A common pattern in cross-border deals is that one partner brings capital from overseas while the other brings the opportunity, local knowledge and management. Whether value is shared fairly over the life of the deal usually depends less on the handshake than on the structure and the documents.
This article outlines in general terms, under Australian law, the issues that arise when structuring a joint venture or co-investment with an overseas partner. It also looks at how the person who brings the deal can lawfully and transparently share in more of its value, through equity, ongoing roles and follow-on rights rather than a single fee. A separate article discusses introducer and finder’s fee agreements.
Consider a hypothetical Melbourne entrepreneur who found a property and business opportunity and a family investor in Malaysia willing to fund it. The entrepreneur wanted a share of the upside and a management role; the investor wanted control over spending and a clear exit. Further capital was needed midway, and foreign investment approval had to be considered. The right approach depended on facts that needed advice.
Incorporated or unincorporated
- Incorporated joint venture. The parties hold shares in a company that runs the venture, governed by its constitution and a shareholders’ agreement. Liability is generally limited, and directors owe duties to the company.
- Unincorporated joint venture. The parties contract directly and may hold assets as tenants in common. Drafting usually aims to avoid an unintended partnership, which can carry joint liability.
- Special purpose vehicle. A new company or trust for a single project can ring-fence risk and simplify financing.
- Unit trust. Common for property, with a trustee company and a unitholders’ agreement. Depending on how investors are brought in, a unit trust may be a managed investment scheme, which raises licensing and registration questions. State duty and land tax surcharges for foreign persons may also apply.
The JV or shareholders’ agreement
The agreement usually covers the venture’s purpose and scope, each party’s contributions, board composition, reserved matters needing unanimous or special approval, the business plan and budget, information rights, distribution policy, transfers of interests and confidentiality. A separate article on our site discusses shareholders’ agreements for family businesses.
Capital calls
Ventures often need more money than planned. The agreement may say whether further funding is an obligation or an option, how calls are made and what follows if a party does not fund, such as dilution, a loan from the other party or a forced sale. A dilution mechanism that seems neutral can operate harshly against a partner whose funds are delayed. Funds sent from overseas must comply with the laws of the country the money leaves and of Australia; we work with lawyers in that country on outbound approvals, Australian banks will ask about the source of funds and wealth, and AML/CTF laws apply.
Management and service fees with related parties
The operating partner is often paid development, asset management or service fees, sometimes through a related company. This can be legitimate if the fees are disclosed, agreed in writing, priced on a basis both parties understand, and subject to an approval process. Undisclosed related-party fees are a frequent source of disputes and may breach directors’ duties, trustee duties or contractual obligations. Audit and information rights help both sides.
Equity for the person who brings the deal
Instead of a one-off fee, the person who finds and runs the deal may participate in it. Common approaches, described generally, include:
- A promote or carried interest: a larger share of profits after investors receive their capital and an agreed return, set out in a distribution waterfall.
- Sweat equity: shares or units issued for services, often vesting over time or on milestones.
- Co-investment: putting in some capital alongside the investor.
- Ongoing roles: a management agreement or board seat for the life of the venture.
Issues include how contributions are valued, leaver and vesting terms, and the tax treatment of receiving equity for services. Everyone involved should know how the sponsor is being rewarded.
Follow-on and pre-emptive rights
A party may want rights to join future funding rounds or related projects, a first look at the next opportunity, and pre-emptive rights on new issues and transfers to protect its percentage. The company’s constitution and the Corporations Act replaceable rules may contain their own pre-emptive provisions, which need to fit with the agreement.
Deadlock and exit
Equal ventures can stall. Mechanisms include escalation to senior representatives, mediation, expert determination, put and call options, buy-sell provisions, and drag-along and tag-along rights. Exit terms commonly address lock-in periods, default events, change of control of a partner, and how the price is set. The court remedies for oppression and winding up on the just and equitable ground remain in the background but are slow and costly.
FIRB
A foreign person, which can include a company or trust with foreign interests, may need approval under the foreign investment framework before acquiring an interest in an Australian entity, business or land. Whether approval is needed depends on the investor, the sector, the size of the interest and the value. Land, agribusiness and national security businesses attract particular rules, and foreign government investors are treated differently. Agreements are often made conditional on approval. A separate article discusses FIRB approval for investors from Southeast Asia.
Dispute resolution
A tiered clause may provide for negotiation, then mediation, then expert determination for valuation or technical questions, and arbitration or court for what remains. Where a partner’s assets are overseas, arbitration may be attractive because awards can generally be enforced in the many countries that are party to the New York Convention. The seat, rules and language of the arbitration are worth agreeing at the outset.
Cross-border tax
Tax questions may include withholding on dividends, interest and fees, tax treaties, thin capitalisation, transfer pricing for related-party fees, the residence of the venture entity, foreign resident capital gains tax, and the partner’s home country tax. These need advice from a qualified tax adviser in each relevant country working with the lawyer.
Questions to discuss with your adviser
- Which structure suits the venture, and why?
- What happens if a party cannot meet a capital call?
- Which related-party fees are payable, and how are they approved?
- How is the sponsor’s equity or promote calculated and disclosed?
- How is deadlock broken, and how can a party exit?
- Is FIRB approval needed?
Frequently asked questions
What is the difference between a joint venture and a partnership in Australia?
A partnership generally involves carrying on business in common with a view to profit and can create joint liability. Many joint ventures are structured to avoid being a partnership, but the label alone does not decide it.
How does the person who finds the deal get equity in a joint venture?
Common approaches include a promote, sweat equity or a co-investment, and these need clear documentation and disclosure.
Do foreign investors need FIRB approval for a joint venture in Australia?
It depends on the investor, the sector, the interest acquired and its value.
Every family’s situation is different, and the answer often turns on details. Book a consultation so we can review your documents and circumstances before you act.
How Chua Tan Associates can help
Chua Tan Associates has practised in Melbourne since 1990 and acts for Australian and overseas partners in joint ventures and co-investments, drawing on a broad library of contract precedents we adapt to each deal. We help bring opportunities and the right people together, and we work alongside accountants, financiers, migration lawyers, including our colleagues who are Accredited Specialists in Immigration Law, and lawyers in Asia. Justin Chua trained in accounting (Bachelor of Commerce, accounting major), worked in finance in Hong Kong and has run businesses himself. As a Nationally Accredited Mediator he helps partners resolve differences early. We advise in English, Mandarin and Cantonese.
Important: This article is general information only and must not be relied on. It is not legal, tax or financial advice, does not take your circumstances into account, and may not reflect changes in the law after publication. Laws of other countries may also apply. Do not act or refrain from acting on the basis of this article. Reading it or contacting us does not create a lawyer–client relationship. Please book a consultation for advice on your situation.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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