USA Law and Practice Contributed by: Olesya Bakar, William “Bill” Jackson, Daniel E. Levisohn and Steven D. Lear, Holland & Knight LLP
would elect or appoint directors who would in turn appoint officers of the corporation. A “close corpora - tion” under certain state statutes may be managed by the shareholders without a board of directors. Regardless of the type of JV entity or its industry, JV agreements are likely to cover the following topics. • Governance: A JV may be (i) co-managed by the unanimous decision of the ventures; (ii) managed by a managing venturer (or its affiliate), with the other venturers having consent rights over certain major decisions; (iii) managed by an executive committee or board of managers, directors or venturers appointed by the venturers to collec - tively manage the JV; and/or (iv) managed via the appointment of officers of the JV. • Capital contributions (for LLCs and LPs): Here, top - ics include how capital contributions are made (in cash or in kind), future capital contribution require - ments (capped or unlimited) and who can call capital (see also 6.3 Funding ). For corporate JVs, shareholders fund capital by acquiring more shares and may want pre-emptive rights (rights to partici - pate in any share offering) to avoid dilution (reduc - tion in its percentage ownership interest). • Distributions (for LLCs and LPs): At issue here is whether cash distributions are made pro rata among venturers or whether a distribution waterfall provides an order of priority and/or a performance incentive for a managing venturer. Corporate JVs require that all shareholders of the same class receive the same per-share distributions. • Allocations and other tax provisions: For LLCs and partnerships, IRC Section 704 and the complex Treasury Regulations thereunder allocate income, loss, gain and the components thereof among the venturers. Each LLC or partnership must appoint a venturer or third party as the “partnership rep - resentative” with the authority to represent the JV and the venturers in IRS audits. A partnership representative that is an entity must include an individual designee. A tax attorney well versed in partnership taxation should prepare or approve all tax provisions in each JV agreement. • Affiliate transactions: These authorise transactions between the JV and any venturer or its affiliate, and the terms thereof.
• Indemnification: This pertains to exculpation and indemnification provisions with respect to the venturers as well as fiduciary duties (the required standard of care and the ability to compete with the JV) of the ventures and managers. • Major decisions: typically, each venturer that is not managing the JV will have certain negotiated major decision rights to approve certain actions by the JV. • Deadlock resolution process: This dictates what happens if the venturers cannot agree on a JV course of action, resulting in deadlock. See also 6.4 Deadlocks . • Transfers and other exits: This relates to whether a lock-out period exists before any exit, the trans - fer rights of each venturer (to affiliates and non- affiliates), the rights of first refusal or first offer, and drag-along and tag-along rights; • Confidentiality: This pertains to the information each venturer is prohibited from disclosing. 6.2 Governance and Decision-Making Decision-making depends on the management struc - ture of the JV. For an LLC or LP, the following applies. • If a venturer or its affiliate, such a manager or man - aging member of an LLC or a general partner of a partnership (a “manager”), manages the JV, day- to-day decisions would usually be made by the manager, with certain major decisions requiring the approval of one or more non-managing venturers. • A board comprising individual representatives of each venturer (or manager if more than one), acting similarly to the board of directors of a corporation, could be responsible for managing the JV or voting on major decisions, with day-to-day functions car - ried out by officers of the JV (if any) or delegated to a manager or venturer. • Officers of a corporate JV manage under the over - sight of the board of directors. See also 7.2 Duties and Functions of JV Boards and Directors . See 6.4 Deadlocks with regard to resolving dead - locks.
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