Daniel Liemberger

Joint Ventures in

Austria Establishment/Running/Termination 1. Establishment of Joint ventures 1.1 Are there particular legal forms required by law for joint ventures? If no, any typical or usually selected legal forms? Both, Austrian business and legal practice do not clearly provide a definition for “joint venture”. Some practitioners use the term in a narrow sense to define a jointly owned and managed business enterprise, while others argue a much broader concept which includes any form of formalised cooperation between independent companies. Austrian business practiced joint ventures in the broader sense are mostly to be found in the following arrangements: Joint venture companies joint development agreements; joint project agreements; long term supply arrangements, co-operative distribution arrangements; Due to the lack of concept under Austrian law, the legal form of organisation of a joint venture varies widely, depending on the depth of co-operation the joint venture partners want to achieve. As a consequence, joint ventures under Austrian law may be organised as: contractual joint venture; civil law and other non-registered partnerships; partnership joint ventures (OG – Offene Gesellschaft); limited partnership joint ventures (KG - Kommanditgesellschaft); and joint venture companies such as the joint stock company (AG - Aktiengesellschaft) or the limited liability company GmbH - Gesellschaft mit beschränkter Haftung). In

addition,

silent

partnerships

(stille

Gesellschaft)

and

sub-participations

(Unterbeteiligung) are also used in Austrian law to organise a joint venture. In principal, a joint venture could also be organized in form of a SE (Societas Europaea), but this type of company has not become that accepted yet, respectively is seldom used.

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Due to the numerous possibilites of joint venture forms available under Austrian law the rules applying to the different organisational forms are found in a large variety of different areas of Austrian law, in particular in the areas of corporate and civil law, antitrust and tax law.

1.2 Any licenses/permits required for setting up joint ventures? Austrian law does not contain general formal requirements when setting up joint ventures. However, it should be noted that joint venture companies are subject to the same regulatory provisions as all other companies in Austria. Therefore, if the joint venture company has a purpose, respectively shall run a business for which a public licence is required according to Austrian Trade Law (Gewerberecht), it must apply for such a license and should not start working before officially receiving it. Otherwise it could be sued by competitors for unfair competition. If the joint venture wants to become financial services according to the Austrian Banking Act (BWG – Bankwesengesetz) it will only be registered in the commercial register once the obligatory license has been granted by the competent authority (FMA – Financial Market Association). In specific areas, such as banking, insurance, drugs and pharmaceuticals, public transport, weapons and defence material production, every Austrian company (and therefore also joint ventures) requires a special upfront public authorisation or license to do business which is only granted when strict criterias are met by the company.

1.3 Is the purpose of joint ventures limited or restricted by law? As mentioned above, all kinds of joint ventures are allowed under Austrian law. No specific legal framework for joint ventures exists under Austrian law.

1.4 Is the number of joint venture partners limited or restricted by law? There exists no such limitation for the membership in Austrian joint ventures. The minimum number for the most important corporate legal forms available for joint ventures is one. Two partners require only partnerships and limited partnerships, silent partnerships and sub-participation.

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1.5 Any requirement that a joint venture partner be a national entity or an entity ultimate controlled by a national? In general, such requisites are not required apart from one exemption: if the joint venture wants to acquire certain real estate in some parts of Austria (e.g. restriction apply on a federal level when it comes to acquisition of agricultural area). To what extent can the rules governing the joint venture be made subject to foreign law? In contractual joint ventures the partners can choose to set up the joint venture vehicle under any law, unless such a choice of law would be considered as fraudulent. If the corporate joint venture needs to be registered with the Austrian commercial register (e.g. in case the joint venture vehicle being a joint stock company or the limited liability company), only Austrian law can be the governing law.

1.6 Is there a typical minimum or maximum term of a joint venture? The term of the joint venture vehicle depends on the purpose of the project for which it has been founded. The joint venture agreement may be concluded for an unlimited period of time as well as for a limited term. Normally the joint venture agreement provides that the agreement shall end automatically if one of the joint venture partners terminates the joint venture agreement. In addition, the joint venture agreement normally provides for a regular termination right for each of the joint venture partners; in such case, the agreement should stipulate that the joint venture shall continue between the remaining joint venture partners. Accordling to Austrian civil law the right of each joint venture partner to terminate the agreement for good cause may not abolished by mutual consent of the joint venture members.

1.7 What are the typical areas of business or typical purposes in your jurisdiction for joint venture? As typical areas for joint ventures sectors like the construction industry, technology and pharmaceutical (research & development) industry as well as public private partnership can be mentioned. But since there are no restrictions on the purpose of businesses for joint ventures, there exists numerous examples, even for example the medicare sector.

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2. Corporate Governance 2.1 What are the typical bodies of the joint venture? This strongly depends on the company form chosen for the joint venture. Beside the shareholders and the management body a supervisory board and/or an advisory board (even scientific advisory board) may be implemented in the Articles of Association. Depending on certain circumstances, in case of a GmbH it might be mandatory to establish a supervisory board. Whereas the parties to the joint venture agreement are free to decide whether they establish an advisory body or not (however due to Austrian jurisprudence in case such an advisory body is given the same or comparable powers as a supervisory board, certain provisions of the Stock Corporation Act or the Act on Limited Liability Companies, such as the right of a works council to assign members in such body).

2.2 Who appoints management? In a GmbH the shareholders appoint the management (Geschäftsführung). In general the management has to comply with the instructions of the shareholders. In a stock corporation the management (Vorstand) is appointed by the supervisory board (not by the shareholders!). The management board of a stock corporation is free from instructions and run the business on the basis of their individual responsibility. Therefore, the exercise of influence or control is rather limited in a stock corporation. Thus, stock corporation might not be the ideal company form to realize a joint venture.

2.3 What is the typical procedure for decision making among joint venture partners? In contractual joint ventures the parties are free to regulate the joint venture as they wish, to the extent the provisions agreed upon cannot be interpreted as a violation of morality. In a corporate joint ventures there are restrictions, the extend of which depends on the legal form chosen by the joint venture partners. Generally, it is fair to say that the joint stock corporation (Aktiengesellschaft) is the most stringently regulated form and the Stock Corporation Act allows relatively few deviations from its general statutory principles; on the other end of the spectrum of flexibility are forms as the joint venture partnerships such as the OG and the KG where the statutory framework is relatively basic and even the basic principles may be abolished by the parties by unanimous decision.

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2.4 Mandatory rules governing relationship of joint ventures with joint venture partners? As mentioned above in contractual joint ventures the parties are free to regulate the joint venture as they wish, to the extent the provisions agreed upon cannot be interpreted as a violation of morality. In a corporate joint ventures there are restrictions in form of mandatory provisions by law. Again the extend of which depends on the legal form chosen by the joint venture partners. On of the most important mandatory rules in practice when it comes to limited liability companies and joint stock corporation might be the prohibition of repayment of contributions. Due to Austrian jurisprudence transactions and contracts that violate this mandatory law are null and void and the company has a claim against the receiver on repayment of the whole sum the shareholder unlawfully received in this respect.

3. Financing 3.1 Are there any statutory investment rules applying to joint ventures? / 3.2 How is a joint venture typically financed? / 3.3 Any particular risks for joint venture partners regarding finance? Normally, contributions may be made in cash or in kind (including goods, and claims against the contributing shareholder and/or third parties). Joint venture members contribute in cash, or via a shareholder loan (or – due to Austrian tax reason – via a so-called “grandparents-grant” (Großmutterzuschuss) to the joint venture. Whether there are any statutory limits to the possibility of contributions kind depends on the specific legal form chosen as the corporate joint venture: Since civil law partnerships (like OG and KG) as well as silent participations and sub-participations do not require a minimum stated (and registered) capital, joint venture partners are totally free to make all or part of their contributions in kind. The difference between the contributing in cash or inkind will only is visible by looking at the book-keeping entry in the joint venture company’s balance sheet. Regarding the AG (joint stock company) and the GmbH (limited liability company), there are much stricter rules regarding regulating contributions in kind in the event of formation and in case of capital increases. All these applicable mandatory rules aim to preserve the stated share capital of the respective companies. Although the rules contained in the Stock Corporation Act and in the Act on Limited Liability Companies slightly differ, the general principles can be described as follows: a. in general, contributions in kind in the event of formation or capital increase will only be valid if the company proves by submitting an independent expert's statement that the contribution in kind has

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at least the value of the nominal share capital issued by the company in exchange for the contribution in kind; b. contributions made in violation or circumvention of the strict statutory rules are invalid and may lead to the respective shareholder being asked by the company (or more often by the insolvency receiver) to make the contribution in kind a second time (in cash); c. shareholders should be extremely careful not to make so-called “hidden contributions in kind” (verdeckte Sacheinlagen), i.e., contribution where the shareholder makes his contribution in cash to circumvent the strict statutory rules for contributions in kind, only to get his cash contribution immediately back by way of an upstream loan from the company. Such a hidden contribution in kind makes the contribution invalid and may lead to a rejection of the registration of the capital contribution or capital increase in the commercial register. As a consequence the formation or the capital increase does not become valid. The limited partnership (KG) does not require a stated minimum capital. However, the limited partners have the possibility to register the amount of their partnership contribution (Kommanditeinlage) in the commercial register (Firmenbuch), thus limiting their personal liability vís-à-vis third parties to registered partnership contribution. Contributions in kind during formation or capital increases are possible at any time and will not be examined by the commercial register before registering the increase of the partnership contribution. However, in case of insolvency of the KG, the insolvency receiver will regularly check whether or not the contribution in kind was done and least at “par value”, i.e., had at least the value of the nominal amount of the partnership share given to the respective shareholder in exchange for the contribution in kind. If this is not the case, the receiver will always bring a claim against the KG partner asking him to fulfil his contribution commitment in cash. (Other than in Germany, there is no limited partnership by (issued) shares in Austria).

3.4 Obligation to make-up losses or obligation to provide additional financing? To the extent the joint venture partners have chosen to form the joint venture as a partnership joint venture, such a joint venture is subject to the general statutory provisions applicable to the civil law partnership contained in the ABGB which provides the greatest flexibility. The joint venture agreement may therefore foresee that one joint venture member may participate without including any (financial) risk or loss or reward.

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However, a joint venture agreement clause protecting one joint venture member from any risk is not valid vis-à-vis third parties due to the fact that the GbR and the OG are both based on the general principle of joint and several liability (gesamtschuldnerische Haftung) of all partners. In practice, such a clause would be interpreted to give the respective partner a claim against the other joint venture members to hold him innocent against any claims brought against him by third parties. Only the KG as a limited partnership would give all limited partners the possibility to be shielded from any third party risks, provided they have fully paid in their partnership contribution (Hafteinlage) and such contribution has not been paid back to them. As an alternative, the joint venture partners may enter into a so-called silent partnership. This is a joint venture structure offered by the ABGB (Austrian Civil Code) where a passive investor, the socalled silent partner, makes a contribution to a business venture anticipating adequate return from the profits of that business without having any responsibility for the day-to-day business nor any control of the management (except for structural decisions fundamentally changing the business). In this case, the joint venture agreement is made between the silent partner and the business, i.e., the operating company, rather than with the shareholders or partners who own the company. Depending on the exact terms of the silent partnership agreement, the silent partner often does not participate in the loss of the business but rather receives a fixed annual interest on his contribution or participates in the distributin of profits of the business. This type of silent partnership where the silent partner has a position similar to a lender is called the “typical silent partnership” (typische stille Gesellschaft) because it is the statutory model proposed by the ABGB. However, the more frequently used version to the so-called 'atypical' silent (atypische stille Gesellschaft) where the silent partner shares not only in the profits but also in the losses of the business; if as a result of losses his account has been reduced below the amount of his initial contribution, he is not entitled to a distribution of profits until the losses allocated to him have been compensated by subsequent profits. In addition, the atypical partner normally participates in any increase of hidden reserves during the term of the partnership. If the joint venture company is a limited liability company or a joint stock company obligations to make-up losses or obligations to provide additional financing (Nachschussverpflichtung) can validly only be agreed upon by the joint venture partners in the respective articles of association.

3.5 Can joint venture partners be held directly liable by creditors of the joint venture? In case the joint venture company is a limited liability company or a joint stock corporation (or a GmbH & Co KG – limited partnership with a limited liability company being the partner with

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unlimited liability) the joint venture partners cannot be held directly liable by creditors of the joint venture (except from cases on criminal offences). In a partnership (OG) the joint venture partners are directly liable to creditors. The same is true for a GmbH & Co KG for the partner with unlimited liability.

3.6 Use of assets/personnel of joint venture partners? In a GmbH or an AG you will find in most of the cases a list on certain business issues demanding the duty to obtain the prior consent of the supervisory board or the shareholders (acquisition of shares in third companies, borrowings, bond issues, engagement of permanent employments

(when

exceeding a certain annual remuneration), establishment of daughter companies or branches, etc. etc.) in the articles of association or in the by-laws through which the shareholders can exert influence on the management body. In a partnership (OG) or limited partnership (KG) the joint venture partners are free to decide on the usage of the resources of the joint venture (and if they establish rules in their partnership agreement or decide upon a case by case basis).

4. Admission of New Members to Joint ventures 4.1 Transfer of share by existing joint venture members? Joint venture agreements usually contain provisions on the restriction on transferability of shares. Such provisions might contain a large variety of restrictions, from the transfer of shares being subject to the prior (written) consent of the other joint venture partner, pre-emption rights or tag-along and/or drag-along rights to call- and put-option and special provisions in case of a trade sale or listing (IPO). It is advisable to secure at least the above mentioned reservation of consent for the transfer of shares in the respective articles of association (in order that the parties have a right in rem). If call- and/or put-options are stipulated, the agreement must be notarized in order to have an enforceable claim against the other partner.

4.2 Admission of additional joint venture members? The partners of a joint venture usually have a comprehensible interest that a new partner is not only bind by the articles of association, but in most cases also on the existing consortium agreement. Therefore, the articles of association should also contain the provision that any prior (written) consent to a transfer of shares is subject to the obligation for any joint venture partner to transfer not

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only its share (containing all rights and obligations as stipulated in the articles of association) but also the new joint venture partner becoming a party of the existing consortium agreement.

4.3 Expulsion of joint venture members? The expulsion of a joint venture partner is a very delicate issue in joint venture agreements. Apart from the so-called dead lock clauses (as described in further detail in item 5.4.) such as “Russian Roulette”-, “Mexican Shoot-Out”- or “Dutch Auction”-clauses joint venture partners rather agree on contract penalties in case of breach of contracts and/or call- and put-option scenarios. In case of an Austrian GmbH (limited liability company – the most used vehicle for joint ventures) the compulsory expulsion of a shareholder (joint venture partner) is unlawful according to Austrian jurisprudence. Only Article 66 of the Act on Limited Liability companies provides for an expulsion in a certain case (not fulfilment of the payment liability on shares). Although it this is highly criticised in Austrian doctrine, Austrian jurisprudence also denies the applicability of the reasons for expulsion as laid down in the Austria Commercial Code for partnerships by way of analogy. However, Austria jurisprudence accepts the expulsion of a shareholder if provisions in this respect have been implemented in the articles of association (the shareholder is obliged to transfer his share to the other shareholder in case the shareholders resolution on the expulsion is based on good causes. A definition of the reasons for the expulsion for good cause in the articles of association is admissible. In principal, such provisions are only limited by a possible violation of morality. In this respect it should be noted that if the expulsion of a joint venture member is based on an expulsion clause in the articles of association the stipulated pricing mechanism may not lead to an undue low compensation.

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5. Dispute Resolution 5.1 Distribute resolution mechanism? Please see item 5.2. below. 5.2 Escalation mechanism? Where a dispute arises between parties to a joint venture agreement and a dispute resolution clause has not been included in that agreement, the relevant parties can at any time bring formal court proceedings in a court which has jurisdiction over the dispute. On the other hand, either at the time the agreement is entered into or at the time of that the dispute arises, the relevant parties can agree to seek to resolve a dispute by means of alternative dispute resolution methods. These methods include: (negotiation) meeting to attempt to resolve the dispute within an agreed time frame. The negotiation process can also involve the escalation of the dispute to more senior personnel of the relevant parties, such as each party’s chief executive officer; (mediation) meeting with the assistance of a neutral person or person to systematically isolate disputed issues in order to develop options, consider alternatives and reach a consensual agreement that will accommodate their needs, and (arbitration) attending before a neutral person or persons who has the ability to make a decision in relation to the dispute which binds the relevant parties. Negotiation and mediation are not legally binding on the parties. Litigation and arbitration are legally binding on the parties. If negotiation and/or mediation are used and fail to resolve the dispute, the parties can then move to a binding form of dispute resolution, i.e. arbitration or litigation. Both these methods can also be used on their own (i.e. without any preceding steps such as mediation). In the event of a deadlock, the joint venture agreement can provide that the issue is escalated to certain key executives of each partner in an attempt to solve the problem; unfortunately, this often results in the same deadlock.

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5.3 Veto rights? The joint venture agreement can provide that the Chairman of the Board (AG) or a managing director (GmbH) has the right to cast a tie-breaking vote in the event a board vote results in a tie (this tiebreaker can apply with or without the escalation clause). The problem with this approach, however, is that it is not appropriate in every deadlock scenario (e.g., what is the penalty to be applied if a partner defaults on its capital contributions). Also, this gives one party control, which is contrary to the entire purpose of the 50/50 joint venture in the first place. To eliminate the problem of one party having too much control, rather than providing the Chairman with the tie-breaking vote, the joint venture can provide that an independent, non-executive director has the right to cast the tie-breaking vote. However, finding an independent director that the partners agree on may prove difficult for various reasons (and no person may be willing to take on this burden without any upside). Also, as with the Chairman tie-breaker vote, this is not appropriate in every scenario.

5.4 Sell-out/buy-out mechanism? When the parties do not want to let a third party settle the deadlock on key issues, one solution is the buy-sell provision pursuant to which one of the partners buys the other partner out. This can be handled in many different ways but the following are commonly seen favourites: “Russian Roulette.”: One partner serves notice to the other partner stating the notifying partner’s perceived value per share of the joint venture. The partner receiving the notice must then either sell all of its shares to the other partner at that price per share or purchase all of the other partner’s shares at that price. “Texas Shoot-Out.”: Each partner submits a sealed bid containing its perceived value per share of the joint venture. The partner with the higher bid buys the other partner out at the higher bid amount. Dutch Auction: Each partner submits a sealed bid containing the lowest price per share at which it would sell all of its shares. The partner with the higher price buys the other partner’s shares at the lower price submitted. Adjusted Fair Market Value: An expert or auditor determines the “fair market value” of the price per share. Once determined, the partner triggering the buy-sell provision will either buy the

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other partner’s shares at a set premium (e.g., 20%) or sell its shares to the other partner at an equivalent discount. Buy-sell provisions are the last resort because, once implemented, the joint venture arrangement terminates and one partner acquires 100% of the joint venture vehicle. Careful consideration should be given to a partner’s current and future liquidity position because a less liquid partner could find it being forced out of the joint venture at a less than fair price. Also, a less liquid partner will need to ensure that the buy-sell provision cannot be manipulated to avoid the more liquid partner being able to trigger the provision on the pretext of a deadlock in order to buy the company (perhaps even at a discount). In this respect it should be noted that the stipulated pricing mechanism may not lead to an undue low compensation, otherwise the clause could be challenged by an Austrian court due to violation of morality. Often the draftings of deadlock provisions will depend to a great extent upon what the "key issues" are that the parties want to ensure consensus upon are. These clauses, when used, will serve to terminate the joint venture one way or another. They are useful in the sense that they often allow for an equitable resolution to a deadlock, without the need for prolonged or acrimonious dispute. It is crucial that the deadlock clauses are drafted clearly and precisely in order for them to operate efficiently, minimise the risk of a protracted dispute, and provide a suitable level of protection to both parties during any negotiations.

5.5 Early termination possible? As already pointed out in item 1.6. above according to Austrian civil law the right of each joint venture partner to terminate the agreement for (important) cause may not abolished by mutual consent of the joint venture members. Starting court or arbitration proceedings against the joint venture partner may always constitute an important cause to terminate the joint venture agreement.

5.6 Mediation? Neither at the beginning or after the escalation mechanism as described in item 5.2. the joint venture members can agree to start a mediation process. The mediator is typically a third and neutral party. Such a mediator will and shall not make any decisions in the respective dispute but concentrate on and seek the parties to filter their common interests and come to a mutual solution of the specific problem by the parties. Mediation works well for factual matters but not so well for solving multi-

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faceted business issues, such as determining the best capital raising terms or whether to admit a new strategic partner. In this connection it must be said that mediation, although being an international trend of ADR (Alternative Dispute Resolution) has not yet become a success story in Austria and is rather seldom, if at all, practiced in Austria. 5.7 Arbitration or State Court? Joint venture partners are free to agree upon either a jurisdiction or arbitration clause. In practice positive arguments for both of them can be raised. In the vast majority of joint venture agreements arbitration clauses can be found due to the fact that the parties prefer the confidentiality of arbitration proceedings. 6. Unwinding of Joint ventures 6.1 Unilaterally? The unwinding of a joint venture depends on the specific statutory provisions applying to the chosen legal structure of the company. In any case, the joint venture agreement should provide for provisions on the distribution of the liquidation proceeds as well as the handling of IP-rights. In case of an Austrian GmbH (being the most commonly used vehicle for joint ventures) the winding up of the company requires a notarized shareholders resolution. Therefore, a unilateral unwinding of a joint venture company is not possible. If the joint venture agreement in case of agreed events provides for a unilateral termination right (that normally comes only into effect if the joint venture partner waives his termination rights for a certain period of time), the joint venture agreement should also include provisions on the price mechanism of the compensation.

6.2 Limited Term? There is no limited term for the unwinding of a company. On the contrary, the distribution of the liquidation proceeds may only take place 3 months after the liquidation process has been published in the Viennese Official Gazette (6 months in case of an AG).

6.3 Distribution of assets/liabilities? Distribution of assets may be executed only after expiring of the term as mentioned above in item 6.2. and only after all debts of all known creditors have been balanced. * * * * * *

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