LUXEMBOURG Law and Practice Contributed by: Anna Gassner, Philipp Mössner, Andrea Carraretto and Etienne Weryha, GSK Stockmann SA
6.3 Funding The funding of JV vehicles generally involves a blend of equity and debt, depending on the financial resources of the JV participants. The latter will make contribu - tions in cash or in kind directly to the JV share capital or grant shareholders loans to the JV vehicle. The JV agreement can provide for a future funding obligation to support the JV vehicle, notably with respect to capital requirements, working capital, ongoing operations, or financing of a project. Adjust - ment clauses addressing default by one partner can help resolve situations where such funding obligations cannot be satisfied by a partner. Equity funding can lead to a change in the ownership of the JV vehicle and could effectively trigger a dilu - tive effect on the shareholding of existing participants. Several mechanisms, such as preferential subscrip - tion rights, anti-dilution clauses, issuance of instru - ments such as warrants and options do exist under Luxembourg law to ensure that a JV partner’s share - holding is not diluted. Another equity funding option is a contribution to the capital Account 115 of the JV vehicle without issuing new shares. This approach is widely used and allows for quicker (and generally more cost-efficient) capital injections. 6.4 Deadlocks As mentioned in 6.1 Drafting and Structure of the Agreement , one of the most essential issues to be addressed in a JV agreement is the resolution of a deadlock situation. Provisions relating to confiscation or compulsory pur - chase of shares are generally valid, as long as they do not deprive shareholders of their shares without payment or deprive them of the right to request the dissolution by court of the JV for cause. Furthermore, several contractual mechanisms can be contemplated to prevent a deadlock, which can be set forth either in the JV agreement or its articles or in both: • escalation clauses to senior representatives of the involved parties; • mediation and negotiation clauses;
• dispute resolution mechanisms (international arbi - tration or expert determination); and • exit strategies – put and call options in favour of the dissenting partner, exclusions mechanics pro - vided for in the articles of the JV vehicle. 6.5 Other Documentation The set-up of a JV usually further requires the execu - tion of additional documents, each having a specific role to play with respect to the success of the JV, notably: • NDAs; • IP licences covering the use of the IP rights held by one of the partners to the JV by the latter; • agreements to transfer assets to the JV vehicle as the case may be; • asset management and service agreements; • business plan; and • policies (eg, KYC, conflicts of interests). 6.6 Rights and Obligations of JV Partners Depending on the corporate form of the JV vehicle, the general rule for profit sharing between the JV part - ners is that any profit distributed to the JV partners shall be allocated pro rata to their participation in the JV agreement. The same rules apply for loss sharing. However, Luxembourg law allows tailored sharehold - ing and thus tailored profit and loss sharing mechan - ics (eg, by multiple classes of shares with different economic rights granted to each class). In terms of distributions, this specific shareholding makes it pos - sible to grant preferential rights. These preferential rights may be structured as a distribution waterfall or on a case-by-case basis, for example, by reference to specific internal rates of return (IRRs) achieved. Nevertheless, Article 1855 of the Luxembourg Civil Code sets a limit to the parties’ freedom as it provides that “an agreement giving one of the partners all the profits is null and void” ( clause léonine ). This prohibi - tion applies to any JV agreement as well as to the articles of association/partnership agreement of a JV vehicle (this legal provision only invalidates the allo - cation of all profits to a party but does not prevent a significantly disproportionate allocation). Identically to profit sharing, contractual provisions may also provide
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