1.0 Joint venture

The timing of the community’s investment in the SPV will vary from project to project and will likely reflect the level of risk and involvement in the project that the community wishes to take. The later the community invests in the SPV the less risk will be associated with the project, so if, as is often the case, the community invests on or after financial close (i.e. when the project finance to fund the construction of the project is secured) the risks associated with initial project feasibility and obtaining planning consent will have been removed and the developer will expect the community to pay a higher price for its shares in the SPV. Conversely, if the community invests in the SPV at an early stage in the project e.g. before a planning application is submitted, then there will be a greater degree associated with the project, and this should be reflected in the amount the community would expect to have to pay for its shares.

From the developer’s perspective early investment in the SPV by a community serves to reduce the level of funding the developer is required to commit to the early stage development of a project albeit that it will expect the community to pay proportionately less for its shares at this stage reflecting the higher level of risk associated with the project at that time. The potential downside of early community investment for developers is that time and resource devoted to the community investment in the SPV may slow down the progress of the project itself.

In practice, unless the community body already has access to funds to invest in an SPV and depending on the size of the investment, the community body is likely to need time to raise funding to make its investment which will in turn reduce the likelihood of the community investing at an early stage in the project.

From the developer’s perspective, obtaining a clear commitment from the community as soon as practicable, whichever form of shared ownership model (if any) the community wishes to pursue, is a key concern to minimise the risk of delay to the development of the project. In this regard, early engagement with the community by the developer is recommended where possible.

The source of funding will determine the nature and scope of the issues that the community will need to address. To the extent that the community seeks debt or grant finance from public sector sources, it will need to ensure that it satisfies the relevant funding criteria and address any due diligence enquiries raised. Where the community seeks funding from a bank, it will also need to satisfy the funding criteria and due diligence, which may be more demanding and onerous compared to public sector funding. Bank finance will almost inevitably require the community to provide security for that finance, the nature of which will depend on the bank’s terms and what security (other than its shares in the SPV) the community will be able to provide to the bank.

 Other potential sources of funding, such as private equity and debt or equity based crowd funding may also be considered. In addition, if the developer does not need the community’s funds to finance the project, it may be feasible to agree to capitalise any community benefit payments that the community may be due to receive from the project to finance the community’s investment in the SPV.

a) The level of control and protection that a community can realistically expect to receive will usually depend on the size of the community’s investment as a proportion of the total number of shares issued by the SPV. The higher the percentage shareholding, the greater the level of influence and rights that the community can expect to receive.

Bearing in mind that developers will usually expect to be the majority shareholder in the SPV and will therefore be entitled to exercise greater influence over the SPV’s business affairs, the community will primarily be concerned to ensure that the joint venture agreement with the developer contains sufficient protection for the community as the minority shareholder. This is typically achieved by agreeing a list of what are usually referred to as “Reserved Matters” in relation to the SPV that require community approval before they can be implemented. For example, a common Reserved Matter will preclude the sale of the business and assets of the SPV without the community’s consent.

From the developer’s perspective, whilst recognising that the community will be entitled to a reasonable degree of protection, the developer will be concerned to ensure that the Reserved Matter protection agreed with the community is not so prescriptive as to undermine the developer’s ability to build the project and run the business of the SPV.

b) Board representation. Another common issue is whether the community ought to be entitled to have the right to appoint a director to the SPV’s board of directors and therefore have the ability to contribute to the decisions made by the SPV board, as well as having visibility of the decisions made. Again, the higher the percentage shareholding held by the community, the stronger the case for the community having such a right.

The developer may or may not be receptive to the community, and have the right to appoint a director to the SPV board, particularly if the community investment is relatively small or if the SPV board is small and therefore gives the community appointed director a disproportionate level of influence relative to the community shareholding. One possible compromise is for the community to have the right to appoint a person who can attend SPV board meetings as an observer but without the voting rights that a director would have.

If the community has neither the right to appoint a director or an observer, it will wish to ensure that it has sufficient access to financial and operational information to be able to monitor the SPV’s performance. The developer may wish to limit the extent to which the community is given access to confidential information, although the community would normally be obliged to keep any such information confidential under the terms of the joint venture agreement.

c) Drag and tag along rights. If the developer wishes to sell its shares in the SPV in future, it may seek to include a “drag along” right in the joint venture agreement. A drag along right would essentially oblige the community to sell its shares in the SPV if the developer receives an offer for its shares that the developer wishes to accept. Some communities may resist agreeing to “drag along” rights particularly if they intend to hold their shares for the lifetime of the project.

Conversely, if the community wants to have the flexibility to sell its shares in the future, it should seek to have a “tag along” right included in the joint venture agreement. Such a right applies where the developer wishes to accept an offer to sell its shares and requires the developer to obtain for the community the right for the community to sell its shares to the third party buyer on equivalent terms.

Pre-emption rights. Given that the relationship between the developer and the community will have evolved over a reasonable period of time both parties may be concerned to ensure that if one party wishes to sell their shares in the SPV they must first offer them to the other party at market value before selling to a third party with whom the remaining original joint venture party may not wish to deal with. In practice, if the community only has a small shareholding and limited access to funds, there may be little prospect of being able to afford to buy the developers shareholding, but nevertheless, pre-emption right would give the community the flexibility to do so.