Where Should a Cross-Border Joint Venture Be Incorporated? The Legal Choices That Shape Control, Funding and Exit

The most consequential decision in a cross-border joint venture may be taken before its first contract is signed: where the business should be incorporated. This decision should be tested against an uncomfortable scenario. A partner wants new investment, but the other will not invest and will not sell. Where should the business be incorporated to ensure that the company can continue to operate, despite the disagreement between its owners?

 

Where the Business Can Legally Operate

 

If a venture is focused on one country, it makes sense to start there. Creating a separate holding company in another jurisdiction should be justified by a commercial need, such as accommodating several operating subsidiaries or finding a legal regime that both parents can accept. Restrictions on ownership, screening of investments, currency controls, and availability of banking facilities should be considered in the preliminary comparison, alongside court remedies and implementation costs. The neutrality that a jurisdiction offers to its shareholders is a plus; complexity is not.

 

The UAE illustrates the difference between ownership and the right to operate. Full foreign ownership is permitted for many businesses on the mainland, but activities of strategic interest are subject to special conditions. A foreign or free-zone holding company should not be selected as a substitute for understanding the licences and approvals needed where the venture will operate.

 

Tax residence is another separate issue. Singapore’s tax authority assesses where a company’s business is controlled and managed, rather than where it is incorporated. Even meeting the board there may not be enough if decisions are taken elsewhere. A jurisdictional comparison should therefore cover the whole investment cycle, including the implications of withholding taxes, distributions and disposal proceeds, as well as the headline corporate tax rate.

 

The Agreement Cannot Replace Company Law

 

There is nothing wrong with partners trying to agree their own commercial relationship via a shareholders agreement. They should understand, however, that a contract cannot replace the company’s constitution. Section 33 of the UK Companies Act 2006 makes it clear that this binds the company and its members. Selecting a different governing law for the shareholders’ agreement does not override mandatory rules, such as voting rights, transfer restrictions and rights attached to shares. These should be consistent across both documents, with incoming shareholders required to subscribe to the agreement where appropriate. A contractual undertaking to vote in a particular way is not necessarily the same as a restriction built into the articles of association.

 

Control Extends Beyond the Equity Split

 

Election of directors alone does not guarantee control. Reserved matters can include needing the consent of specified shareholders to borrow money, to issue new shares, to dispose of significant assets or to change the nature of the business. These provisions are designed to protect an investor against decisions that may frustrate its bargain. The scope and financial limits of these consents should be carefully analysed: a requirement for unanimity on ordinary expenditure can become a major constraint. Quorum requirements similarly warrant scrutiny: a shareholder’s right to appoint a director can become a blocking right if meetings cannot be held without that nominee.

 

Directors’ duties impose yet another limitation. Section 172 of the UK Companies Act generally requires directors to act in good faith to promote the success of the company for its members as a whole, subject to qualifications including the need to have regard to the interests of the company’s creditors in appropriate circumstances. A parent company cannot assume that its nominee is free to take instructions regardless of the interests of the JV. If the parents remain competitors, information rights may need to be limited too: the UK competition regulator has warned that the sharing of sensitive business information may exceed the scope of the joint venture.

 

When Funding Becomes a Deadlock

 

The initial capital contribution is only the beginning of the funding negotiation. The agreement should distinguish between finance that has already been committed and further investment that will need new consent, and set out the implications of overspending, guarantees and shareholder loans. Refusal to make an additional contribution can be no different from a breach of an existing obligation. Any dilution mechanism needs to have a specific trigger and valuation methodology, rather than assuming that the shareholder providing emergency funding will be able to set the price.

 

Debt adds a further jurisdictional dimension. Deductibility of interest, withholding requirements and treatment of related-party lending should be analysed alongside the commercial terms. Singapore, for example, requires cross-border related-party loans to comply with the arm’s-length principle. The financing package should be evaluated as a whole: a loan that leaves the ownership percentages unchanged may redistribute economic rewards or create differing rights of repayment.

 

A deadlock provision should specify which unresolved decisions give rise to escalation, allow senior executives a defined opportunity to reach a deal, and keep essential operations running in the meantime. Technical disputes may be suitable for expert determination, but disagreements over the business strategy require a different solution. A buy-sell mechanism can terminate the relationship by requiring one party to purchase the other’s shares, but equal contractual rights do not create equal bargaining power. A partner unable to fund an acquisition may have no real choice but to walk away.

 

An Exit Needs More than a Valuation Formula

 

Transfer provisions determine whether either of the shareholders is entitled to introduce a third party. Rights of first refusal can preserve the existing partnership, while tag-along rights allow an investor to participate in a qualifying sale and drag-along rights can compel others to join in. Their triggering events need to be carefully drafted. Indirect change of control at parent level should also be considered: the commercial partner can change without any transfer of the JV’s shares.

 

Singapore’s Court of Appeal illustrated the importance of an exit route in its 2018 Perennial (Capitol) decision. It refused to wind up the companies in deadlock where the articles contained an available fair-value exit mechanism. The court recognised that an unfair mechanism might call for a different approach, but would not use winding up as a means of releasing shareholders from their bargain. The jurisdiction’s approach to judicial remedies can therefore be as important as the words used in the exit clause.

 

Completion should also cover release from guarantees, outstanding shareholder loans and continuing access to intellectual property. A sale price does not resolve whether the company can continue to use a parent’s software, brand or production process. Those arrangements should be coordinated with the sale of shares rather than left to be negotiated after the right of exit has been triggered.

 

The Dispute May Need More Than One Forum

 

The incorporation jurisdiction, contractual governing law and seat of any arbitration are separate choices. The arbitration clause should identify the seat, rules, appointment process and language, and coordinate related financing and licensing agreements. The New York Convention provides a framework for enforcing foreign arbitral awards, but enforcement is subject to recognised grounds for refusal. The location of assets should therefore be discussed before a dispute arises, rather than waiting for an arbitral award to be taken.

 

Arbitration also has limitations that affect the choice of incorporation. In the Tomolugen Holdings v Silica Investors case, Singapore’s Court of Appeal distinguished between an arbitrable dispute between shareholders and remedies that fall outside an arbitrator’s powers, such as winding up a company. A dispute may therefore call for arbitration of the allegations and subsequent court proceedings for particular relief. Putting all disagreements into a wide-ranging arbitration clause does not remove the role of the corporate courts.

 

The choice of jurisdiction should be tested by these considerations, rather than preceding them. For a single-market venture, a local company may suffice; a multi-country business may require a separate holding jurisdiction. The better structure is the one in which control, funding and exit provisions remain functional even when cooperation ceases, without adding unnecessary expense to the life of the business while it lasts.

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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