Joint venture agreements in the nuclear power sector

Many companies of various sizes and with diverse core businesses are intensively investing in projects relating to the engineering, procurement, funding, construction, or operation of nuclear power plants. Mainly due to the complexity of the development of such projects, together with the high costs and the considerable liabilities deriving from implementation of these activities, that firms intending to undertake and develop these usually tend to enter into joint venture (JV) agreements to do so. Umberto Penco Salvi of Clifford Chance explains the fundamentals that are critical in such agreements.

A JV agreement is a contractual business partnership between two or more entities which is entered into to pursue a shared economic interest, and that is generally dissolved by the same entities once the project has been completed. In particular, not only does this kind of collaboration allow the parties to share costs and strengths, minimise risks, and increase competitive advantages, but it also allows them to carry out activities in an integrated way, so that the entities are actually able to enjoy joint synergies of technologies, skills, human resources, know-how, and, of course, profits.

In commercial practice, there are mainly two fundamental types of JV agreements: one is the “contractual JV”, by which the parties regulate the terms and conditions of the partnership, as well as their respective rights, obligations and liabilities in a cooperation contract, without the need for them to establish a new company.

The other type of JV, which is, by far, the more frequently adopted, especially in the energy industry sector, is the “corporate JV”, or “equity JV”. Although essentially similar to contractual JVs, it has one essential difference between the two forms of collaboration: in the latter, to pursue the shared objectives, parties will have to establish a new company, called the Special Purpose Vehicle (SPV), defining in the contract the amount of shares of the new company that each of the partners will own, the initial corporate capital that they will respectively subscribe for and the way profits will be awarded.

Ownership structures of the “corporate JV”

In relation to the ownership structure of the SPV between the partners, there are two different categories: the “joint control” regime, which envisages the partners owning 50% of the SPV’s shares each, and the “50 plus one share” or “sole control with minority shareholders” models, which envisages one entity with a preeminent role and the other entity having certain rights aimed at protecting its investment from possible abuses by the majority shareholder. It is however noteworthy to add that in a “sole control” ownership structure, with a minority percentage included in the range from 30 to 49 percent and above, the resulting governance power of each the parties in the decision-making process, in practice, will not be very different from the one that they exercise in a “joint control” regime.

The decision-making process

Following on from the above, it is now possible to evaluate how these power equilibriums can influence the decision-making processes of JVs. In particular, the approval of decisions in a normal JV to the limited extent of a determined series of topics differs from the way decisions have to be taken by a JV operating in the nuclear power sector. More specifically, in the latter, the adoption of those decision will require the consent of both parties’ due to the peculiar characteristics of the nuclear sector, which requires considerable investment and the implementation of which generates considerable responsibilities upon the partners.

The decision-making processes in JVs

Generally speaking – therefore, not only in the nuclear power sector – the quorum required for decisions to be taken by the partners of a JV depends on the subject of the decisions that have to be made, as well as on the percentage of the SPV each of the partners holds. Needless to say that tactical decisions regarding the most important matters of the governance of the SPVs are usually taken by both partners of a JV.

Normally, in “joint-control” JVs as well as in those with a slightly different shareholding structure (e.g., 40/60), both partners manage their SPV, jointly designating the CEO, the Chairman and the top management of the new company. Theoretically, then, as a general rule and not taking in consideration any particular shareholders’ agreement, in these types of JVs the Board of directors should approve the business plans, define the budget, approve capital increases, and decide on the acquisition or the dismissal of major assets, on transactions above a certain monetary threshold or to be carried out between the JV company and one of the partners, as well as on possible spin-offs, either unanimously or with a particularly high quorum.

In “sole control with minority shareholders” JVs, on the other hand, projects are usually managed mainly by the dominant shareholders, thus leaving dominant shareholders the responsibility for ordinary decisions. This, however, should not prevent the parties from adopting strategies – like the change in the JV’s object, the acquisition or the dismissal of major assets of the SPV or mergers, demergers, or other extraordinary transactions – with a shared consent, especially if the agreement provides the minority shareholder with the above mentioned guarantees. That said, if the ownership structure is heavily unbalanced in favour of one of the parties (ie, a “sole control” with a minority shareholder owning 10% of the company), it is likely that even decisions regarding arguments of a certain relevance will be taken by the majority shareholders without the need to consult the minority party.

The decision-making processes in nuclear power JVs

As noted above, the decision-making process for JVs operating in the nuclear power sector differs, under some specific aspects, from the way the partners of a JV operating in any other industry usually decides on governance and management matters; in particular, in nuclear power JVs, whatever the ownership structure of the SPVs, certain topics must, , be dealt with by both partners, and the decisions regarding these matters must be taken unanimously.

Given the peculiarity of nuclear power under a multitude of aspects, from the extraordinary safety measures it requires both in the construction and in the operation of the plants, to the extent of the investments necessary to implement either a development, a construction or an operational project, it is rather easy to understand why the partners of a JV agreement must jointly make decisions on some, fundamental issues. While in JVs operating in industries other than the nuclear one, decisions on topics like the budget to be destined for the implementation of the project or the safety measures that have to be adopted during its execution might be taken even if there is a disagreement between the partners – hence, by only one of the parties, even if it is a “joint-control” SPV, in JVs dealing with the nuclear power sector, in relation to a selected series of subjects, a shared decision has to be made. It is because of these particular quorum requirements that the parties might encounter some difficulties in executing the project, therefore having to make use, in case of lack of an agreed solution, of the “deadlock clauses“ to settle the dispute and rearrange the JV.

The main topics for which jurisprudence and market practice require the unanimity (or a particularly high quorum of the board of directors of the SPV) are matters related to the construction phase of a nuclear power plant, to the safety features to be employed during the construction and the operation of such plants, and to the decommissioning of old or no longer operational plants.

Construction matters

The complexity of the implementation of construction projects and the responsibilities arising from it explain why certain decisions related to this project phase have to be taken unanimously by the partners. The most relevant of these key matters seem to be the ones regarding the variations of the project milestones, of the key dates and of the commencement of commercial operation (exceeding by a certain amount of time the timeline agreed by the parties for operations to be started), as well as those requiring changes to the financial structure of the SPV or the approval of any encumbrance, guarantee, pledge or privilege in respect of any assets of the SPV.

If the parties are not able to reach an agreement on those matters, to either carry on with the execution of the project or terminate the JV, they will have to appeal to the “deadlock clauses”.

Nuclear safety features during construction and operation phases

Safety of power plants has always played an essential role in the context of energy production industry. Today, after the accident at the Fukushima power plant, safety has become the most discussed topic of all, giving rise to concerns regarding the adequacy of the existing safety measures, and leading some countries to suspend their nuclear power projects in progress.

Given the relevance of this subject, the decisions regarding construction or operational safety matters need the approval of both parties. In relation to construction, joint consent is required for major modifications of the design of the units that might impact on nuclear safety standards, or major quality deviations in terms of design, and construction of systems or components that are safety related. In relation to the operating phase, a unanimous deliberation is required for decisions regarding nuclear safety management systems and policies, as well as their evolution in compliance with regulatory guidelines (if existent), the yearly nuclear safety performance reporting and analysis. Joint consent is usually required also for decisions concerning corporate assets protection policies, including fire fighting, security, and, finally, to the major modifications of design of the units affecting nuclear safety.

Decommissioning of nuclear power plants

A third macro segment of the nuclear energy sector in which decisions necessarily have to be taken jointly by the partners is the decommissioning of old or no longer operational nuclear power plants. More specifically, this activity regards the cessation of operations and the withdrawal of the plants from service, followed by transformation into out-of-service plants and, eventually, complete dismantling and removal. Decommissioning thus involves both administrative and technical operations allowing to withdraw a facility from the list of licensed facilities. While the administrative operations concern particularly the elaboration of decommissioning plans and the obtainment of authorisations and release certificates for the facilities and the site, the technical operations include ,among others, the decontamination, dismantling, waste management, progressive demolition of the plant and the destruction of the buildings. Only after a facility has been completely decommissioned it is released from regulatory control, and the licensee of the plant no longer has responsibility for the facility’s nuclear safety.

Decommissioning activities appear then to be of primary importance for JV agreements as well; and that is the reason why most of the decisions the partners have to make in relation to the administrative and the technical operations of the decommissioning of a plant have to be taken unanimously.

In particular, joint decisions are usually required in relation to matters such as the estimation of the future dismantling costs (including costs incurred from the end of the electricity generation and the beginning of dismantling operations), the liabilities, and the way costs arising from these activities should be allocated between the parties. The board of directors of the SPVs should also decide unanimously on other, more specific issues such as costs originated from back-end fuel services. Also crucial to nuclear power JVs that operate plants are decisions regarding decommissioning after a nuclear accident.

Moreover, a joint decision will be necessary when it becomes evident, in the course of the operations, that the expected costs or time-frame for the removal of highly radioactive waste substantially differs from the expected corresponding costs or time-frame, and any of the parties requests a review of the corresponding parameter.

Umberto Penco Salvi is a partner at Clifford Chance, Milan. With more than 18 years of experience in the M&A sector, Umberto has been involved in several key transactions in the energy industry. Based on his remarkable experience and strong background in the energy field, Umberto, together with his international team of professionals, is a trusted advisor of top-tier players in Europe, to which he provides legal counseling on a regular basis. Umberto also lectures at the SDA Bocconi, Milan, and is an active participant in the public consultation process conducted by governmental agencies.

Clifford Chance is one of the world’s leading law firms, represented by 33 offices in 23 countries. Its 3200 legal advisers operate in six core areas of commercial activity: capital markets, corporate/M&A, finance and banking, real estate, tax/pensions and employment, and litigation and dispute resolution. For more information, visit: Clifford Chance

This feature is based on a paper first presented at “Nuclear Power Europe 2011″, Milan, Italy.