As an alternative to a strategic sale, many joint venture investors choose to offer equity when conditions in the global capital markets permit such an offering. The benefits of a successful joint venture are often best realized by taking it public, or at least raising capital with an equity component. In addition, the passage of time or the occurrence of certain events, such as those set forth below, may lead to an offering of equity:

• Expiration of joint venture agreement.
• Fulfillment of business purpose.
• Dispute between joint venture owners.
• Need for additional financing.

When capital markets are not ready for equity, but the joint venture company requires additional financing, it is usually obtained by issuing debt securities, including debt with an equity component, or by borrowing syndicated loans.

Essential Joint Venture Agreement Provisions

The joint venture agreement should always contain the following provisions, in order to preserve the option of a capital markets exit strategy:

• Demand registration rights: entitles a holder of restricted shares to force the issuer to register all or part of the shares owned by the holder for resale to the public.
• Piggyback registration rights: entitle a holder of restricted shares to register and sell its shares not upon demand, but whenever the issuer conducts a public offering.
• Tag-along rights: the right of a minority shareholder to participate on a pro-rata basis in any sale by the controlling shareholder of its equity interest in the joint venture. Insures that the minority shareholder will participate in any control premium that may be paid for the controlling shareholder's shares. Allows the minority shareholder to share in the same opportunities for liquidity that are made available to the controlling shareholders. However, does not impose any obligation on the minority shareholder to sell.
• Drag-along rights: the right of a controlling shareholder to require a minority shareholder to sell its equity interest to a third party, if the controlling shareholder sells its interest at the same time and on the same terms. Allows the controlling shareholder to structure an exit transaction as a stock sale, without concern that a minority shareholder may upset the deal by electing not to participate.

Preparing for an Offering

The following matters should be addressed in order to prepare a joint venture company for an offering in the global capital markets:

• The officers and directors should be prepared to address the requirements of securities regulations and market practices, and should be prepared to face the amount of work required for a global securities offering, including due diligence, preparing the financial statements, and preparing the disclosure document.
• A joint venture company may want to fine-tune its business profile in order to facilitate its global securities offering, such as by disposing of:

  -- unprofitable or less profitable businesses;
  -- businesses outside its core business that make it difficult for investors to determine its overall value; or
  -- businesses that have the real or perceived potential to negatively affect its overall value.
  

• The joint venture company may consider re-incorporating in a jurisdiction with internationally accepted corporate governance standards, such as Delaware or, for tax reasons, Bermuda. Countries using Anglo-American common law generally protect minority shareholders' rights better than countries using Continental European civil law, and this distinction is recognized by investors. Many investors, both individual and institutional, will pay a premium for companies with internationally accepted corporate governance.
• On the other hand, if corporate governance arrangements are not satisfactory to shareholders, companies may face discounted share prices and a higher cost of capital due to shareholder concerns.

Corporate Governance

Provisions in United States securities laws which foster good corporate governance and the protection of minority shareholders include:

• Section 13(d) of the U.S. Securities Exchange Act of 1934 requires any person or group beneficially owning at least 5% of any equity security to file a report within five days of when the 5% threshold is crossed.
• The tender offer rules under the Exchange Act grant each shareholder of a particular class the right to participate in any tender offer, and to receive the best price paid to any other shareholder pursuant to the tender offer.
• NYSE requires companies to have at least two outside directors on the board, an audit committee made up of outside directors, and specific quorum requirements for shareholder meetings. AMEX and NASDAQ have similar requirements.
• Rule 13(e) of the Exchange Act governs the treatment of minority shareholders in "going private" transactions. The impact of this provision is to deny controlling shareholders the practicable ability to squeeze out the minority at an unfairly low price.
• SEC Rule 10b-5 gives shareholders the right to sue for losses incurred because of fraudulent statements made by a company whose equity they own.
• The proxy rules in the U.S. make it relatively easy for shareholders to communicate with one another when coordinating challenges against underperforming management teams. The proxy rules allow shareholders to communicate with one another as long as they send a copy of the substance of the communication to the SEC afterward.

Corporate Preparation

The joint venture company may need to modify its legal documentation and accounting procedures in order to meet the standards required in the global capital markets, or to remove existing impediments to the proposed offering, such as non-voting stock. Additional business, governmental and corporate arrangements may be required to protect the issuer or provide more comfort to investors, such as:

• Documentation of previously undocumented arrangements with other businesses or local governments.
• Changes in corporate governance policies to satisfy stock exchanges or marketing concerns, such as, for example, the appointment of independent directors.
• Employment contracts with key personnel.
• Taking steps to protect an issuer's directors and executive officers against United States securities law liabilities, including purchasing insurance.

Accounting Matters

The SEC requires that financial statements be prepared in accordance with U.S. GAAP (or reconciled to U.S. GAAP in the case of foreign private issuers), and audited in accordance with U.S. generally accepted auditing standards. It is advisable to prepare the joint venture company's financial statements in accordance with U.S. GAAP as soon as practicable, and, in any case, well in advance of the anticipated securities offering. Of course, this may already be the case, in order to satisfy the joint venture owners.

Capital Markets Options

• Advantages of an Initial Public Offer:

  -- creates liquidity for the joint venture owners;
  -- raises capital for growth, diversification of operations and debt reduction;
  -- increases public awareness and profile of the joint venture company; and
  -- provides attractive incentives for employees, such as stock options.
  

• Disadvantages of an Initial Public Offering:

  -- requires public disclosure of financial and operational information, including by business segment;
  -- often results in loss of autonomy in management decisions; and
  -- can have substantial costs, including accounting and legal costs associated with shareholder relations.
  

• Advantages of a debt offering over an IPO:

  -- obtain additional financing for the operations of the joint venture company;
  -- control and ownership of the company remains unchanged;
  -- no obligations to shareholders; and
  -- lower transaction costs.
  

• A compromise between an IPO and a straight debt offering is an offering of convertible bonds:

  -- a convertible bond in one which is convertible into shares of the issuer's common stock;
  -- the indenture contains the conversion ratio, the conversion price or any other method of determining how many shares the bond is convertible into; and
  -- Convertible bonds usually carry a slightly lower interest rate than straight debt, due to the convertibility feature.
  

Offering Process

• The U.S. Securities Act of 1933 requires an issuer to file a registration statement with the SEC before it may offer its securities to investors in a public offering.
• Counsel for the issuer will prepare a registration statement with the SEC (on Form S-1 for a U.S. issuer or on Form F-1 for a foreign private issuer) which contains such information as:

  -- risk factors;
  -- use of proceeds;
  -- description of issuer's business;
  -- issuer's capitalization;
  -- management's discussion and analysis of financial condition and results of operations;
  -- exchange rate;
  -- officers and directors;
  -- related party transactions;
  -- identification of principal shareholders;
  -- description of securities; and
  -- audited financials.
  

• Concurrently with the drafting of the registration statement, issuer's counsel and the underwriters and their counsel conduct due diligence on the issuer. Due diligence is a thorough investigation of the issuer's legal and accounting records, and interviews with the issuer's officers and employees to ensure that all necessary information concerning the issuer will be accurately included in the registration statement.
• An underwriting agreement is negotiated at the time of drafting of the registration statement, and establishes the terms and conditions by which underwriters will offer the securities for sale. However, such agreement is usually not signed until the registration statement becomes effective.
• Once the drafting of the registration statement is complete, and it is signed by the appropriate officers and executives of the issuer, it is then filed with the SEC.

Waiting Period

• SEC Review: during the 30 to 40 days following the filing of the registration statement the SEC will review the registration statement to verify conformity with the applicable requirements of the Securities Act. The SEC will return comments to the issuer, and the issuer will amend the registration statement accordingly.
• NASD Review: at the same time, the National Association of Securities Dealers will review the fairness and reasonableness of the terms of the underwriting agreement, particularly the compensation of the underwriters.

Road Show

Once the issuer has filed one or two amendments and responded to the comments of the SEC, the lead underwriter and company management attend meetings in the U.S. and around the globe primarily with institutional investors and money managers in an effort to sell the securities. At these road shows, the preliminary prospectus is distributed to potential purchasers and presentations are conducted.

SEC Approval and Sale of Securities:

• · SEC approval: when the company has satisfied the disclosure requirements, the SEC will notify the company and the underwriters of its willingness to grant an acceleration to declare the registration statement immediately effective.
• Determination of price: the company and its underwriters then will agree on the final price terms and file a final prospectus with the SEC.
• Sale of securities: at this point the issuer may complete the sale of its securities. The sale will be followed by a press release, a "tombstone advertisement" for financial publications, and public distribution of the final prospectus

Registration Under U.S. Exchange Act

If the newly issued securities are to be listed on a national securities exchange, such securities must be registered pursuant to Section 12 of the U.S. Exchange Act prior to the commencement of any trading. Once an issuer registers its securities under Section 12, it becomes a reporting company with the SEC, and accordingly it must file periodic and annual reports with the SEC.

Syndicated Loans

• When the capital markets for either equity or debt are not available, or the terms are not favorable, but the joint venture company needs financing, then a common alternative is syndicated loans. A syndicated loan is made by two or more lending institutions, on similar terms and conditions, using common documentation, and administered by a common agent.
• One of the advantages of syndicated loans is that funds are available more quickly than in a capital markets transaction. Syndicated loans usually include more onerous terms and conditions than bonds, such as restrictive financial covenants and extensive events of default, but give the borrower greater flexibility with respect to prepayments.
• Another advantage of syndicated loans over bonds is that if a waiver or other modification becomes necessary, the consent of bank lenders is easier to obtain than the consent of bondholders, in part because there are usually fewer lenders involved, although they will usually ask for a fee.

Conclusion

The global capital markets are an attractive source of funds for a joint venture company to use as an exit strategy, especially in light of the limited number of potential buyers in a strategic sale. However, the applicable regulatory framework is complex, and, thus, a joint venture company seeking to access the global capital markets should seek the advice of experienced professionals.