVC? "Minority Protection"
 Among others, it is important particularly to ensure the rights of director and
officer nomination, the right of veto for important matters and the right to exit
from the joint venture under certain unexpected circumstances.
 To achieve this aim, there would be two options, one to agree on such rights
in JVC and another to adopt a class voting in AOA.
 Here, validity and enforceability of agreed protection rights in a JVC would be
an issue. - Four possibilities on the problem of the validity:
(a)such agreement is not valid as it violates the company law,
(b)JVC itself is valid between the parties, but a decision at the shareholders
meeting which is contrary to the agreement is still valid and the minority
shareholder has no way to veto or nullify such decision.
(c)JVC is valid as a contract, but no specific performance or prevention order is
available as a remedy.
(d)Damages is not quantifiable.

 This issue is a big headache for legal departments whose mission is to draft
a legally stable international JVC. Need to carefully investigate relevant court
cases under governing law of JVC and find out rationale or logic of judges,
then reflect them in the draft … Not easy!
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Enforceability of JVC
 Issues?
 Is JVC enforceable, i.e., legally recognized (against JVC, other JV parties
and creditors of JVC) ?
 Among others, is a voting agreement (VA) among the JV parties
(shareholders) enforceable?
 If enforceable, how?
【Example of VA】
“The Board of Directors of the Joint Venture Company shall be composed of five
(5) members, of which three (3) shall be nominated by Party A and two (2) by
Party B. Each of the Parties shall exercise its voting rights at any relevant
shareholders meeting to ensure such nominees will be elected as directors.”

 No flexibility under civil law system:

 Under the civil law system (such as German, French and Japan), JVC used
to be considered a “social agreement” that should not be totally enforceable,
since a company law is of compulsory nature and cannot be excluded or
modified by a private contract between shareholders.
 It could be an alternative to use the articles of association, but in Japan and
P. R. China the company registry has required to use a unified form that
cannot be modified.
 In Japan, there was no class voting system in its company law until recently. 16
Comparison by Country in Asia *LLC: Limited Liability Company

P. R. China Singapore India Indonesia Vietnam

Popular Sino-foreign Private Private Perseroan LLC*
Form of JV Equity Joint company company Terbatas
Venture limited by limited by (=Joint Stock
Enterprise shares（Pte. shares (Pvt. Coporation)
(LLC*) Ltd., Ltd.)
Sdn.Bhd.）
JVC Enforceable, Enforceable, Enforceable, Enforceable, Uncertain.
generally if approved except for any except for any except for any Any
enforcea- in case of stipulation that stipulation stipulation that stipulation
ble? FIEs. is excessively that is is excessively that
harmful for the conflicting harmful for the violates or
Also rights of a with the sprit rights of a is not
enforceable specific JV of a company specific JV party. expected
in case of party. E.g., act, such as under any
domestic non an absolute law
JVCs (to be competitive restriction on (including
discussed) clause that is transfer of a
unreasonably shares, which company
restricts on JV should be law?)
party’s clearly set out could be
business in the articles void.
activities of association.

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Voting Agreement (VA)
 What is VA?
 An agreement to vote at a shareholders meeting or a board meeting as
previously agreed in JVC.
 It works as a veto right for a minority shareholder to protect its business goal
and various interests in JV.

 Effect of VA :
【Japan】
 Commonly accepted theory:
 Previously, VA was considered as unenforceable since it is contrary to
fundamental principles of a company law, i.e., a shareholder can exercise its
voting rights always at will.
 The current commonly accepted norm is that VA is valid between the JV
parties thereto as a contractual relationship, but a shareholder can exercise
its voting rights at will even if it is breaching VA. VA cannot force a
shareholder to vote as agreed.
 There is no precedent that allows a specific performance to force voting or
injunction to suspend voting. So far, only a compensation for damages is
admitted as a remedy for breach.
 SM or BOD resolution that breaches VA could not be nullified later.
 There opinions have been reflected in the court cases. 18
Voting Agreement (VA)
【Japan】 (Continued)
CASE: Tokyo High Court Judgment 2000.5.30 (Case Report “Hanrei
Jihou” No. 1750, p. 169)
“ VA is enforceable, but the period of agreement that will last for 18 years is too
long and 10 years would be appropriate. Also, any subject matter agreed in VA
that is not specifically identifiable should be not binding.
Compensation for damages could be admitted, but there was no damages in
this case.”

Minor, but convincing theory(of Professor Egashira）:

If JVC or VA is concluded by all of the JV parties, specific performance should
be granted as a remedy.
A resolution passed by voting that breaches VA could be considered as a
breach of the articles of association and therefore voidable（Art. 831.1.2 of
Company Law).
Likewise, if any shareholder intends not to vote as agreed in VA, other
shareholders can obtain a judgment that creates a constructive voting of such
shareholder in accordance with VA, as far as the related stipulation in VA is clear
enough（Proviso of Art. 414.2 of Civil Code, Art. 174 of Civil Enforcement Act).
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 *John Cadman, 1.2.3. Enforceability of shareholders’ agreements,
Voting Agreement (VA) “Shareholders’ Agreement” 4th Ed., Sweet & Maxwell, 2004

【England】 More flexible.

 Shareholder may bind himself to vote in a particular way, if he so wishes.
 A voting agreement is enforceable between the parties by injunction, which
may be either prohibitive, preventing the shareholder from voting in
contravention of the agreement, or mandatory compelling him to vote in
accordance with the wishes of the other party*.
 Injunction is an available remedy, but a judgement to nullify an already
made resolution would not be granted.
 Case: Puddephatt v Leith [1916] , CHANCERY DIVISION [1914-1915] All
ER Rep 260; [1914-15] All ER Rep 260
 The defendant made an advance to the plaintiff upon the security of some
shares which were transferred into his name. The defendant agreed to
"vote in all cases, when a vote is necessary in respect of these shares, as
you wish me to do." Subsequently, the defendant voted at a company
meeting against the wishes of the plaintiff and indicated his intention of
doing so again at the next company meeting.
 Held: (i) the undertaking to vote in accordance with the plaintiff's wishes
was a binding collateral agreement; (ii) as there was one definite thing to
be done about which there could be no doubt the court would grant a
mandatory injunction as well as a prohibitive injunction to compel the 20
defendant to vote as required by the plaintiff at future company meetings.
Voting Agreement (VA)
【China】
If all of the shareholders (JV parties) are the parties to JVC, VA is effective
between JV parties as a contractual relationship.
In addition to compensation for damages, injunction is an available remedy.
But a judgement to nullify an already made resolution would not be granted.
Company Law (Article 22) stipulates a resolution is voidable if it breaches any
legislation or articles of association.
Case: 2011年10月17日（2011）苏商终字第0023号
Enforceability of JVC that provided for a shareholder’s nomination right of
officers of a Joint Venture Company for property development was an issue.
JVC is enforceable as far as it does not violate any mandatory provision.
In this judgement, the court rightly described the nature of JVC:
a. JVC was executed before the establishment of JVC based on the quality
principle in stead of the majority rule. Therefore, even if the relevant stipulations
were not reflected in the articles of association, JVC should be binding on the
parties thereto.
b. JVC purports to restrict a majority shareholder’s rights that is the basic
principle of a joint venture. If a majority shareholder can virtually deviate from or
unilaterally modify what she agreed in JVC by passing a resolution at a
shareholders meeting or board meeting, JVC means nothing.
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Conclusion
Unenforceable JVC? - Possible Situations
1. If there is any shareholder (among others, a minority shareholder) who is not
a party to JVC…?
Unlikely in practice. Moreover, it is a shareholder’s discretion to agree with
another shareholder on how it will exercise its voting rights.
2. If it prejudices a minority shareholder’s rights…?
Not convincing. If any specific VA is excessively harmful to a minority
shareholder, or if majority shareholders act in a way to prejudice a minority
shareholder , it could be voidable due to their abuse of its rights, but should not
deny enforceability of JVC as a whole.
VA also works as a minority protection.
3. If it prejudices a creditor’s rights…?
Unlikely in practice. Any concerted act of shareholders could be voidable if it
amounts to a fraudulent act or undue preference.
Solutions
１．Customizing Articles of Association to reflect VA (and other stipulations of
JVC as much as possible, while you should note that the articles of association
is a public document)
２．Establishing JVC first in an appropriate jurisdiction where a class voting is
available or JVC is fully enforceable
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３．Put/Call Options in case of Breach of VA
 Think globally, act locally

Thank you for your patience

and kind attention.

Any question?

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