It is common to have an agreement governing the control of the SPV and the relationships among the main sponsors and others with an interest in the project vehicle.
Such agreement sets out the rights and responsibilities of each owner of the project 78
entity. The precise form of the agreement would vary with the nature of the vehicle but would typically be an Agreement Among Shareholders, a Partnership Agreement or a Joint Venture Agreement. These agreements are collectively referred to as “the Agreement Among Owners” (or the “AAO”) for the purposes of this chapter. Because participants often have different and conflicting objectives, many contentious issues can arise in the negotiation of the AAO. Some of the main issues that need to be resolved are as follows:
1. FINANCIAL ISSUES
a. Contributions of the Participants
One of the most frequently encountered problems concerns the relative contributions of the participants to the project. They must agree on such basic issues as: the amount and sequencing of each owner’s financial contribution; the form of the contributions (e.g. will they be in cash or in kind via equipment, technology, know-how or licenses); and provision of raw materials, personnel or other inputs to the project. In addition, there may be problems relating to the valuation of participant contributions when they are made in the form of in-kind contributions or in different currencies whose relative values may change over time.
b. Willingness to Provide Supplemental Credit Support
A related area of negotiation is the extent to which each party participates in providing credit
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support for the project in addition to its equity contribution. Such support can be provided in a variety of ways including: supporting construction period funding through a guarantee or completion/cost overrun agreement; a purchase contract for project output;
an advance payments for project output; or a deficiency agreement to support the revenue stream.
c. Profits, Reserves and Distributions
The owners also need to negotiate and include in the AAO provisions dealing with (1) the calculation and division of profits and (2) the method for making decisions on how much should be left in the venture for working capital, reserves, or expansion and how much should be paid out in the form of distributions to the owners.
2. MANAGEMENT AND CONTROL ISSUES
These issues relate to such matters as allocation of management responsibility, division of voting rights and, in general, how decisions involving the project entity are made. Each participant will have specific management and control objectives with respect to the project entity and the project in general. However, a participant’s desire for control may not always coincide with its ability to make financial contributions. Moreover, business organization or other legislation in the host country often plays a role in determining who controls the project. For example, host country legislation may specify the control mechanisms or require local
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shareholders to have a controlling interest. In addition, special voting mechanisms (e.g.
different classes of stock) are sometime established for decision making in specific situations of special importance to one or more of the participants.
In some projects, a party may have a conflict between its interest as a shareholder or partner in the project entity and its other interests in the project as, for example, a contractor or off-taker. In such cases, the AAO may require the party to abstain from participating in any decisions affecting its interests or special voting majorities may need to be established. For various reasons, a participant may wish to sell or relinquish its ownership interest in the project to a third party not involved with the project. To deal with such cases, the AAO will generally contain provisions which provide for pre-emption, buy-out or right-of-first-refusal clauses to provide a mechanism to keep control in the hands of the original sponsors.
3. CHECKLIST OF PROVISIONS OF AN AGREEMENT AMONG OWNERS
Whatever form the Agreement Among Owners takes, it should be based on the objectives and expectations of the various participants and include provisions that deal
with the problems noted above. Because each project is different and has a different set of participants, there is no standard form agreement for governing project organization and relations among the parties. However, the following checklist is included to illustrate the diversity of the
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issues that may need to be dealt with in the agreement among owners.
• Preamble identifying the parties and setting forth the purpose of the project.
• Legal nature of the SPV.
• Provisions on the amount, type, and timing of each party’s investment.
• Dilution of an owner’s interest and voting rights if it does not provide its expected share of the investment.
• Voting rights and other decision making mechanisms for the project.
• Methods for resolving disputes.
• Protecting minority interests.
• Share transfer restrictions.
• Entry of new shareholders.
• Succession and exit.
• Valuation of an owner’s interest.
• Nature of other credit support expected from each participant.
• The sharing of credit support obligations.
• Licensing of technology and know-how from participants.
• Training of local personnel.
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• Pricing of inputs supplied by (and outputs purchased by) participants.
• Planning and decision making for expansion or alteration of the project.
• Appointment of the management of the project.
• Clauses dealing with the impact of changes in exchange rates.
• Procedures to mesh differing accounting systems.
• Arbitration and dispute settlement.
• Choice of forum and governing law.
• Effects of subsequent changes in law.
• Transfer and assignment of interests.
• Termination provisions.