An investor entering an unfamiliar European market almost always needs a local partner, and the joint venture with a local operator is the standard answer. It is also the structure that generates the most disputes, for a reason that is structural rather than personal: the two parties contribute different things, are exposed to different risks, and measure success differently, and unless the documentation reconciles that, time will not.
What each side is actually contributing
The investor contributes capital and, usually, bears most of the downside. The operator contributes market access, execution capability, relationships and time, and typically far less capital. That asymmetry is the whole design problem: the operator earns most of its return from the promote at the end, which means its incentive is weighted toward upside, while the investor’s exposure is weighted toward loss. A structure that does not address this is a structure where the parties will want different things at the moment it matters.
Where the operator contributes management and no capital, the entitlement must be created deliberately: a class of shares carrying a profit right above a defined return, or a contractual share outside the capital. Article 2:228 of the Dutch Civil Code sets one vote per share as the default, allows the articles to depart from it, and requires unanimity in a meeting representing the entire issued capital for any later change to voting rights. Those voting rules permit a class structure, but one that is far easier written at the start than agreed later.
What a financing bank asks before it funds the venture
A lender underwrites the asset, then the borrower, then the sponsors behind it, and joint venture documentation usually fails at the third stage. The first failure is that it answers none of the credit questions: who controls the accounts and signs alone, and whether the lender can replace the operator on default without a consent right blocking it.
The second failure is threshold mismatch: where facility and venture agreement set different capital expenditure thresholds, the operator needs two approvals for one invoice. The bank also identifies the beneficial owners of both partners, and an opaque chain above a local operator delays drawdown, as our note on what Dutch lenders require from a foreign borrower sets out.
Alignment is bought, not assumed
The most effective alignment mechanism is real money: the operator invests a sum that matters to it, not a token. Beyond that, the promote should be earned above a genuine preferred return, so that the operator is paid for outperformance rather than for the passage of time, and it should be subject to a mechanism that prevents the operator being paid early on gains that later reverse.
A partner who has money in the deal reads the downside case with different eyes. That is not cynicism, it is the entire purpose of co-investment.
That mechanism is a clawback, and it is worth only what secures it. An obligation on an operating company to repay money it has already spent is worth little; what works is a holdback into escrow, or a guarantee from an entity with assets.
Control: the two lists
A working joint venture has two written lists. What the operator can do alone, which should be broad enough that the asset can actually be managed. And what requires investor consent, which should include sale, refinancing, capital expenditure above a threshold, material changes to the business plan, related-party contracts and anything affecting the tax structure. The second list should be short and specific. A consent list so long that everything requires approval produces paralysis and an operator who works around it.
Where the list lives matters as much as what is on it. A reserved matter in the shareholders agreement binds the shareholders, and breach of it sounds in damages. The same matter in the articles binds the company, so a resolution taken without the required majority is defective rather than merely actionable. Defective is not the same as void: under article 2:15 of the Civil Code such a resolution stands until a court annuls it, the power to sue for annulment lapses one year after the resolution was publicised or came to the shareholder’s knowledge, and the defect can be cured by confirmation. Reinforced majorities create deadlock by design, so the document should say how it ends: escalation against a clock, then an expert, then a transfer.
Information rights are the early warning system
The investor’s protection between board meetings is information: monthly operating reporting, quarterly financials, immediate notification of defined events such as a tenant default, a licence problem or a budget overrun above a threshold. The reporting standard we describe in our note on reporting and governance for investors in a managed asset applies directly. An investor who first learns of a problem from the annual accounts has lost the year in which it could have been fixed.
Reporting dates should follow the dates that matter, not the calendar: information arriving after the lender’s covenant certificate has been signed describes history. Rights of access matter as much as rights of delivery: direct contact with the property manager and the auditor, and an observer at management meetings.
Related-party dealing has to be regulated
Local operators frequently have affiliated businesses, property management, construction, agency, and using them is often sensible because they are competent and available. What is not acceptable is using them at prices nobody tested. The joint venture agreement should require related-party contracts to be on market terms, disclosed, and above a threshold approved by the investor. The tension between managing an asset and financing or servicing it is one we address in our note on financing and managing the same asset.
Two exposures follow from dealing with the operator’s own businesses. The first is pricing. Market terms is a statutory standard as well as a commercial one. Article 8b of the Dutch Corporate Income Tax Act 1969 provides that where one entity participates in the management, control or capital of another, or where the same person participates in both, and their conditions depart from those independent parties would have agreed, profit is determined as if arm’s length conditions applied; both must record how those prices were set. Article 8b has no threshold; the master file and local file of article 29g begin at 50 million euro of consolidated group revenue.
The second is presence. Article 3 of that Act defines a permanent establishment by reference to the applicable treaty, otherwise as a fixed place of business, a construction site qualifying only beyond twelve months. What creates one through a partner is paragraph 8: a person who habitually concludes contracts for the taxpayer, or habitually plays the principal role in contracts the taxpayer then concludes systematically without material modification. Working exclusively for the investor does not create a permanent establishment; under paragraph 9 it only withdraws the independent agent exemption. The question is who signs.
Splitting the result without breaking the participation exemption
The investor’s return arrives as distributions and as gain on exit, and in a Dutch structure both can fall outside the corporate income tax base. Article 13 of the Corporate Income Tax Act 1969 leaves benefits from a participation out of account in determining profit, and paragraph 2 defines a participation as at least five per cent of the nominal paid-up capital. The Belastingdienst states the same condition for the participation exemption.
Venture mechanics can break that position unintentionally. A holding above five per cent can be diluted below it by a promote issue, by a rescue capital increase the investor declines to follow, or by a third partner. The cushion is limited: where a participation of at least five per cent held for more than one year falls below that level, the tax authority confirms the exemption continues for three years.
Size is not the only test. Whether a participation is held by way of investment turns on the purpose with which it is held, and the Belastingdienst is explicit that a stake held for the return expected from ordinary asset management is an investment, while a stake whose business lies in the extension of the holder’s own business is not. Paragraph 9 of article 13 then disapplies the exemption for an investment participation unless it qualifies, broadly where the company bears a real profit tax.
Paying the waterfall is a corporate act as well as a contractual one. Article 2:216 of the Civil Code gives a distribution resolution no effect until the board approves it, and the board may refuse only on one ground: that it knows or should foresee the company cannot continue paying its debts as they fall due. Directors who should have foreseen it are jointly and severally liable to the company for the shortfall with statutory interest, and so is anyone who took the distribution knowing the same, up to the amount received. Paragraph 4 puts whoever determines or co-determines policy in the same position as a director. A promote instalment the waterfall says is due remains subject to that distribution test.
Cross-border, the relief carries its own anti-abuse rule. Council Directive 2011/96/EU exempts profits distributed by a subsidiary to its parent from withholding tax in article 5 and attributes parent status on a ten per cent holding in article 3(1)(a), while article 1(2), inserted by Council Directive (EU) 2015/121, denies those benefits to arrangements not genuine and put in place for the main purpose, or one of the main purposes, of obtaining a tax advantage that defeats the object of the Parent-Subsidiary Directive. Article 7(1) of the Multilateral Convention, in the text published in Tractatenblad 2017, 86, withholds a benefit under the treaties it covers where it is reasonable to conclude that obtaining it was one of the principal purposes of the arrangement. The board taking the reserved matter decisions should meet where the holding sits.
Planning the ending at the beginning
Every joint venture ends, and the documents should say how. An agreed sale window, a buy-sell mechanism, rights on default or on the departure of the key individuals the investor was actually backing. That last point is often overlooked: an investor backing a local operator is usually backing two or three specific people, and the agreement should say what happens if those people leave.
A shotgun clause, one party naming a price and the other electing to buy or sell, is even-handed only where both can fund it; against an operator who cannot write the cheque it is a one-way option. Article 2:192 of the Civil Code lets the articles oblige a shareholder, in cases they describe, to offer and transfer his shares, at a price equal to the value set by independent experts if he asks for it. But neither that obligation nor a price rule departing from it may be imposed on a shareholder against his will, so in practice those provisions are agreed with each holder they will bind rather than voted in.
Key individuals should be named rather than described, with a definition of departure and two separate consequences. One is termination of the management agreement, which should be available on any qualifying departure. The other is a right to buy out the operator’s equity, which should be narrower than that, because removing an operator from the mandate is a different decision from buying it out. Route and timing are covered in our note on exiting a European real asset.
Montclare manages and structures European real assets for institutional and private investors, from acquisition through to exit. Our services are set out on our services page.
This article is informational and does not constitute investment, tax or legal advice. Asset management and investment advice are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.