Joint Ventures 2023 Comparisons

Uncertain times often act as a catalyst for the willingness of companies to enter into joint ventures (JVs). By doing so, companies can share the risks of engaging in new investments, in light of the fact that a substantial number of JVs do not ultimately achieve their initially intended purpose and subsequently need to be terminated. Austria is no exception in this regard.

In fact, consistently high inflation has affected Austria more than other EU member states. Risks resulting from higher interest rates and the war in Ukraine combined with the need to decrease dependency on far-away suppliers have led to an increased willingness by Austrian companies to team up with other companies in JVs, to avoid carrying too much risk on an individual company basis, especially where the investment amount for the JV is high.

The energy infrastructure area has been particularly active in establishing JVs. Companies searching for new cutting-edge energy sources, such as the production of hydrogen, often cannot handle the investment amounts by themselves and thus need to enter into JVs with other companies. The hydrogen sector is just one example of the increase in so-called green JVs. The technology sector has also been a hot-bed of JV activity in Austria.

In light of the Russian invasion of Ukraine, disengagement of Austrian companies from JVs with Russian counterparties within and outside Russia has been a very active area for many Austrian companies, given the significant investments that Austrian companies historically have had in Russia.

There are two basic structures for JVs in Austria:

• the first and dominant structure is the creation of a separate equity vehicle (equity joint venture); and
• the second is a JV based on a contractual relationship (contractual joint venture).

Generally, the form of the JV also often reflects the intensity of the co-operation. Equity JVs are often closer collaborations than contractual JVs, with common strategic goals that are also more durable. This is evident when the JV, for whatever reason, is wound up. An equity JV is more difficult to wind up since, aside from terminating contractual relationships, the JV vehicle needs to be liquidated. Depending on the jurisdiction and whether the JV partners are in dispute, such liquidations can be time-consuming.

The most common equity JV vehicle deployed in Austria is the limited liability company (Gesellschaft mit beschränkter Haftung) followed by the limited partnership (GmbH & Co KG), the latter sometimes being chosen for tax reasons. In both such structures, the major advantage is that the JV parties benefit from a liable shield such that, in the absence of an abuse of corporate form, they are generally not liable for the liabilities incurred by the JV vehicle. While an Austrian stock corporation (Aktiengesellschaft) also provides a liability shield for the JV parties, this form is typically not chosen as the JV parties (being shareholders of the stock corporation) cannot issue binding instructions to the management. Such binding instructions are, however, possible with respect to an Austrian limited liability company.

Contractual JVs, though in the minority of JV structures generally, can most often be found in the following three areas:

• natural resources JVs;
• time-limited infrastructure projects; and
• looser forms of co-operation for a limited purpose.

In natural resource JVs, one of the JV parties often already holds a significant and valuable regulatory licence from the Republic of Austria to undertake their activities (eg, oil and gas exploration). The party holding such a licence will often not want to transfer the licence to a separate JV vehicle given the uncertainties that may arise regarding what happens with the licence if the JV fails. In addition, there may be impediments from a regulatory perspective to having the licence transferred.

Time-limited infrastructure projects, such as the building of a tunnel, often involve a multitude of contractors, with each having their distinctive role in the implementation of a project. Once the project is finished, each of the JV parties goes their separate ways.

The third type of JV that frequently takes the form of a contractual JV is one with a more narrow purpose. This, for example, would not be the classic manufacturing JV, which typically takes the form of a limited liability company. Examples of more narrow-purpose JVs include R&D JVs and co-marketing JVs. In particular, R&D JVs in the renewable energy sector have become very common, especially in light of the EU grant programmes supporting such R&D activity.

What is significant (especially for JV parties from outside Austria not versed in Austrian law) is that even contractual JVs are subject to a separate quasi-corporate regime under the Austrian General Civil Code (Sections 1175 et seq). The provisions of this quasi-corporate regime – the so-called civil law association (Gesellschaft bürgerlichen Rechts) – are largely dispositive in nature so that it is possible, and important, to exclude their applicability when undertaking a contractual JV.

It is also worth mentioning that whether there is any freedom to choose the form of the JV in the first place depends on whether the JV is a so-called greenfield or brownfield JV. In a greenfield JV, where the JV parties are setting up a completely new JV structure, there is no limit to structuring possibilities. In a brownfield JV, where, for instance, a company purchases 50% of the shares in an existing limited liability company, the JV structure is pre-ordained as a result of the limited liability company form that has already been in place, often for many years. For companies in Austria generally, the limited liability company is the dominant form of choice, such that most brownfield JVs will continue with the limited liability company serving as the JV vehicle.

Given the broad array of considerations that can come into play and the unique requirements of every JV, it is difficult to generalise regarding the choice of JV vehicle. That said, primary drivers for choosing the appropriate JV vehicle often include:

• ensuring a liability shield for the benefit of the JV parties; and
• being able to implement the desired corporate governance structure and tax treatment for the JV parties.

In particular, the tax treatment for the JV parties can also lead to a structure in which a HoldCo is established in another jurisdiction, which will then hold 100% of the shares in the Austrian limited liability company. The most popular holding jurisdiction used by Austrian parties outside Austria is the Dutch HoldCo, in light of the significant web of beneficial tax treaties that the Netherlands has with other countries.

The primary regulator in Austria for the operational activities of manufacturing JVs is the Trade Code authority. The Trade Code (Gewerbeordnung) contains detailed regulations on plant permits, compliance issues with permit conditions and many other regulatory areas. This is to be distinguished from the basic issues of whether the creation of the JV itself triggers an approval requirement under the Austrian Investment Control Act (see 3.3 Restrictions and National Security Considerations) or under antitrust legislation (see 3.4 Competition Considerations).

The Financial Markets Anti-Money Laundering Act (Finanzmarkt-Geldwäschegesetz – AML) has been in force since 1 January 2017, transposing the international and EU rules for the prevention of money laundering and terrorist financing into national law.

The AML imposes special due diligence requirements and defines certain obligations for credit and financial institutions regarding due diligence and reporting in order to prevent money laundering and terrorist finance. Bank business may only be transacted with customers who have been identified – the “know-your-customer” principle. Also, with respect to the foundation of a limited liability company in greenfield JVs, the Austrian bank into which the share capital needs to be paid will look closely at the source of funds and the JV partner making the transfer of funds.

Austrian bar rules for lawyers (Sections 8a-8f of the Lawyers Act – Rechtsanwaltsordnung) and Austrian bar rules for notaries also contain similarly strict provisions on know-your-customer and the prevention of money laundering and terrorist financing. 

On 25 July 2020 a new Investment Control Act (ICA) (Investitionskontrollgesetz – InvKG) entered into force, and aims to prevent the “sell-out” of the Austrian economy in strategic areas. The ICA implements the FDI Screening Regulation (Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments – ie, non-EU/EEA/Swiss individuals or corporations into the EU) and significantly expands the control over foreign investments both in terms of scope and procedure. This includes a more comprehensive, EU-wide co-ordinated control of third-country investments in system-relevant Austrian companies.

The ICA is particularly relevant for brownfield JV transactions, where a “foreign party” as defined above acquires a shareholding in an existing Austrian company.

A “foreign direct investment” is subject to the approval of the Federal Ministry of Labour and Economy (Bundesministerium für Arbeit und Wirtschaft) if the following criteria are met:

• the target company is active in one of the sensitive or system-relevant areas listed in the Annex to the ICA; and
• certain voting rights thresholds are reached or exceeded, or otherwise a controlling influence is acquired or a controlling influence on parts of the company is acquired through the acquisition of significant assets.

A basic distinction is made between “particularly sensitive sectors” and other areas where a threat to security or public order may arise. For “particularly sensitive sectors” the voting right thresholds are 10%, 25% and 50%, whereas for the other areas only the higher thresholds of 25% and 50% apply. Examples of “sensitive or system-relevant areas” are:

• defence equipment and technologies;
• the operation of critical energy infrastructure and critical digital infrastructure;
• water; and
• research and development in the fields of pharmaceuticals, vaccines, medical devices and personal protective equipment.

The generally less-sensitive “other areas” listed in an Annex to the ICA contain often very broad references to sectors. The Federal Ministry of Labour and Economy interprets the ICA such that once the target’s activities fall within the scope of one of these sectors, it is not relevant whether the target’s activities pose any danger to the national security of Austria, which is the rationale for the existence of the ICA in the first place. The Federal Ministry’s view is that it will then decide whether any such danger to national security is posed.

This also means that small brownfield JV transactions, which clearly pose no danger to Austria’s national security, need to be notified to the ICA authority. For example, the “other areas” Annex to the ICA references “information technology” as a relevant sector. This has resulted in virtually every transaction with Austrian software targets having to be notified under the ICA if one of the acquiring JV parties qualifies as a “foreign party” and exceeds the relevant voting rights threshold. This strict reading of the ICA has been criticised in legal literature, but currently the only safe approach is to file the JV transaction to the ICA authority.

The application for approval must be submitted immediately after the conclusion of the JV agreement (signing/commitment to the JV transaction) or, in the case of a public offer, immediately after the announcement of the intention to acquire. The obligation to submit an application generally applies to the acquirer(s). Information on the acquirer (including the beneficial owner), the target company and the transaction structure, as well as information on the business activities of the acquirer and the target company (including a description of the market and competitors), must be set out. Furthermore, the application for approval must contain information on the financing of the transaction and the origin of the financial sources, as well as – if foreseeable – information on whether effects on “programmes of European interest” are to be expected (see in detail Section 6 para 4 No 1 to No 10 of the ICA).

A viable alternative to making an application for approval after signing is the possibility of obtaining a clearance certificate (Unbedenklichkeitsbescheinigung). Within two months of receipt of the complete application for a clearance certificate, either a clearance certificate is issued or a notification is given that the application will be treated as an application for approval. If no decision is issued or notification given within this two-month period, the clearance certificate is deemed to have been granted. This clearance certificate alternative opens up the possibility of achieving clarity at an early stage of the transaction.

A key regulatory authority with regard to JV transactions is the Federal Competition Authority (Bundeswettbewerbsbehörde), which is competent for the clearance of mergers if the transaction volume does not exceed the thresholds of the EC Merger Control Regulation, but exceeds the thresholds under Austrian competition law. A transaction has to be notified to the Federal Competition Authority under Austrian competition law if the following conditions are met and no exception applies:

• the combined worldwide aggregate turnover of all participating undertakings in the year prior to the transaction was more than EUR300 million;
• the combined domestic aggregate turnover of all participating undertakings in the year prior to the transaction was more than EUR30 million and the turnover of at least two undertakings exceeded EUR1 million each; and
• the worldwide turnover of at least two participating undertakings each was more than EUR5 million in the year prior to the transaction.

The requirement in the second point above that at least two of the companies involved must each also have generated domestic sales of more than EUR1 million was introduced in 2021. This aims to exclude mergers where the target has no relevant domestic turnover and the merger would only need to be filed in Austria because the purchaser had a turnover of more than EUR30 million in Austria.

The main exception, under which no merger notification needs to be filed (despite the thresholds set out above having been met), is that the transaction does not need to be notified if in the year prior to the transaction:

• only one independent undertaking had a domestic turnover of over EUR5 million; and
• the other participating undertakings combined had a worldwide aggregate turnover not exceeding EUR30 million.

However, even if the thresholds set out above are not met, transactions closing after 31 December 2021 which meet the following, newly introduced conditions also need to be notified to the Federal Competition Authority:

• where the combined worldwide aggregate turnover of all participating undertakings in the year prior to the transaction was more than EUR300 million;
• where the combined domestic aggregate turnover of all participating undertakings in the year prior to the transaction was more than EUR15 million;
• where the value of the consideration for the transaction is more than EUR200 million; and
• where the target company has significant operations in Austria. Special rules on turnover calculation exist for the banking, insurance and media sectors. A further relevant authority regarding cartels and merger control is the Cartel Court (Kartellgericht).

In 2021, the Austrian Cartel Act, which not only deals with merger control issues but also with cartel issues, went “green”. The new version of Section 2 para 1 of the Cartel Act expands the few legal exceptions to the ban on cartels. Cartels are now also exempted from the prohibition if their profits make a significant contribution to an ecologically sustainable or climate-neutral economy. The provision thus creates legal certainty and a free space for entrepreneurial co-operation in favour of sustainable agreements that would otherwise be prohibited under national law. However, it would also be desirable to create a clear “safe harbour” for Austria by using the authorisation for block exemption regulations. 

There is also a new substantive review criterion that allows the prohibition of mergers. As an alternative to the prohibition of a merger which creates or strengthens a dominant position, mergers can now already be prohibited if a significant impediment to effective competition is to be expected as a result. However, there are additional justification criteria. In certain cases, the Cartel Court is given the option of not prohibiting a merger where an improvement of competition is to be expected which outweighs the disadvantages, or where the economic advantages of the merger substantially outweigh the disadvantages.

As regards the main criterion for the prohibition of a merger – ie, the creation or strengthening of a dominant position – in 2021 there were also two significant amendments. First, companies are now also deemed to hold a dominant market position if they have significant access to the market or to data of particular competitive relevance – for example, due to their intermediary services for other companies. Second, the concept of market dominance has been further tightened by the concept of relative market power. According to the new Section 4a of the Cartel Act, a company is also considered to have a dominant market position if it has a superior market position in relation to its customers or suppliers. Thus, the legislature has addressed typical market power structures of the digital platform economy.

As an EU member state, Austrian JV partners and the JV vehicle itself must comply with all EU sanctions regulations, which are directly applicable in Austria. While the EU’s authority to issue sanctions regulations is broad, enforcement and fines relating to the breach of sanctions regulations is left to the member states.

Of course, the primary issue for the past couple of years has been the EU’s adoption of sanctions against Russian entities and individuals. Constant vigilance is required by companies when assessing their compliance status, especially given the fact that EU sanctions regulations come with little forewarning. By way of example, the tenth EU sanctions package adopted on 25 February 2023 included a ban on Russian nationals from serving on governing bodies of member states’ critical infrastructure companies. This ban applied to existing Austrian JVs as well, such that swift action had to be taken with respect to existing and long-standing JVs with Russian parties.

Companies in Austria are required to report their ultimate beneficial owners (UBOs) through the Austrian company service portal (the USP, which is operated by the Austrian Ministry of Finance). The reported information needs to be updated in the case of changes and on an annual basis. The UBO is – by definition – always a natural person (ie, the natural person who ultimately owns or controls a legal entity). A company is considered to be owned or controlled by a natural person if this natural person holds a direct interest (capital or voting rights) in that company of more than 25% or can exercise direct or indirect control over an entity which holds a direct participation of more than 25% in such company. Control requires:

• participation of more than 50% (capital or voting rights);
• the exercise of control within the meaning of Section 244 para 2 of the Austrian Commercial Code; or
• the exercise of control via other means.

There are also complex provisions on joint UBOs and the exercise of joint control.

In the past, the register of UBOs was freely accessible. However, in late 2022 the European Court of Justice ruled in a case concerning a Luxembourg real estate company (connected case files C-37/20 and C-601/20) that certain provisions of the EU anti-money laundering directives (Directive (EU) 2018/843 and Directive (EU) 2015/849), which were the legal basis for Austrian UBO regulations, violate fundamental principles of data protection. As a result of that ruling, the Austrian Ministry of Finance closed the register of UBOs for the general public.

Since then, only certain entities (ie, public authorities, credit or financial institutions) or certain groups of people (ie, attorneys at law, notary publics, fiduciaries, tax advisers or auditors) have access to the register of UBOs. In addition, some or all entities or persons entitled to access the register of UBOs may be restricted from accessing the register of UBOs for a duration of five years if the UBO asserts a sufficient legal interest in such restriction. Such sufficient legal interest may exist if facts justify the assumption that certain criminal offences will be committed against the UBO if its identity became known and that such danger could be prevented by restricting access to the register of UBOs.

The most significant developments have been in the regulatory area, namely in the area of foreign direct investment (see 3.3 Restrictions and National Security Considerations) and in the antitrust area (see 3.4 Competition Considerations).

It is common in Austria for JV parties to agree to a mutual NDA and a letter of intent, which typically also contains an exclusivity clause. There is usually no separate exclusivity agreement that is entered into.

The mutual NDA typically contains a very broad definition of confidential information and would contain the standard exceptions, such as publicly available information and information to which the JV party already rightfully has access.

Generally for JVs, the letter of intent will contain a greater level of detail than a letter of intent in a sale of all shares in an M&A transaction. The main reason for this is that the JV parties will often want to ensure they have a core agreement on basic issues such as dividend policy, corporate governance, exit rights and restrictions before proceeding to the drafting stage of the JV documents themselves.

The vast majority of JV transactions in Austria involve private companies, who generally are not subject to any disclosure requirements by law.

If one of the JV partners intending to participate in a JV is an Austrian publicly listed company, this may trigger an ad hoc disclosure requirement under Article 17 of the Market Abuse Regulation. Briefly speaking, listed stock corporations are required to disclose insider information relating to them without undue delay. The conclusion of a JV agreement can qualify as insider information if this information could have an impact on the stock price of the listed shares. In practice, the main difficulty lies in the assessment of when the conclusion of the JV agreement has become certain enough to trigger the disclosure requirement (conclusion of a term sheet, approval by the supervisory board, signing, etc). Early involvement of legal experts or the compliance department is highly recommended.

Where the JV target itself is an Austrian publicly listed company, which is a fairly rare occurrence, the provisions of the Austrian Takeover Act need to be observed, which can trigger the requirement of a public takeover bid if the JV partners hold more than 30% of the shares in the target company and have agreed to co-ordinate their voting rights in the target company. In addition, the Austrian Takeover Act includes a number of notification obligations vis-à-vis the Austrian Takeover Commission. Further, the Austrian Stock Exchange Act contains disclosure requirements if certain participation thresholds, starting at 4% (or 3% if this is provided by the articles of the target company), are reached or exceeded.

Finally, Austrian publicly listed companies are obliged to disclose limitations with respect to the transferability of the shares or the voting rights attached to them in the management report to the financial statements (Lagebericht) if they are contained in agreements among their shareholders, provided such arrangements are known to the board of directors of the listed company.

The setting up of the JV vehicle and the constituent documents generally occurs when the JV documents are signed. The core JV vehicle documents in Austria for the limited liability company are the articles of association (Gesellschaftsvertrag). These will typically be accompanied by by-laws for the managing directors of the limited liability company, who need to be natural persons (companies are thus not allowed as in other jurisdictions). The main JV document will often outline who the initial managing directors are. To establish the limited liability company, one half of the share capital of the company needs to be paid in and be confirmed as such by the managing director(s) who have been appointed. The generally applicable minimum share capital amount is EUR35,000 such that, as a minimum, a payment of EUR17,500 is required.

Establishing a limited liability company in Austria is a fairly formalistic process, as a submission for registration of the limited company needs to be made to the local commercial registry; this is within the authority of a court, such that a judge or a judicial assistant will issue a ruling on registration of the limited liability company.

Once registration is approved, the basic data of the company (eg, type of company, shareholders, managing directors, holders of special statutory powers (Prokuristen), financial year) is publicly available via the electronically administered commercial registry (Firmenbuch). In addition, it is important to note that the articles of association of the company (but not the by-laws for the managing directors) are also publicly accessible. For this reason, consideration is also given to keeping certain matters out of the articles of association and including them only in the JV documents. The JV documents themselves do not need to be submitted to the commercial registry.

Regardless of which form is chosen for the JV vehicle, the terms the parties agree upon for the JV will be set out in detail in the JV agreement. The main terms that a corporate JV agreement would be expected to cover include the following.

• Specifics on the initial capitalisation and whether the parties have any sort of additional financing obligation. While there may be funding obligations that are spread out over time to accommodate the needs of the JV company, which will correspond to expected outlays in the business plan (and will be an important exhibit to the JV agreement), typically the parties do not agree to have any sort of open-ended financing obligation beyond what is specifically agree to in the JV agreement.
• Whether and under what circumstances external financing of the JV vehicle will be sought and whether the JV parties will provide shareholder loans or guarantees to the JV vehicle.
• Contribution of assets and/or know-how by the JV parties to the JV vehicle. Examples would include the contribution of real property and machinery.       
• Corporate governance.
• Term of the JV – often, a period of between ten and 20 years is chosen.
• Termination possibilities, typically reduced to a listing of material breach situations, sometimes tied to specific obligations under the JV agreement and sometimes including termination possibilities where the JV vehicle is in a prolonged loss-making status.
• Put and/or call options, if any.
• Exit right to sell the shares in the JV vehicle to a third party after the expiry of a defined lock-in period, which will often be between five and ten years.
• Deadlock provisions, if any.
• Ancillary agreements such as service agreements to be entered into with a JV party.

For the typical set-up of a JV in Austria – ie, the formation of a JV vehicle as a limited liability company – a distinction needs to be made between the reaching of a decision among the managing directors and which decisions of the managing directors need to obtain approval from the shareholders (the JV parties).

In a typical 50/50 JV, there will be two or four managing directors, with each of the JV parties appointing the same number of managing directors. In the by-laws for the managing directors, it is thus important to indicate which managing directors have which areas of primary responsibility. Even if a managing director does not have primary responsibility for an area, this does not absolve such managing director from their obligation to maintain general oversight over such other area. It is also important to define whether the managing directors are empowered to bind the JV vehicle towards third parties through their sole signature or only with one of more of the other managing directors or appointed holders of statutory authority. Those appointed as holders of statutory authority (Prokuristen) are a step below the managing directors in the general hierarchy of authority in a limited liability company.

Of equal importance is the question of which decisions of the managing directors require the approval of the JV parties as shareholders of the JV vehicle. A good starting point are the respective catalogues of reserved matters that each of the JV parties has in their own company group. Generally, shareholders in Austrian JVs want to maintain a significant amount of control over decision-making such that the catalogue can easily cover 25 or more individual reserved matters, some of which will be keyed towards monetary thresholds that need to be exceeded to require approval from the shareholders.

In considering the corporate governance set-up of an Austrian limited liability company JV vehicle, it is also important to assess whether the JV vehicle now – or in the future – will trigger an obligation to install a supervisory board (Aufsichtsrat). It is mandatory to install a supervisory board if one or more of the following elements is met:

• the stated share capital of the JV vehicle exceeds EUR70,000 and the number of shareholders exceeds 50;
• the number of employees of the JV vehicle average exceeds 300;
• the JV vehicle centrally manages or, by means of a direct interest exceeding 50%, controls private or public limited companies, and the total combined number of employees of the controlling and controlled companies on average exceeds 300;
• the JV vehicle is a general partner (Komplementär) in a private limited liability partnership (Kommanditgesellschaft) and the total combined number of employees of the company and the private limited liability partnership in average exceeds 300;
• employee representatives have the statutory right to nominate, appoint, recommend or reject members of the supervisory board pursuant to Part VIII of the Austrian Labour Relations Act as a result of a cross-border merger; or
• the company is a company of public interest.

The articles of association may provide for an optional supervisory board, but this is typically not done as there is a risk that this could be regarded as triggering the right of the JV vehicle’s works council (if one has been established) to send one third of the representatives to the supervisory board. If an additional board is set up, it will usually be an advisory board that will make recommendations to the JV shareholders.

The JV vehicle is typically funded through a mixture of debt and equity. On the equity side, a distinction also needs to be made between contributions that go into the free reserves of the JV vehicle and can therefore be repaid to the JV shareholder, and contributions that cannot be repaid. Shareholder loans and shareholder guarantees (in the case of bank financing) are commonly used instruments in Austrian JV set-ups.

It is possible to foresee in the JV agreement that if in the future one of the JV parties defaults on its payment obligation and the other JV party provides the corresponding equity injection, the total share interest percentage of the defaulting JV party is to be diluted accordingly. Best practice is to include such an adjustment clause, but it is fairly common in Austrian JV transactions for there to be no such provision foreseeing default and dilution.

There is no general standard practice on how JV partners deal with deadlocks. In many JVs, the parties simply leave the issue open, which can be viewed as a certain incentive for the parties to come to an agreement. Leaving the issue open until later, however, is generally not recommended. One of the significant roles that a lawyer can play in drafting and negotiating the JV agreement is to go through worst-case scenarios with their client, on the understanding that many JVs fail in the end. One reason for failure can be a deadlock situation, so the JV agreement should contain provisions dealing with deadlocks.

An initial issue concerns what should be defined as a deadlock in the first place. Ideally, there will be a catalogue of issues such as a failure to agree to a budget for the following business year, the making of new investments not foreseen in an approved budget, and strategically significant issues such as entering new markets.

While it is possible to give the JV partners an alternating casting vote for different time periods, this mechanism typically does not work well and is also subject to abuse. In 50/50 JVs, where equality of decision-making power is a key tenet, it is also impractical to foresee one of the JV parties being allowed to decide alone or with respect to certain decision areas.

Better practice is to escalate the dispute upwards in the hierarchy of the JV partners. This will often have a significant positive influence on the JV partners in reaching an agreement to avoid, for example, the need for the group CEO on each side attempting to reach an amicable resolution.

If, after such escalation mechanism, there is still no agreement of the JV partners, it is also possible to foresee in the JV agreement – at least for some issues – that an independent third party reaches a decision which is final and binding on the parties within an expedited timeframe. This has the timing advantage of not having to go to arbitration to resolve the dispute where there is an allegation by one of the JV partners that the voting conduct of a JV party is in breach of the JV agreement.

However, in many cases (such as with respect to significant strategic decisions), there will be no breach situation involved, and the conflict will ultimately need to be resolved by other means. One option – which, however, is often a lose-lose situation financially for both JV partners – is for the JV agreement to provide for liquidation of the JV vehicle.

Another alternative is for the JV agreement to contain put and call options that can be exercised by one or both JV partners, or to foresee the conducting of an auction process between the JV partners. There are many different options to structure such provisions, including Russian roulette and Texas shoot-out.

In drafting such provisions, it is important to keep in mind that such provisions allowing for the transfer of shares are subject to the requirement of being entered into in the form of a notarial deed. Failure to comply with the notarial deed requirement renders the respective provisions null and void.

Often, one of the JV parties will provide significant know-how to the JV vehicle for it to be in a position to operate. It is standard practice for the know-how grantor to not transfer original rights in the IP, but rather to enter into a licensing agreement for use of the IP rights by the JV vehicle. From the perspective of the know-how grantor, significant quality standards should be set out in the licensing agreement, so that if these are not met there is a termination possibility by the know-how grantor. For example, in a JV for the production of tractors where the JV vehicle is relying upon the know-how granted by one of the JV partners, the licensing agreement should foresee that failure to meet quality standards in a significant defined respect entitles the know-how-granting JV partner to terminate the licensing agreement (which can also lead to a termination right of the entire JV under the JV agreement).

Critical for every JV is for the JV partners to agree upon a well-thought-out business plan, which will typically be an exhibit to the JV agreement. The business plan will also often set out the timing parameters on when funds will be required by the JV vehicle, and is often a key basis for producing the annual budgets. Many JVs also – in addition to the annual budgetary approval process – update the business plan for a multiple-year time period.

Other ancillary documents such as service agreements between the JV vehicle and a JV partner may also be agreed upon.

As noted above, all constituent documents for the JV vehicle will usually also be set out in an exhibit to the JVA.

See 6.2 Decision-Making on the different levels of corporate governance and possibilities. In the typical JV vehicle for a 50/50 JV – an Austrian limited liability company – each of the JV partners will have the right to nominate and appoint an equal number of managing directors, or just one.

Weighted voting rights are not used or recognised in Austria for limited liability companies.

Managing directors of Austrian limited liability companies owe a plethora of duties to the JV vehicle. Among other core obligations, managing directors are obliged to act in the best interest of the company with the diligence of a prudent businessman regardless of the level of skill and experience that the individual director may specifically have. This is the core duty of care obligation of managing directors.

Managing directors are also obliged to act in accordance with shareholder instructions and otherwise to generally prevent the company from suffering damage. Managing directors are of course also subject to a strict confidentiality obligation.

There are also multiple duties arising out of legal provisions, compliance with which must be ensured. Examples include:

• proper preparation of financial statements;
• the convening of general meetings of shareholders on an annual basis, and where one-half or more of the share capital is lost convening a general meeting immediately;
• compliance with tax laws and other public laws;
• compliance with the JV vehicle’s articles of association and by-laws for the managing directors; and
• compliance with capital maintenance principles.

In particular, the last category of compliance with capital maintenance principles presents difficult issues in practice for managing directors. Except for the payment of dividends properly decided upon, any transaction made with or any benefit provided to the JV partners that does not satisfy the arm’s length principle is generally null and void. Austria is one of the strictest jurisdictions regarding upholding capital maintenance principles.

Of great practical significance for managing directors is the business judgement rule, which has been incorporated into Section 25 (1a) of the Limited Liability Company Act (and in Section 82 (1a) of the Stock Corporation Act).

As in other jurisdictions, the business judgement rule creates a safe harbour and exempts managing directors from liability towards the JV vehicle for damages caused by their business decisions that are within their decision-making authority and where there is sufficient evidence that the relevant business decisions were made in good faith. Actions of the managing directors falling within the parameters of the business judgement rule are thus not considered to be a breach of the management’s due diligence obligation, even if the particular decision turns out to be negative for the JV vehicle.

Grossly erroneous decisions by managing directors and the making of so-called legal decisions (such as decisions violating law) are not privileged under the safe harbour of the business judgement rule.

Business decisions that violate the principles set out in the business judgement rule may also, under certain conditions, lead to a managing director being held liable for breach of trust under Section 153 of the Austrian Criminal Code (ACC).

The business judgement rule does not focus the assessment on the content of the business decision taken, but rather on the essential prerequisites that were considered in reaching the decision. If the preparation of the decision by the managing directors complies with the procedural requirements of the business judgement rule, the decision itself is largely immune from substantive review by the courts.

A general prerequisite for the application of the business judgement rule is that the managing directors do not act contrary to the law, the articles of association or other board resolutions.

A business decision within the meaning of the business judgement rule must meet all of the following criteria at the time the decision is made (from an ex ante perspective).

• The subject matter of the decision is a business matter that leaves open various entrepreneurial options for action (entrepreneurial decision). This means that there must be a possibility of making a decision involving a discretionary element. If, for example, certain conduct of the managing directors is prescribed by law, this is not an entrepreneurial decision because there are no alternative courses of action – the required conduct must be fulfilled.
• The decision is based on adequate information. In general, the more important the decision is for the existence and success of the JV vehicle, the broader and more consolidated the information base must be. This can also lead to the managing directors having to seek expert advice from attorney and auditors on complex issues.
• The subject matter of the managing director’s decision may not be based on extraneous interests (ie, personal interests of the managing director, interests of third parties, mere group interests); this must be confirmed and considered from the perspective of the JV vehicle and the general advantages for the JV partners or other affiliates of the JV vehicle cannot be taken into account.
• The decision is in the best interest of the company on the basis of the information available from an ex ante perspective (acting in the best interest of the company).

For riskier business decisions, it is generally prudent for the managing directors to also set out in writing their rationale for reaching the decision and, specifically, how they have fulfilled the requirements of the business judgement rule.

While the managing directors can of course delegate responsibility for specific areas within the JV vehicle company structure to others, this does not detract from the general responsibility of the managing directors as outlined above.

Managing directors are obliged to disclose conflicts of interest and are required to refrain from taking action to the detriment of the JV vehicle. It is permissible for a managing director of a JV partner to also be a managing director of the JV vehicle, but such managing director will need to ensure that in acting on behalf of the JV vehicle they act in the interest of the JV vehicle.

Where there is a conflict for any such managing director to take action on at the level of the JV vehicle in Austria, such managing director should refrain from participating in the decision-making on such matter.

In every JV, there is a risk for the JV partner providing significant intellectual property (IP) for the implementation of the JV that such IP will be misused. It is key for any such JV partner to ensure that they retain the ownership of all their background IP. The JV partners will then need to contractually delineate as to what extent the JV vehicle obtains any original IP rights if the JV vehicle further develops the background IP of a JV partner.

Typically, the JV partner transferring IP rights to the JV vehicle will do so only via a licensing agreement, and thus will not transfer any original rights to the IP. Trade marks, logos and general use of know-how are often also set out in detail in the JV agreement.

From the perspective of the JV vehicle, it would be ideal for it to obtain original rights in the IP of the JV partner. This is not market practice; rather, the typical transfer mechanism is a contractual right of use on the part of the JV vehicle.

The consideration of ESG factors in business transactions is usually a key factor for many Austrian companies, and JVs are no exception. In particular in brownfield JVs, where, for example, a party acquires 50% of an existing limited liability company, increasing focus is being placed on whether the target of the JV is ESG-compliant. Surveys show ESG issues rank among the top five legal issues in corporate transactions, along with regulatory issues, data protection and cybersecurity, and even ahead of the issue of litigation. Early attention should also be paid to whether the target’s ESG compliance programme is compatible with the acquiring party’s ESG compliance structure.

ESG due diligence is of course cross-disciplinary and touches on familiar and new due diligence aspects. Targets are scrutinised not only with regard to environmental aspects but also, in particular, with regard to social factors and corporate management and organisation (governance). The aim is to identify existing and, above all, possible future reputational and liability risks and – if quantifiable – the associated costs. This presents a significant challenge given that the framework for ESG compliance is rapidly developing and often requires a predominantly forward-looking analysis.

The possible topics of ESG due diligence are wide-ranging. They range from:

• E = environment, such as the question of the use of renewable energy sources and the prevention of environmental pollution in the area of the entire value chain (for example, what legal options exist to replace an existing supplier of operating resources in order to improve the carbon footprint and what costs are associated with this);
• S = social compliance with diversity and discrimination prohibitions, recognised human rights principles, and general employee concerns; to
• G = governance transparency, reporting, sustainable corporate governance and bonus systems geared towards this, existence of whistle-blowing systems, and much more.

In Austria, there are several regulations in place with respect to the disclosure of ESG criteria. In particular, the relevant disclosure regulations are mainly contained in the substantive ESG-related EU regulations and directives applicable in Austria due to the implementation of the EU’s ESG legislation. Some of the core provisions are outlined below.

Transparency on Non-financial Matters

Pursuant to Section 243b and Section 267a of the Austrian Commercial Code, Austrian corporations must add a non-financial report to their annual management report, if the following three requirements are met cumulatively.

• The company must qualify as a “large corporation” within the meaning of Section 221 of the Commercial Code – ie, at least two of the following characteristics have to be met:
1. balance sheet total of more than EUR20 million;
2. turnover of more than EUR40 million within the last 12 months before the balance sheet date; or
3. annual average of more than 250 employees.
• Corporations with public interest within the meaning of Section 189a paragraph 1 of the Commercial Code, including insurance companies, banks and capital market-oriented companies.
• Corporations with more than 500 employees on an annual average basis.

Companies also have the option of preparing a so-called non-financial report in addition to the annual management report, which must at least comply with the requirements of Section 243b paragraphs 2 to 5.

Consolidated subsidiaries are exempt from submitting a non-financial report pursuant to Section 243b paragraph 7 UGB, if they and their subsidiaries are included in the group management report or separate consolidated non-financial report of another (also foreign) EU/EEA company that complies with the requirements for submitting a non-financial report.

According to the Non-Financial Reporting Directive (NFRD), the affected corporations have to publish information related to:

• environmental matters;
• social matters and treatment of employees;
• respect for human rights;
• anti-corruption and bribery; and
• diversity on company boards (in terms of age, gender, and educational and professional background).

Alongside the NFDR, and pursuant to Section 243b of the Commercial Code, environmental, social, human rights and anti-corruption impacts must be disclosed in the non-financial report. The term “non-financial reporting” means that the information must be assigned to the area of sustainability, but not that it has no financial significance. Corporations are required to disclose their “business model”, “concepts”, “due diligence processes” and the “material risks” of the company’s activities for society as a whole and the environment, including how the corporation deals with these risks.

A deliberately inaccurate or incomplete presentation of non-financial information may constitute a criminal offence under Section 163a paragraph 1 litera 1 of the Austrian Criminal Code.

Amendment of the EU Corporate Sustainability Reporting Directive (CSRD)

The CSRD replaces the previous CSR Directive (Directive 2014/95/EU) which the EU member states must transpose into national law by July 2024 at the latest, and which amends the current NFRD. Companies must apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

The scope of the directive is considerably extended and applies to more European and non-European companies listed and operating in the EU-regulated markets. Non-European companies with substantial activity in the EU market (net turnover of more than EUR150 million in the EU at consolidated level) and which have at least one subsidiary (large or listed) or branch (net turnover of more than EUR40 million) in the EU are required to draft a sustainability report at the consolidated level of the ultimate third-country undertaking.

The CSRD follows a “double materiality perspective”. This means that companies must record the effect of sustainability aspects on the economic situation of the company. Additionally, they must clarify the impact of operations on sustainability aspects. The CSRD requires that the reporting include information on:

• sustainability goals;
• the role of the management board and supervisory board;
• the company’s most significant adverse impacts; and
• intangible resources not yet recognised in the balance sheet.

The CSRD provides the specifications, while the European Sustainability Reporting Standards (ESRS) define the content.

Please see 6.4 Deadlocks, discussing deadlocks and termination issues.

Additionally, JV partners typically also outline a catalogue of termination reasons in their JV agreement. Possible termination triggers include the following:

• fault-based triggers such as breach of obligations under the JV agreement or ancillary agreement (eg, violation of the IP licensing agreement, breach of confidentiality generally or failure to meet a funding obligation);
• loss-making or unexpectedly poor performance of the JV vehicle, often with specific monetary values; and
• change of control of a JV partner.

Cure periods are often also set out for those termination triggers relating to breach situations capable of being cured before the non-breaching JV partner has the ability to exercise a termination right.

It is equally important to not only outline the termination triggers, but to also provide in detail what the consequences of termination are. In equity JVs, it is also significant that a mere termination of the JV agreement does not automatically lead to a “termination” of the JV vehicle. As a separate legal entity, the JV partners need to consider whether one or both of the JV partners should have the right to force a transfer of shares in the JV vehicle or whether the consequence of termination should be liquidation of the JV vehicle. In Austria, liquidation of the JV vehicle is generally regarded as a last-gasp measure where none of the JV partners exercises their right to force a transfer of shares.

Once assets are contributed to a JV, these assets will generally remain the property of the JV vehicle. Any transactions regarding such assets after the formation of the JV vehicle between the JV vehicle and a JV partner will need to meet the arm’s length principle, which is the foundation of the strict Austrian capital maintenance rules.

In addition, the managing directors of the JV vehicle will need to have an independent basis for deciding why any such transfer of assets from the JV vehicle to a JV partner is beneficial from the perspective of the JV vehicle. These same restrictions also apply to assets originating from the JV vehicle itself.