Shipping joint ventures are usually formed for a particular objective, typically, to build, acquire or manage one or more vessels. With ESG firmly on the agenda of most corporates, innovative ESG and sustainability focused tie-ups between shipping companies and technology developers are also becoming popular. It seems that collaboration in the shipping sector is only likely to grow with the increased need to decarbonise the supply chain and deliver low carbon fuel solutions and supply vessels to service ventures such as offshore wind projects.
Whilst it is possible to set up a purely contractual collaboration/strategic alliance (ie, a contractual joint venture committing the parties contractually only) most shipping ventures involve the set-up of a jointly owned corporate joint venture vehicle, usually in the form of a private limited company (JV co). The JV co would then potentially own the vessel, related shipping asset or technology/IP, or wholly own one or more special/single purpose companies (SPVs) which would house the assets that are the subject of the joint venture project.
Parties should consider carefully the most appropriate jurisdiction for the JV co, its SPVs, and any vessels owned, managed, or operated by the JV co and/or its SPVs. An assessment of the tax position (including the potential for tonnage tax) and consideration of local laws and regulations to highlight any specific requirements (eg vessel flag restrictions etc) should be undertaken from the outset. Offshore jurisdictions are a popular choice and there are a number of these to choose from.
It is important that the objective and strategy of the JV co is clearly defined during the early discussions between the parties. The parties should decide the ‘project’ or ‘purpose’ of the JV co so that the investment strategy of whether it will build, acquire, invest or operate vessel(s) is clear from the outset. Agreement of the parties on the specification of the vessel that the JV co intends to target, particularly the type (eg bulker, container ship etc), size range and the approach to be taken with regard to chartering, is also beneficialul to establish early on. These discussions will help to ascertain the viability of the JV co project/purpose, identify synergies and highlight the all-important financial profitability potential of the collaboration.
The agreed strategy of the JV co will often also shape the arrangements around each joint venture party’s commitment to exclusivity. Each of the parties will likely have interests outside of the joint venture which they do not want to compromise. Equally, each party will need the other to commit to an understanding in respect of those outside interests. Typically, a right of first refusal is often secured for the JV co, such that the joint venture parties each agree that they will not themselves (or through their group companies) invest in vessels (projects) targeted by the JV co, unless it has already been offered the investment prospect .
The parties will need to address which investment opportunities are caught by this (so as not to limit their own activities), carve out any exclusions to such exclusivity, and ensure a process for prompt decision making by the JV co is in place when such opportunities are put to it (so that the opportunity is not missed where the JV co is not interested).
It is common for the joint venture parties to provide certain services to the JV co, ranging from technical to operations and management. The parties must agree the parameters around any services provided, particularly a commitment on the party providing the services to treat the vessels owned by the JV co equal to any other vessels that it may own, operate, or manage.
The parties should also agree service levels and the triggers for the JV co to terminate services where necessary without being blocked by the joint venture party providing the service. The operational services and the stake in the joint venture are inevitably closely linked. As such, the parties might consider including put and call options where there is a termination of services.
The level of control each party has in the joint venture must be clearly documented in the joint venture agreement. Whilst day to day control or management of the project itself often falls to the joint venture partner with shipping experience (eg, vessel expertise) rather than the partner with the larger equity stake, overall governance and control must still be agreed and addressed properly.
This is likely to be managed by an overarching list of reserved matters (eg, relating to sale/purchase of vessels, securing additional finance, committing to long term charters etc) which the parties agree are critical to the joint venture and require equal decision making by each party and unanimous agreement.
The parties may not always agree and reach consensus on the reserved or key matters, which will then result in a ‘deadlock’. Sometimes other unexpected events or changes could also trigger an exit, such as a party’s default (breach of the joint venture agreement) or a party’s inability to operate (affecting their ability to contribute to the joint venture). How the parties address an exit in these circumstances is crucial given the impact it can have on the joint venture business. In the case of deadlock, typically, parties implement an escalation process whereby the senior management of each party try to resolve the deadlock within a specified timeline, and where this fails, the parties follow one of the agreed exit route options.
Usually, the parties will agree an initial period (known as the lock-in period) of between two and five years during which neither party may exit the joint venture (except in the case of default). This commits both parties to establishing the joint venture business and growing it. Following the lock-in period, or where there is a deadlock or dispute, the parties might agree to exit by one of the following means:
A ‘steel split’ is a mechanism often followed by parties on dissolution, winding-up or exit from a shipping joint venture. A ‘steel split’ allows the parties to split the assets in that joint venture proportionally between the joint venture partners.
The parties should agree a list of suitable ship valuation brokers that they can use to undertake the valuations for a ‘steel split’. Each party can then conduct their own valuation using an acceptable broker. Usually, the average of the two valuations is then used.
It is important that the parties also agree what the valuation must take account of, including charterparties, debt, and liabilities, and the basis of the valuation itself ie ‘after-inspection’ (after physical inspection) or ‘desk-top only’ (without physical inspection). The charterparties should also be checked carefully to ensure any change of control and consent from charterers is factored into the process along with the potential need to novate.
Once the valuation is complete the parties will each pick the assets they want. It is important that the mechanism for this is agreed and documented in the joint venture agreement. There is no simple mechanism here; some choose proportionality (the party with the larger shareholder chooses first) and take it in turns until the assets are all divided up, and some ask an independent third party to group the assets identifying those most suitable for the party’s business. The parties can agree from the outset that where one party receives assets of a higher collective value in the split, that party will then pay the other a balancing payment to reflect this difference and ensure an even economic balance.
The above addresses only some of the matters that parties should consider before entering into a joint venture. Each shipping project has different facets which will determine the balance of legal protection and commercial flexibility. Whilst discussions on such issues may be time consuming, determining and agreeing concerns relating to these matters from the outset is essential. Ultimately, documenting the approach of the parties on these matters will increase the prospects of the joint venture running smoothly and this being successful.