The UK Listing Authority has announced that
significant changes are to be made to the Listing Rules that relate
to joint ventures with effect from 6 August 2007. These
changes will make it much easier for listed companies and their
subsidiaries to be involved in joint venture transactions.
WHAT ISSUES HAVE COME UP FOR LISTED COMPANIES
WANTING TO ENTER INTO JOINT VENTURES?
Since the new Listing Rules were introduced in July
2005, two key issues have become wearyingly familiar when we have
been dealing with joint ventures with listed companies.
Exit provisions and the Class 1
When signing up for a joint venture, the parties
often want to agree certain situations that will result in the
joint venture being brought to an end. These may include
inability to agree on certain issues, breaches of the joint venture
agreement or simply that a particular time has passed.
The mechanism for dealing with the end of the joint
venture is typically that one party will often have the right to
buy out the shares of the other. This is often done at
“market value”, as valued by an independent
valuer. Although not perfect, this is generally seen to be a
fair way to bring the joint venture to a close.
Under the Listing Rules, if you give someone else
(e.g. your JV partner) a right to buy your shares and you
don’t have any discretion to say no, you are treated under
chapter 10 as if you have actually sold those shares today.
It is therefore necessary to treat these types of provisions in a
joint venture agreement as if they were a sale, and apply the Class
Tests in chapter 10 to them. These judge the size of the
transaction in relation to the listed company’s size, looking
at price (compared to its market capitalisation), gross assets and
Because the price under the exit provisions will
only be set when the sale actually happens, the Class Test on price
treats this as “uncapped” - and as a result this means
the joint venture agreement is treated as a Class 1
transaction. That then means shareholder approval is needed
to enter into the joint venture.
For many listed companies, it is just not practical
- nor do they see it as justified - to seek shareholder approval
when they enter into a small joint venture. Although there
are ways to avoid having to get shareholder approval, these may not
be ideal - for example, a common approach has been to cap the
maximum price payable under the exit provisions at a fixed amount
just below the Class 1 threshold, but if the JV is to last for 10
years it becomes much more possible that the final value will be
greater than that amount, and the listed company will have lost
out. Alternatively the JV partners may decide not to include
any exit provisions at all, but that can simply store up problems
for the future.
Related parties, related
It is fairly common for joint ventures to be
established on a “deadlocked” basis - that is, each JV
partner has equal control rights, and can appoint the same number
of directors. The general intention is that any decisions
need the support of both JV partners - and this is often the most
practical approach when two substantial organisations are coming
The second issue that has often come up is that
chapter 11 of the Listing Rules states that, where the JV is
deadlocked, a JV partner that is listed has to treat both the other
JV partner and the JV company itself as its related parties.
This has several consequences, but the most serious is that any
transaction with a related party that reaches 5% or more on any of
the Class Tests must be approved by the listed company’s
shareholders. Even some smaller transactions - of 0.25% or
above on any of the Class Tests - need the listed company’s
sponsor to get involved and give a comfort letter.
As a result, any dealings with the JV can become
very difficult: anything - from making small amendments to the JV
agreement to transferring assets into or from the JV or terminating
the JV and buying out the other party - can suddenly incur a lot of
time and cost.
HOW ARE THE LISTING RULES BEING CHANGED NOW?
The main changes are:
Where the JV agreement includes exit provisions
where the price is uncapped (generally because it is to be market
value at the time of exit), this will only be treated as a Class 1
transaction (and therefore needing shareholder approval) if any of
the other Class Tests indicate that it should be Class 1 or
If all of the other Class Tests indicate that it should be Class 3,
the uncapped exit provisions will mean it is treated as a Class 2
transaction (therefore requiring only to be announced in sufficient
detail in accordance with specific requirements in chapter 10 of
the Listing Rules).
The change will ease the burden for a significant
number of smaller joint ventures. However, larger joint
ventures will still need either to get shareholder approval or
structure their transaction in a way that achieves the same
commercial ends but doesn’t trigger the Listing Rules issue -
again incurring time and cost.
The UKLA’s position is that only where there
is a “remote prospect” that the actual price on an exit
will reach the Class 1 level should it be treated as less than
Class 1. They think that the 5% maximum for Class 3 treatment
is what is needed to show this level of remoteness. For now we have
to accept this middle ground. However, they say that they
will keep the issue under review, so listed companies that find
that this rule causes commercial problems should make sure that the
UKLA is aware of these.
Incidentally, the relaxation of the uncapped
consideration rule is not restricted to joint ventures but has
general application to all transactions. It might, for example,
enable a listed company or one of its subsidiaries to enter into
uncapped earn-out arrangements without having to seek shareholder
Ordinary course of business
The UKLA has confirmed that it is possible for the
establishment of a JV, or for acquisition or disposal of interests
in a JV, to be treated as a transaction in the “ordinary
course of business”. Generally this would be agreed
between the listed company and the UKLA on a case-by-case
basis. The effect of this is that the JV would fall outside
the Class Tests completely and the problems above would not
The UKLA has also stated that they are neutral as
to form, so that, if an activity would normally be treated as being
part of the ordinary course of business for the listed company,
this analysis would not change simply because the activity was
being undertaken through a joint venture vehicle.
This may not be directly useful to most listed
companies, where joint ventures are often used to take on something
new. However, in some sectors, such as property companies or
those involved in PFI projects, a significant part of their
ordinary business is arranged through JVs, and they are likely to
find this valuable in minimising the overhead costs of those
The creation of a deadlock joint venture will no
longer automatically lead to the joint venture partner, and the
joint venture itself, being treated as related parties of the
listed company. This should make dealings in relation to the
joint venture much simpler and less costly, as they will only need
to take chapter 10 into account.
Only where the JV partner exercises
“significant influence” over the listed company (which
might apply where the JV represented a very large part of the
listed company’s assets or profits), or is a significant
shareholder or director of the listed company, will the related
party rules be likely to apply again.
WILL IT MAKE ANY DIFFERENCE?
The change on related parties will make a
significant difference to deadlocked joint ventures, by reducing
the burden that applies when dealing with the joint venture.
In most cases the related parties rules will no longer be relevant
to joint ventures.
The change to the Class Tests is helpful but only
really benefits smaller joint ventures. Larger joint ventures
- and this means anything that is over 5% on any Class Test - will
still need shareholder approval before the parties enter into the
type of exit provisions mentioned above. But it is a welcome
step forward. The UKLA have said that they will keep this issue
under review, which leaves the door open for further changes.
The confirmation on ordinary course of business
will probably not have much impact on most listed companies, but
for some that use JVs on a daily basis it may offer a better way to
deal with these.
Overall, this is a welcome package of changes, and
shows that the UKLA has been listening to feedback from listed
companies that have been struggling with joint ventures over the
past two years. It will be very helpful to listed companies,
which from 6 August can focus on the commercial benefits of their
joint ventures, rather than spending time and money on technical