There are protections available to minority investors in structuring project joint ventures, however, these considerations are not exhaustive of the risks inherent in the project development process
Global investment into large-scale projects in infrastructure, energy, natural resources and heavy industry continues against the uncertainty of the COVID-19 pandemic, heightened trade tensions and regional geopolitical instability. The forces driving these investments, such as the world’s ongoing demand for sustainable energy and new and renewed critical infrastructure, for example, are long-term in nature and will outlive both this pandemic and a next one. The formation and mobilization of global capital into instruments and vehicles focused on these important sectors is generally accelerating. With such acceleration, enhanced focus on the optimization of project development transaction structures is becoming paramount for the success of these projects and the returns to their sponsors.
In the project development context, a joint venture transaction will often feature several different participants. A lead investor or originating sponsor may source or initiate the project and recruit coinvestors who bring valuable resources to the table, such as industry or geographic expertise, valuable intellectual property, resource-abundant real estate or simply substantial equity checks. As the project matures from its infancy at the idea stage into bankability, lenders and debt financing sources may also become involved. Utility and other regulated infrastructure projects may come to involve a partnership with a government or municipality who may seek to own an interest in the project. Where the project involves production of commoditized off-take, prospective off-takers may also prefer to participate at a minority investor level. To align participants’ interests, sponsors may ultimately issue minority stakes of equity that will provide each participant with a sense of ownership and shared responsibility for the project’s success. This article will survey several meaningful governance protections for investors evaluating minority participation in project development joint venture transactions.
BOARD REPRESENTATION AND PARTICIPATION
A minority investor needs access to information to monitor its investment and evaluate the decisions it faces over a project’s lifecycle. The most critical information is explored and collated among the project investment entity’s board of directors (or analogous committee). When entering into a project joint venture, minority investors should advocate for representation at the board — either by way of a directly nominated and irrevocable voting seat on the board, or by way of dedicating a representative to serve as a non-voting observer of the board — with full rights to attend meetings, receive board materials and updates from management and related correspondence. Ideally, reference to a minority investor’s board representative would be incorporated into quorum requirements in the project entity’s organizational documents, such that corporate actions of the project entity may not be undertaken without such representative’s participation in the relevant organizational proceedings.
PROJECT INFORMATION RIGHTS
To the extent board participation alone does not secure access to sufficient information required to properly monitor the project development and execution process, minority investors should consider additional information rights above and beyond those available at the board level or any extant books and records inspection rights available under applicable law. Since all investors benefit from additional information, consensus often emerges in favor of these rights, but information rights should also be counterbalanced against the cost and effort required to produce them—i.e., key personnel should be focused primarily on the growth of the project as opposed to periodic report generation. Without a consistent pipeline of accurate and timely project information, many of the other minority investor protections surveyed below are significantly attenuated, if not practically inactionable, to a minority investor.
PROJECT SECONDEE APPOINTMENT RIGHTS
Minority investors can both contribute to the project development effort and monitor the development process firsthand by the appointment of a skilled representative of the minority investor to the project on a fee-for-service, full-time, part-time or rotational secondment basis. Secondees can act as an invaluable link between the project and their home organization. Project development teams usually appreciate an additional pair of hands to assist on-site in functional areas where the secondee can add value and integrate with the team. It is important to clearly delineate secondee duties and scopes of responsibilities so as to avoid duplication of effort, conflicts of interest or confusion surrounding decision-making authority. Further, care should be taken to allocate risks and liabilities appropriately, so that a minority investor does not become unduly exposed to liabilities arising from project work undertaken by their secondees acting at the direction of a project sponsor.
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