Corporate Governance Considerations for JV Companies in the Energy Sector

Energy projects are frequently operated through joint venture special purpose vehicle companies. These companies often have particular governance arrangements necessitated by their joint ownership that need to be carefully understood and navigated. Our Corporate Governance team discusses some typical governance features of joint venture companies and offers tips on how to avoid some associated difficulties.

The scale of energy projects mean that they are often collaborative in nature and operated through joint ventures structured through special purpose vehicle companies (JV Companies). JV Companies frequently have particular governance arrangements which can give rise to certain challenges. In this article, we explore some features commonly present in the governing documents of JV Companies and offer guidance on how to avoid any associated pitfalls.

Governing documents

JV Companies are typically governed by a bespoke constitution varying certain elements of the Companies Act 2014. In addition, many JV Companies will have a shareholders’ or joint venture agreement in place to regulate the ongoing relationship of the joint venturers and to supplement the constitution. It is essential that the constitution and the shareholders’ agreement, if any, are each carefully considered before any directors' or members’ meetings are arranged or other governance decisions are made by the JV Company.

Composition of the board of directors

The Act requires a private company limited by shares to have at least one director and at least two directors, in the case of a designated activity company. The constitution and/or shareholders’ agreement of a JV Company will commonly provide for a maximum and/or minimum number of directors.

Significantly, as each joint venture party will be keen to maintain oversight and, as far as they can, control of the JV Company, the governance documents often give each of the joint venturers the right to appoint a certain number of directors. In addition, a director appointed by one of the joint venture parties will generally only be capable of being removed by that party. Any decisions taken to appoint or replace directors on the board of a JV Company need to be made with awareness of such provisions as a result.

It is important to note that each of the directors, regardless of which of the joint venture parties appointed them, owe their duties under the Act to the JV Company alone. While they may have regard to the interests of the member who appointed them, they must always act in good faith in what they consider to be the interests of the JV Company.

Board meetings

JV Companies’ governance documents tend to include particular procedural requirements for board meetings, notably around the following areas:

Frequency

The governance documents of JV Companies may specify the frequency with which board meetings are to be held, for example, monthly, quarterly or biannually.

Notice

It is common for JV Companies to have strict requirements regarding notice of board meetings, generally requiring either five or seven days’ (or business days’) notice. These notices may be required to specify the date, time, and place of the board meeting. This is contrary to the default position in the Companies Act that notice of board meetings need only be reasonable.

The notice may also need to be accompanied by a written agenda of the matters to be discussed at the board meeting, with no business capable of being transacted at the meeting unless provided for in the agenda.

Quorum

JV Companies will generally have specific requirements regarding the quorum for board meetings. This will usually involve at least one director appointed by each joint venturer needing to be present at each meeting for it to be quorate, at least in the first instance.

Voting

The constitution or shareholders’ agreement of a JV Company (or both) may provide for weighted voting rights for members of the board. This means that the directors appointed by one joint venturer may be entitled to cast the number of votes necessary to maintain the agreed control proportions. In effect, some directors present at a meeting are able to cast more than one vote each.

Alternatively, a mechanism may be included to resolve any deadlock between the directors, such as providing for a casting vote for the chairperson.

Reserved matters

It is customary for a shareholder’s agreement of a JV Company to contain a number of shareholder and/or board reserved matters for which the consent of either the majority of shareholders or directors is required. While certain matters are always reserved to shareholders under the Act, for example amending the company’s constitution or winding-up the company, these reserved matters may be more operational and day-to-day. It is vital that reserved matters are reviewed before the JV Company takes any particular action outside of day-to-day activities.

Conclusion

JV Companies typically require bespoke constitutional provisions and usually shareholder’s agreements to facilitate their common purpose, maintain the relationship between the parties and successfully manage the governance of the JV Company. This is perhaps particularly true of energy sector JV Companies, as the projects they manage are regularly large in scale and often have a cross border element, and so may require tailored governance provisions to ensure their effective operation.

It is therefore essential that the governing documents of the JV Company are carefully reviewed before any governance decisions are made. Particular attention should be paid to provisions relating to the composition of the board, board meetings, and reserved matters. These provisions will usually require fair representation from each of the joint venture parties and include other requirements designed to ensure the smooth governance of the JV Company. It is important that care is also taken to apply these provisions correctly as failure to do so could result in the breakdown of the relationship between the joint venture parties.

For more information and expert advice on these matters, contact a member of our Corporate Governance or Energy teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.