The parties could elect to incorporate a JVC in order to conduct all or only part of the overall petroleum project activities. It is possible that a petroleum project could be structured with incorporated and unincorporated joint ventures side by side. Any industry participant will have its own opinion as to the optimum joint venture structure and it is not possible to make a simple declaration of whether the incorporated or unincorporated joint venture structure is best. Each formulation represents a different route up the same mountain and only the particular circumstances of an individual petroleum project will indicate which structure might be more appropriate.
An incorporated joint venture and the use of a JVC could be particularly beneficial for a petroleum project in a number of circumstances.
•Operator selection – the incorporated joint venture allows the JVC to be the operator, which could be helpful where the parties are unable to agree which one of them is best-qualified to be the party-operator under a JOA.
•Involvement – the JVC could give the parties more shared involvement (including wide measures of secondee participation and clearly-identified multi-party roles and responsibilities) than is ordinarily afforded by the JOA’s operator/non-operating parties dichotomy.
•Liability ring-fencing – the liabilities to third parties to which all of the parties would ordinarily be exposed under a JOA are replaced by the single point responsibility of the JVC (being an entity with independent legal personality, ordinarily distinct from that of its shareholders).
•Cash generation – the JVC could be used as a vehicle to raise third party financing for petroleum project development costs, on the basis of no or limited recourse to its shareholders.
•Concession fit – the JVC could be of particular attraction where the terms of the concession are such that it is expressed to be incapable of being held by multiple parties – such that those multiple parties would instead incorporate a joint venture company, which will be the sole holder of the concession. An incorporated joint venture project structure is found for example in Russia, where a concession is typically granted to a single company which is owned by the project parties. As a practical matter it is also easier for the parties to transfer their interests in the project by transferring their shareholdings, rather than transferring a direct interest in the concession.
Because it is founded on a contract, the unincorporated joint venture is sometimes called a contractual joint venture; because it is founded on the basis of a shareholder’s interest, the incorporated joint venture is sometimes called an equity joint venture.
(a)The shareholder agreement
The shareholder agreement, while intended primarily to regulate the relationship between the JVC’s shareholders and the manner in which the affairs of the JVC are conducted, will also contain the key operational elements which are associated with the activities of exploring for and producing petroleum. The terms of the shareholder agreement and the JOA will have many similarities and also some key distinctions. These are summarised below, but several noteworthy features deserve some additional commentary first.
•Commitment – in the context of the JVC, the shareholder agreement usually contains a clause whereby the shareholders commit to use their reasonable endeavours to promote and develop the business of the JVC. The shareholder agreement might also oblige each participant, as a shareholder, to undertake not to compete with the business of the JVC in a defined territory during the currency of the shareholder agreement and for a defined period after that participant has ceased to be a shareholder. However, these sorts of undertakings are less common in the context of the JOA, where the parties will be keen to preserve their rights to undertake competing projects.
•Fiduciary duties – whether the parties (in their capacity as the parties or as an operator) will owe any fiduciary duties in respect of the business of the JOA is a topic which is addressed separately (see 7.8). In the context of an incorporated joint venture, however, the directors of the JVC will owe certain statutory duties to the JVC, which will include a duty to promote the success of the company for the benefit of its shareholders as a whole and a duty to avoid having an interest which might conflict with the interests of the company. These are effectively codified fiduciary duties and they will need to be borne in mind by the JVC’s directors when they consider how to run the business of the JVC within the context of any wider corporate group interests which they might have.
•Capitalisation of the venture – in the JOA the parties will each contribute their respective participating interest-based shares of the costs of performance of the joint operations (see 3.2). In the context of the incorporated joint venture, however, the JVC will be capitalised from the cash flows which it generates from the conduct of its business and also by the contributions of the shareholders. This will result in JVC-specific profit and loss accounting.
•Ownership of assets – in most incorporated joint ventures the shareholders typically contribute various assets and interests which are essential to the proper functioning of the JVC and which the JVC will then own (such as land, cash, process technology and know-how). In the context of a petroleum project, the principal asset is the concession, which will be held by the JVC. Other assets which emerge over time, such as any petroleum production, processing, storage or transportation infrastructure, will also be owned by the JVC. This is in contrast to the JOA structure, where the concession will be held directly by the parties and the relevant infrastructure will be regarded as part of the joint property (see 3.4).
•Competition law considerations – the incorporation of a JVC could in theory trigger the need for consideration of certain competition law matters relating to merger control or the management of agreements which affect competition. The practical reality is that the thresholds and the conditions which typically apply in respect of potentially notifiable mergers are so significant that a customary petroleum exploration and production joint venture, structured through the medium of a JVC, would be unlikely to trigger them.
•Transferable interests – the ability of the parties to transfer their interests in the petroleum project in the context of an unincorporated joint venture is considered separately (see Chapter 14). In the context of the JVC, the transferable interest is of a party’s shareholding in the JVC, and with the transfer of that interest will come part ownership (through the medium of the JVC) of the concession and of any relevant infrastructure. The transfer of shares will usually be subject to some form of pre-emption right in favour of the non-transferring shareholders in the shareholder agreement, and the terms of the prevailing petroleum law or of the concession might require state approval of any such change.
•Returns to the parties – in the context of the JOA, each party will have a right and an obligation to lift and to take delivery of its defined petroleum entitlement at the point of production. In the context of the JVC, however, all produced petroleum will belong to the JVC and will typically be sold by the JVC, with the net profits from the proceeds of sale to be distributed as dividends between the shareholders, pro rata