Corporate Governance After M&A and Joint Venture

Mainstream

Closing an international M&A transaction or setting up a joint venture is not the end, but the beginning of the most difficult phase.

The main question of the post-closing period is not whether we signed the documents, but whether we will retain control of the business and return on capital.

The money's already invested. From this point on, the fight begins not for the price of the transaction, but for its real value.

Therefore, effective corporate governance after the transaction is based on three fundamental tests:

1. Where are the points of operational and strategic decision-making?
2. How to resolve conflicts when the interests of partners diverge
3. How to ensure transparency of assets and financial flows

If these issues are not resolved at the start of a joint venture, even a strategically perfect deal will turn into a costly corporate conflict.

When the issue of corporate governance arises after the transaction

Management reform or adjustment is critical if:

• the investor has acquired a share (majority or minority) in a foreign company;
• The parties have formed a joint venture (50/50 or in other proportions).
• after the closing of the transaction, the detailed rules of the Board of Directors were not approved;
• Local partners block access to bank accounts and documentation;
• Management acts in the interests of one of the shareholder groups;
• conflict arises over the reinvestment of profits or the payment of dividends;
• - it is planned to make a capital call, but there are no sanctions for non-participation of the partner;
• One of the parties launches exit options (put/call options);
• The transaction is structured in a foreign jurisdiction (UAE, England, Cyprus, Netherlands);
• It is necessary to implement the holding structure and distribute functions between management levels.

The mistake that most participants make

Many people think, ‘We’ve agreed on everything on the beach, we have a great relationship, we trust each other.’

That's a dangerous misconception.

The correct approach to management is: “What legal mechanisms will protect my investments when our commercial interests temporarily cease to coincide?”

Corporate governance is neither a bureaucracy nor a sign of mistrust. This is a pre-agreed and mandatory regulation for resolving disputes at all levels of business.

Step 1. Check the decision-making mechanisms in the board of directors

The Board of Directors is the main battleground for corporate control.

The following should be analysed:

• the exact quantitative composition of the Council;
• quotas for nomination of candidates from each party;
• the existence of a “golden share” or veto right;
• List of issues requiring qualified majority or unanimity (reserved matters);
• quorum requirements for validation of meetings;
• The right of the Chairman of the Council to cast a casting vote;
• the possibility to hold meetings in writing without joint attendance;
• Rules for the rotation of members of the Council and their removal from office ad nutum;
• Admissibility of absentee voting.

A poorly written board of directors' rules is a guaranteed dead end. If one party blocks the adoption of a budget or the appointment of a CFO, and the regulations do not provide for an escalation mechanism, the business loses control.

Step 2. Identify levels of control: general meeting vs. advice vs. management

Corporate governance does not tolerate a mix of competencies. The powers should be clearly delineated:

• Shareholders Meeting (Shareholders Meeting) Strategy, change of directors, liquidation, major deals. Fundamental property rights are exercised here.
• Board of Directors (Board of Directors) Budget, business plan, key management appointment, approval of transactions above a certain threshold. It is the center of operational strategic control.
• Director General (CEO) and Management. Daily operations within the approved budget and powers of attorney.

In practice, many problems arise from management overstepping the authority without board approval, or shareholders trying to run the business over the heads of directors, destroying procedural legitimacy.

Step 3. Assign and control key management

Control of a company is not just about controlling stocks, it is also about controlling people.

After the transaction, it is critical to fix:

• which party has the right to appoint the CEO, CFO and COO directors;
• term of office and grounds for early dismissal;
• can be fired from the top manager without the consent of the party that nominated him;
• Signing authority and banking mandates;
• restrictions on the amount of transactions for sole signature;
• procedures for issuing and revoking powers of attorney.

It is especially important to enshrine the right of the investor to veto the replacement of the CFO. Loss of control over finances turns shareholder status into a nominal one.

Step 4. To build a system of protective mechanisms of minority shareholders

If an investor owns less than 50% of the shares, standard dispositive corporate law rules almost always leave him without real leverage.

Legal protection of minority shareholders is built through:

• Extended list of issues adopted unanimously (supermajority provisions);
• Protective provisions in the Shareholders’ Agreement;
• disproportionate representation on the board of directors;
• the right to “tag-along right” for exit on equal terms with the majority shareholder;
• Restrictions on the issuance of new shares (anti-dilution protection);
• direct prohibition of related-party transactions without the consent of the minority shareholder;
• Access to information: The right to appoint an auditor, to carry out inventory and to request management reporting in real time.

Without these mechanisms, a minority stake is not a business asset, but only a speculative financial instrument.

Step 5. Set up financial control and reporting

Partnership wars often start with the phrase “show where the money went.”

Post-transaction management should include:

• Approved financial model and annual budget;
• The right to veto unplanned expenditures (capex/opex) over the limit.
• mandatory audit of financial statements (according to IFRS or other standards) conducted by an independent company from the Big Four;
• control of the movement of funds on bank accounts;
• Dividend policy: strict criteria for declaring and paying dividends to avoid unreasonable withholding of profits;
• Prohibition of loans to third parties and guarantees without corporate approval;
• Regular management reporting to the Board of Directors.

Transparency does not arise by itself, it is the product of rigorous and timely implementation procedures.

Step 6. Develop mechanisms for resolving deadlock situations (Deadlock Resolution)

A deadlock is a situation where the parties cannot agree on a principled issue, paralyzing the company’s activities.

A classic example: SP 50/50. One side wants to reinvest the profits in development, the other wants to withdraw dividends immediately. The votes on the board were equally divided.

Deadlock resolution methods that must be prescribed in advance:

• Escalation to the top management of parent companies.
• Mediation (without mandatory results).
• "Russian Roulette": One party calls the price for the business, the other is obliged either to sell its share at this price or to buy out the share of the initiator.
• "Texas Shootout": The parties simultaneously send sealed price offers; Whoever offers more will buy the loser’s share.
• Liquidation model: If the deadlock lasts longer than a certain period (for example, 60 days), the company is subject to voluntary liquidation.

The existence of a prescribed mechanism for “getting out in case of a dead end” often disciplines the parties and forces them to agree.

Step 7. Ensure compliance with sanctions requirements and compliance

Modern management is unthinkable without compliance procedures. Especially in international organizations affected by sanctions risks.

It is necessary to introduce:

• screening of counterparties and beneficiaries for being under sanctions;
• control of foreign exchange transactions and their routing;
• ban on transactions that violate export controls;
• Regular training for compliance management;
• mechanisms for immediately notifying the board of directors of any regulatory risks (red flags).

Ignoring this area of responsibility threatens not just a corporate dispute, but the blocking of accounts, personal liability of directors and criminal prosecution.

Step 8. Prepare an exit strategy (Exit Strategy)

Management is an activity aimed, among other things, at the future sale of an asset.

From the moment of closing the transaction, it is necessary to control:

• Options (Put & Call Options)
• drag-along (compulsory joining to the sale)
• restrictions on the alienation of shares (Lock-up periods);
• The right of preferential purchase (ROFR);
• the procedure for determining fair market value (price formula, involvement of an independent appraiser);
• Good Leaver/Bad Leaver triggers
• Transfer of intellectual property upon withdrawal.

Properly built corporate governance does not interfere with the exit, but maximizes the capitalization of the company by the time of exit.

Shareholder Agreement (SHA) or Articles of Association: more important

In practice, an effective management architecture almost always requires a combination of a “rigid” charter and a “flexible” shareholder agreement, subject to authoritative law (often English or DIFC law).

Common mistakes after closing of the transaction

1. It is impossible to allow the acquired company to continue to be managed by inertia, without the introduction of new policies and regulations of the buyer.

2. What works in a German or English model of governance may not work in a Middle Eastern or Asian framework without localizing procedures.

3. Not appointing your CFO or getting a veto on his replacement is tantamount to handing over the safe keys to a partner with whom you may be in conflict a year from now.

4. Breaking the deadlock without a pre-agreed pricing mechanism almost always leads to a protracted and destructive judicial war.

5. Skipping formal meetings, non-signing protocols and decisions blurs corporate history and creates grounds for accusations of illegal actions of management.

Investor checklist after international transaction

Check yourself on the following points:

1. Has the new board of directors been formed and has the first board meeting been held?
2. Who has the right to sign the bank and what are the limits?
3. What are the issues that require unanimous approval (Reserved Matters)?
4. Do you have the right to veto the CEO, CFO and change the staffing of top management?
5. How often and in what form are management reports provided?
6. Which audit company is approved to verify the accounts?
7. Is the annual budget agreed and when should the next budget be adopted?
8. Are Interested Transactions Prohibited Without Independent Approval?
9. Is there a mechanism in place to resolve the impasse in SHA?
10. Is there protection against dilution (anti-dilution)?
11. Are the sanctions clauses applied to the business and is the partner’s beneficiaries screened?
12. Are default events and Good Leaver/Bad Leaver events clearly defined in the option program?
13. Have you appointed your Shadow Director/Observer to a subsidiary operating company?

How does an effective management system look like?

The management system is maintained on four levels:

1. The Charter and shareholder agreement fixing the balance of power and the system of checks and balances.

2. The strategic level is the Board of Directors, which is not a formality, but actually approves KPI, budget and transactions.

3. Operational level Management with clearly limited powers, reporting regularly to the board.

4. Independent audit, compliance and management reporting system that make business transparent to all partners.

Without the fourth level, the first three lose their meaning because you stop seeing the real state of affairs.

FAQ

What to do if a partner in a joint venture blocks all key decisions?Refer to the mechanism of deadlock resolution prescribed in the shareholder agreement. If the mechanism is absent or does not work, the strategy shifts to negotiating the sale of a stake, to a just and equitable winding up or to seeking procedural violations to challenge the actions of the directors.

Yes, if the terms of the shareholder agreement allow, or if the CEO has committed gross misconduct, violated fiduciary duties, or went beyond the authority, causing damage to the company.

Where to prescribe the protective mechanisms of the minority shareholder: SHAs are subject to English law or other case-law jurisdiction, as this provides greater flexibility, confidentiality and predictability of enforcement through arbitration. The charter should refer to the SHA so that the mechanisms are mandatory for the company.

This is an extreme but effective mechanism for breaking the deadlock. One party sends an offer with a price for its share (or for the share of the partner). The recipient must either sell his share at this price or buy the proponent's share at the same price.

Through the introduction of the “two signatures” rule in bank mandates, approval of the budget on the board of directors with deviation limits, and the right of the investor’s representative to veto any payments over budget or to affiliates.

Related services

• International Mergers & Acquisitions and Joint Ventures
• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Corporate Governance, Regulatory Compliance & Business Integrity
• Commercial Contracts
• Asset Protection & Wealth Structuring

Related material

• How to structure a joint venture in the Middle East: choice between UAE and KSA
• Shareholder agreement: 10 items that should not be missed
• How to Protect a Minority Investor in an International Project
• Deadlock in the joint venture: strategy
• Fiduciary duties of directors in different jurisdictions
• How to get out of international business: put and call options
• International Arbitration in Corporate Disputes: What an investor needs to know

Conclusion

Corporate governance after an international transaction is not a collection of formal protocols, but a continuous process of protecting capital.

The success of a joint venture or acquisition is determined not by the signatory at the closing ceremony, but by those who control the board’s agenda, bank signatures and mechanisms for getting out of the conflict.

The winner of international projects is the investor who invests not only in due diligence before the transaction, but also in the management architecture after it. Control is not sold or bought – it is built legally competently.