Question
From:(redacted)
Sent: Wednesday, October 19, 2005 7:52 AM
To:Verne, B. Michael
Subject: new rules question
Mike: I want to be sure I'm giving a client accurate advice on something.They're forming a rather elaborate joint venture with another company, with a51/49 right to profits/assets configuration. The joint venture agreementenvisions that the parties will develop a number of new products and willconstruct the facilities to manufacture and sell those products worldwide.Because at the time of formation the 49% owner is contributing only cash andthe 51 % owner is contributing all of the noncash assets, the formation (anLLC) will not be reportable.
My question relates to the potential reportability of possible later shifts ofthat 51/49 ownership arrangement by reason of (a) additional capitalcontributions and/or (b) other events occurring within the joint venture.
It seems pretty straightforward that if, for example, the parties makeadditional capital contributions a year from now, and the lopsidedness of thecontributions causes the to shift the right to profits/assets to 49/51, that'ssimply an acquisition of control by the former minority party, and ispotentially reportable. (The acquisitions of the contributions by the JV mightalso be reportable, even if the change of control is not.)
Similarly, if the parties simply decided to restructure the rights toprofits/assets without any additional capital contributions by either party,that presumably would also be potentially reportable.
Suppose the JV agreement says something like this: Party A will work tocommercialize Product A, and Party B will work to commercialize Product B, andif in Year 3 the profits from Product A exceed the profits from Product B, thenthe ownership percentages will automatically shift from 51/49 to 49/51. I'mhypothesizing a shifting resulting from some event other than an additionalcontribution to the JV by either party. My question is whether that is anacquisition of a controlling non-corporate interest.
Is the test whether there is some volitional shift of control (as opposed to anautomatic -- i.e., non-volitional -- shift)?
Does the language in the SBP about whether the right to profit and/orthe right to assets upon dissolution is variable or fixed come into play here?My example was meant to suggest that the rights to both profits and assets is fixedat the time of formation but under the JV arrangement both of them becomevariable over time, depending upon events within the JV.