Joint Ventures 2023 Comparisons

The last 12 months have seen the global economy facing challenges such as the war in Ukraine, economic slowdown, rising interest rates and concerns about recessions. These factors are affecting various industries – particularly the commercial deal-making sector, which includes joint ventures (JVs). So far, the market has shown mixed signals in the sector – there has been an evident slowdown for mergers and acquisitions (M&A) but the situation for JVs has been more complex, with a reduction in the number of deals (though activity is not at a complete halt).

New Zealand’s election year adds further caution regarding investments and business decisions due to potential policy changes. Overall, the economic and political environment is intricate, marked by present and anticipated slowdowns. The authors have seen a trend of deals being delayed, and a greater focus on thorough research is becoming standard practice, as companies carefully assess their options before entering into JVs.

Despite the cautious atmosphere, JVs are still being pursued, driven in part by available private capital. However, investors are being patient for the right opportunities. The challenging macroeconomic environment has compelled businesses to be more deliberate and considerate in their decisions.

Certain industries have fared noticeably better than others during recent times. There has been a rise in trade buyer activity, and with the economic slowdown this could lead to trade buyers becoming more competitive bidders due to higher finance costs and limited debt availability. Potential fluctuations in the market that may be expected include a rise in distressed deals due to the macroeconomic changes, with higher interest rates and the overall economic/political uncertainty. 

Similarly, sectors such as retail, hospitality and food manufacturing are expected to be more negatively affected by inflation and cost challenges relative to other sectors, likely making them less attractive for potential investors and resulting in less commercial deal making activity in this space.

The typical types of JVs used in New Zealand’s jurisdiction are:

• incorporated JVs in the form of limited liability companies;
• limited partnership JVs; and
• unincorporated JVs (usually traditional partnerships).

Incorporated JVs – Limited Liability Companies

Incorporated JVs typically take the form of a limited liability company (JVCo) incorporated under the Companies Act 1993 (the “Companies Act”). In a JVCo, the JV parties are shareholders, appoint directors, and typically enter into a JV or shareholders’ agreement which governs the operations and decision-making of the JVCo. 

A JVCo has the benefit of a separate legal personality from its shareholders and board of directors. Shareholders of a JVCo receive dividends, and imputation credits can be utilised to mitigate double taxation. Subject to the JVCo’s constitution, directors can act in the best interests of their appointing shareholder/JV participant.

A notable benefit of a JVCo is limited liability, safeguarding shareholders and directors from the JVCo’s debts and obligations. However, when contracting, shareholders or directors may be required to provide personal or parent company guarantees in support of the JVCo’s obligations, diminishing the extent of the limited liability protection. A JVCo also permits flexible funding options through share capital or debt, but careful consideration should be given to existing financial arrangements, group accounting and management protocols.

Limited Partnership JVs

A limited partnership (LP) is a form of partnership involving general partners, who are liable for all the debts and liabilities of the partnership, and limited partners, who are liable to the extent of their capital contribution to the partnership, provided they have not been involved in the management of the LP. 

An LP has the benefit of a separate legal personality from its partners (similar to an incorporated entity such as a limited liability company), while enjoying the tax benefits typically enjoyed by an unincorporated JV, such as a traditional partnership, with income and losses flowing directly to the limited partners based on their personal tax status. 

As mentioned above, general partners typically have unlimited liability for the debts and liabilities of the LP; however, this unlimited liability can often be limited by utilising a limited liability entity as the general partner. Limited partners have limited liability on the basis they don’t participate in the LP’s management, although there are various “safe harbour” activities that the limited partners may involve themselves in without being considered to be involved in the management. If limited partners involve themselves in the management of the LP outside these safe harbour activities, they lose the protection of limited liability and will be treated similar to a general partner.

Other benefits to an LP structure include that it offers more privacy to limited partners compared to a limited liability company (as limited partners are not required to be publicly disclosed) and there is more flexibility in profit allocation compared to in a company. The drawbacks are that LPs can be more complicated in set up, as under the Limited Partnership Act 2008, all LPs are required to have entered into a limited partnership agreement, which governs the operations of the LP. 

Unincorporated JVs

In an unincorporated JV, each participant contributes through their existing structures to achieving a common objective. An unincorporated JV is not a separate legal entity, and typically the participants have an agreement outlining their rights and obligations, with profits and losses flowing through to each JV party.

Specifically, a careful assessment and a well-crafted JV agreement is necessary to address the concern that an unincorporated JV may be considered a partnership under the Partnership Law Act 2019, impacting on profit, loss and liability sharing. Partners in a partnership have unlimited joint liability for debts and owe fiduciary duties to each other. Aside from this, the tax treatment of an unincorporated JV partnership is similar to an LP.

In an unincorporated JV that is not a partnership, the JV parties maintain separate businesses but share costs until the production or output stage. They can agree to allocate profits and losses differently, and each party retains ownership of its property. Liability may still be unlimited for each party, although this may be circumvented through the use of limited liability entities as the JV parties.

An unincorporated JV appeals to investors seeking maximum tax deductions as it is not subject to loss limitation rules, allowing full deductions for tax losses. This structure could also be attractive for those who have concerns around the dividend payment capabilities of an incorporated limited liability company. 

The choice of appropriate JV vehicle depends on several factors and considerations. The primary drivers for selecting a specific JV vehicle include the following.

• Liability protection – the level of liability protection desired by the JV parties. If the parties want to limit their personal liability and separate it from the JV’s obligations, they may opt for vehicles with limited liability features, such as an LP or JVCo. On the other hand, if the parties are comfortable with assuming joint and several liability, they may choose an unincorporated structure such as an unincorporated JV or partnership.
• Control and governance – the desired level of control and governance arrangements. Some vehicles, such as a JVCo and unincorporated JV, offer flexibility in governance and decision-making, allowing the JV parties to retain more control. In contrast, an LP places control with the general partner, and limits the ability of the limited partners to participate in the management of the LP.
• Tax considerations – tax implications play a crucial role as different vehicles have varying tax treatments and consequences. For instance, LPs and unincorporated JVs are often treated as transparent for tax purposes, allowing profits and losses to flow through to the JV parties individually; whereas, because JVCos have separate legal personality, profits and losses are taxed at the entity level before these amounts can flow through to the shareholders (although there is the ability to attach imputation credits to dividends to mitigate the impact of double taxation).
• Flexibility and exit strategy – the need for flexibility in ownership structure, share transfers and exit strategies can influence the selection of a JV vehicle. Vehicles such as JVCos often provide easier transferability of shares and a clear framework for exiting the venture. Unincorporated JVs or LPs may require more complex arrangements for ownership changes and exit strategies.

Ultimately, the choice of appropriate JV vehicle depends on a careful evaluation of these factors, along with the specific objectives, preferences and the circumstances of the JV parties.

The primary regulator (and relevant legislation) governing JVs is the Registrar of Companies, holding office under the Companies Act (typically referred to as the New Zealand Companies Office). The Companies Office is responsible for maintaining and administering companies incorporated under the Companies Act, and limited partnerships established under the Limited Partnerships Act 2008. New Zealand companies and limited partnerships are able to manage and update relevant information in relation to their entities, including updated changes in shareholdings and directors. 

The main legislation in New Zealand that governs anti-money laundering (AML) obligations is the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the “AML/CFT Act”). The AML/CFT Act places obligations on New Zealand’s financial institutions, casinos, virtual assets service providers, accountants, lawyers, conveyancers and high-value dealers to detect and deter money laundering and terrorism financing.

While there are various sanctions laws in New Zealand that may affect or restrict JVs, there are no specific restrictions targeted towards JVs. The following sanctions laws could affect co-operation with JV partners in New Zealand.

• The Russia Sanctions Act 2022 has established a framework for New Zealand to impose and enforce sanctions in response to military actions by Russia (and by countries or persons who may be assisting Russia).
• As a UN member state, New Zealand is bound by the UNSC’s decisions. New Zealand implements sanctions imposed by the UNSC in regulations made under the United Nations Act 1946 against several countries, including but not limited to North Korea, Mali and Iran.
• Under the Overseas Investment Act 2005, the “national interest test” is a “backstop” tool used to manage significant risks associated with transactions that ordinarily require screening under the Act. This test is not focused on the structure of the JV, but rather on the relevant industries in which a JV may be operating. This test is only used rarely and only where necessary to protect New Zealand’s core national interests. If a transaction is determined to be contrary to New Zealand’s national interest, consent may be declined or conditions imposed by the regulator to mitigate any risks.

Similarly, the regulations and legislation above can apply to the formation of a JV in New Zealand.

The Commerce Act governs competition and antitrust law in New Zealand. JVs involving any acquisition of assets of a business, or of shares, will be caught by the Commerce Act’s merger control provisions if that acquisition substantially lessens competition in a market. The legislation also prohibits collective restrictive trade practices that involve:

• entering into a contract, arrangement or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in the market; or
• entering into, or giving effect to, a contract, arrangement or understanding containing a cartel provision (being a provision relating to price fixing, restricting output or market allocating).

However, the Commerce Act does contain a collaborative activity exception which replaced the former JV exception. The exception applies to a cartel provision in an agreement if the parties to the agreement are involved in a collaborative activity (a co-operative enterprise, venture or other activity, in trade that is not carried on for the dominant purpose of lessening competition) and the cartel provision is reasonably necessary for the purpose of the collaborative activity. 

There are no specific rules in New Zealand concerning listed party participants in JVs.

Certain “ultimate beneficial ownership” (UBO) disclosures apply to companies incorporated under the Companies Act. All companies are required to disclose whether they have an “ultimate holding company” (UHC), being a body corporate that, usually by having a majority shareholding, has control of the company. A UHC is not a subsidiary of another body corporate.

It is considered in the public’s interest to know who has a controlling interest in a company’s board, management and policies. 

To the extent a JV party holds a majority shareholding and has control over the JVCo, UBO information may need to be disclosed with respect to that JV party. 

There have not been any significant court decisions or legal developments in New Zealand within the past three years relating specifically to JVs or business collaboration.

When JV parties are first considering entering into JV arrangements with one another, during the negotiation stage, the following documents may be utilised:

• a confidentiality agreement or NDA containing information-sharing protocols, if appropriate; and
• a letter of intent, memorandum of understanding or heads of terms (either binding or non-binding depending on the circumstances) establishing points of principle with respect to the proposed arrangements.

Generally, the discussions between prospective JV parties will be confidential and there are no regulatory requirements for disclosing discussions on JVs.

The steps required to set up a JV vehicle ultimately depend on the type of JV vehicle being established; regardless of this type, a JV agreement of some form will be entered into by the parties to the JV.

LP

To establish an LP, an LP agreement first needs to be entered into between the limited partners, the general partner and the LP, following which the LP can be registered online via the LP register. There is an application fee payable on registration. While an LP cannot be registered unless the relevant parties have entered into a partnership agreement, there is no requirement for the partnership agreement to be disclosed on the LP register.

Unincorporated JV

When establishing an unincorporated JV, there is no need to establish any specific JV entities. Instead, the parties will look to enter into a JV agreement that sets out what each party is contributing and that governs the arrangements and decision-making of the parties.

JVCo

To establish a JVCo, a new company would be incorporated under the Companies Act and registered online via the New Zealand Companies Office register. The JV parties will be recorded as the shareholders of the company, and relevant individuals appointed as directors of the JVCo. The shareholders and directors are required to sign consent forms, agreeing to becoming shareholders/directors of the JVCo.

In addition, details of the shareholders and directors are publicly disclosed on the Companies Office register. There is an application fee payable on incorporation. While it is not mandatory to adopt a constitution on incorporation, given the parties will be entering into a shareholders’ agreement/JV agreement that sets out the agreed arrangements between the JV partners as shareholders, it would be appropriate to adopt a form of constitution for the JVCo that aligns with the provisions of the shareholders’ agreement/JV agreement.

If the JVCo adopts a constitution, this document is uploaded and is made publicly available on the Companies Officer register. However, there is no such requirement to publicly disclose the shareholders’ agreement/JV agreement.

Irrespective of the different forms of JV vehicle, the main terms governing the JV should be contained in the JV agreement. The main terms for a corporate JV agreement should cover:

• the purpose of the JV;
• the contributions of each party (funding and assets);
• what services are being provided by each JV participant;
• the management structure of the JV;
• personnel and property;
• the sharing of profits and losses;
• the disposal of interests;
• deadlock procedure; 
• financial record-keeping;
• restraint on competition;
• event-of-default provisions;
• the duration of the JV; and 
• termination provisions.

An LP agreement tends to be more complex in certain areas and, in addition to the above, contains the following core terms:

• the governance of the GP and the limited partners;
• transfer of partnership interests;
• indemnity of general partners; and
• the procedure following termination.

Similarly to other corporate agreements, the terms will be subject to negotiation between the parties. 

Decision-making in a JV is typically established through an agreed-upon governance structure and outlined in the JV agreement, shareholders’ agreement or limited partnership agreement.

The specific framework for decision-making can vary depending on the nature of the JV, the negotiation and power dynamics between the parties, and the preferences of the JV parties involved. 

It is important for the JV agreement to clearly define the decision-making process, including:

• the types of decisions requiring unanimous consent;
• those decisions subject to majority voting;
• the composition and authority of any governing bodies; and
• the roles and responsibilities of designated decision-makers.

The agreement should also address dispute resolution mechanisms for handling disagreements that may arise during the decision-making process.

Ultimately, the specific decision-making structure within a JV depends on the goals, preferences and negotiated terms between the parties involved. It is thus crucial that the JV agreement is drafted accordingly to accurately reflect the arrangement. 

The funding of a JV can vary depending on the specific agreement between the parties involved. It is common for JVs to be funded through a combination of debt and equity, but the exact mix and proportions may be determined by various factors, including the financial resources of the JV parties and the nature of the venture.

One of the key considerations in determining the JV structure is the flexibility in changing ownership control and tax considerations. For example, with a JVCo, which inherently provides more flexibility in ownership control, there might be more incentive for the parties to opt for equity funding. Alternatively, in an LP there are tax limitations for adding or selling LP shares, and the parties may prefer to fund the venture through debt as a result.

The JV agreement may specify whether the parties have obligations to provide future funding to the JV entity. This can include commitments to contribute additional capital as the venture progresses or as specified milestones are achieved. Such obligations are typically outlined in the agreement and are subject to negotiation between the parties.

If a participant wishes to provide additional equity funding to the JV entity, resulting in changes in ownership, this would typically be addressed through an amendment to the JV agreement or through a separate agreement. The details of the equity funding, including the amount, terms and resulting ownership percentages, would need to be negotiated and agreed upon by all relevant parties.

The amendment or separate agreement would outline the process for the new equity funding, including any required approvals, the valuation of the JV entity and the adjustment of ownership percentages. It may also address any potential dilution of ownership for existing participants and mechanisms to ensure fairness and to protect the rights of all JV parties.

It is crucial to have clear provisions in the JV agreement regarding future equity funding, ownership changes and related matters to ensure transparency, to protect the interests of the parties and to avoid potential disputes.

Deadlocks between the board and the JV partners in a JV are typically addressed through mechanisms outlined in the JV agreement or shareholders' agreement. These mechanisms aim to facilitate decision-making and resolve disputes when the parties are unable to reach a consensus.  The usual option taken when deadlocks occur is for the status quo to remain, whereby the parties shall continue on the basis that the resolution which gave rise to the issue has not been passed.  If a party is insistent on not keeping the status quo than some common approaches to dealing with deadlocks are:

• A mediation or dispute resolution process which could involve engaging a neutral third party, such as a mediator or arbitrator, to help facilitate discussions and find a mutually acceptable solution. Mediation aims to assist the parties in reaching a resolution through negotiation and compromise.
• The appointment of an independent expert or an advisory panel. This expert or panel can be consulted to provide an unbiased assessment of the situation and offer recommendations for resolving the deadlock. Their insights can help the parties make an informed decision and move forward.
• The use of tag-along or drag-along rights, which allow one party to "tag along" or "drag along" another party's decision. Tag-along rights enable a minority party to sell its shares along with a majority party in the event of a sale, while drag-along rights enable a majority party to compel a minority party to sell its shares.
• In extreme cases, if a deadlock persists and resolution seems unlikely, the JV agreement may include provisions for termination or buyout. This can involve the dissolution of the JV or the sale of one party's shares to the other party or a third party. Termination or buyout provisions provide an exit strategy when deadlocks cannot be resolved, allowing the parties to move on independently.

It is crucial to have clear deadlock resolution mechanisms in the JV agreement to ensure that deadlocks do not impede the progress and success of the venture.

In addition to the JV agreement or shareholders’ agreement, various other documents may be required depending on the specific nature of the JV and the activities involved. Some common documents include the following.

• Intellectual property (IP) licence agreements that set out the terms under which the JV can utilise certain IP assets held by either JV party.
• Asset-transfer agreements in the event that either JV party is required to transfer specific assets to the JV entity. These agreements outline the details of the asset transfer, including the scope of the assets, transfer terms, warranties and any conditions or considerations associated with the transfer.
• NDAs or (alternatively) confidentiality terms tend to be incorporated into the JV agreement or shareholders’ agreement and used to protect sensitive information shared between the JV parties. These terms establish the obligations and restrictions related to the use, disclosure and protection of confidential information exchanged during or prior to the JV.
• Employment or secondment agreements for when employees or personnel are seconded or employed by the JV entity. These agreements define the terms of employment, including roles, responsibilities, compensation, benefits and termination provisions.

In the case of a JVCo, the structure of the board of directors will vary depending on the agreement between the participants. This includes an LP where the general partnership is formed by the limited partners as an incorporated entity – ie, the limited partners each hold shares in the general partnership. 

Typical structures include proportional representation whereby the board reflects the respective ownership stake of each of the parties. In some cases, there may be equal representation regardless of participants’ ownership interest where there is a high degree of trust between the parties.

In New Zealand, weighted voting rights are used to ensure board control with JV or shareholders’ agreements containing a proportionate voting clause, ensuring that the member(s) appointed by each participant and present at a meeting of the board have such number of votes as is proportionate to the interest of the participant which appointed them.

The authors also note that it is not unusual for the general partner of an LP to be a special purpose company incorporated by the JV parties for the purpose of acting as general partner. In this case, the general partner company is another JV between the parties, with the board structure being set up in a manner that allows the JV parties to exercise control over the LP, without breaching any of the “safe harbour” activities that would result in the limited partners losing their limited liability.

In New Zealand, director’s duties are governed by a complex combination of general law and statutory rules, including Sections 131 to 138 of the Companies Act. The primary duty of a director in New Zealand is to act in good faith and in the best interests of the company. There are also obligations regarding exercising powers for a proper purpose, and not engaging in reckless trading. 

In regard to how these duties are weighed against a competing duty that a director may have to the JV participant that installed them, under the Companies Act a director of a company that is carrying out a JV between the shareholders may, when exercising powers or performing duties as a director in connection with the carrying out of the JV, and if expressly permitted to do so by the constitution of the JVCo, act in a manner which they believe is in the best interests of the shareholder or JV party that appointed them, even though it may not be in the best interests of the JVCo. However, it is important to note that the constitution of a JVCo has no effect to the extent that it contravenes, or is inconsistent with, the Companies Act.

Subject to any restrictions contained in the constitution of the company, the board of a company may delegate certain of its powers to a committee of directors, a single director or an employee of the company. However, the board remains responsible for the delegate’s exercise of that power as if they had exercised the power themselves, unless they had reasonable grounds to believe that the delegate would fulfil their duties in accordance with the company’s constitution and the Companies Act and they actively monitored the delegate’s exercise of the power using reasonable methods.

The JV agreement or shareholders’ agreement will determine how conflicts of interest are managed. The agreement should expressly state the number of directors each participant may appoint and remove, without restricting who these directors may be.

There should also be a “Best Interests” provision that states whether a director may act in a manner which that director believes to be in the best interests of the participant that appointed that director, even though it may not be in the best interests of company.

Lastly an “Interested Directors” provision would set out whether a director who is interested in the transaction at hand can vote on the matter, and whether they are to be included in the quorum of directors considering the transaction. In general, it is unlikely to be considered inappropriate for a person to take a seat on the JVCo board as a consequence of their position in the JV participant. 

The key IP issues that should be considered when setting up a JVCo include the following.

• Ownership of IP – it is important to determine the ownership of existing IP assets contributed by the JV parties and to clarify how new IP developed during the course of the JV will be owned. This should be addressed in the JV agreement to avoid disputes and ensure proper protection and exploitation of the IP.
• IP licences and transfers – if the JV entity needs to use or transfer IP from the JV parties or third parties, clear licensing or transfer arrangements should be established. These agreements should outline:
1. the scope of the licence or transfer;
2. any limitations or restrictions; and
3. the rights and obligations of the parties involved.
• Protection of confidential information – safeguarding confidential information is crucial in a JV. Implementing robust confidentiality measures, including confidentiality clauses or NDAs, can help protect sensitive information shared between the JV parties during the collaboration.
• Infringement and monitoring – the JV parties should consider establishing procedures for monitoring and addressing IP infringement. This may involve:
1. conducting regular IP audits;
2. monitoring third-party use of the JV’s IP; and
3. taking appropriate legal actions to enforce IP rights when infringements occur.

In contractual collaborations, key IP issues to consider include the following.

• Ownership and use of IP – clear provisions should address the ownership and permitted use of IP in the collaboration. The contract should specify whether the parties retain ownership of their respective IP or whether there is joint ownership or licensing of IP created during the collaboration.
• Confidentiality and non-disclosure – protecting confidential information exchanged during the collaboration is critical. Confidentiality clauses or NDAs should be included to:
1. define the scope of confidential information;
2. specify obligations to maintain confidentiality; and
3. establish the duration of confidentiality obligations.
• IP rights in collaborative output – it is necessary to clarify the ownership and rights in any IP generated as a result of the collaboration. This includes determining whether joint ownership, licensing, or specific assignment of IP rights will apply and how any resulting IP will be used and commercialised.

In the JV agreement, IP issues are typically dealt with through dedicated provisions addressing the following.

• Ownership and licensing – the agreement should clearly state the ownership of pre-existing IP contributed by the JV parties and specify the licensing or transfer of IP to the JV entity. It should also define the scope of use and any limitations or restrictions on IP rights.
• IP development – the agreement should address the creation of new IP during the JV and establish ownership and exploitation rights. This may involve provisions for joint ownership, licensing or assignment of IP rights.
• Confidentiality and non-disclosure – the agreement should include confidentiality clauses to protect confidential information shared within the JV and specify the obligations of the parties to maintain confidentiality.
• IP disputes and enforcement – provisions should be included to address how IP disputes will be resolved, such as through mediation, arbitration or litigation. The agreement may also outline the responsibilities of the parties in monitoring and enforcing IP rights.

Whether IP rights should be licensed or assigned depends on the specific circumstances and objectives of the parties involved. Considerations such as long-term goals, control preferences, revenue-sharing and IP value should guide the decision on which approach is most suitable for the JV. Both licensing and assignment have different implications and considerations.

Licensing IP Rights

Retained ownership

When IP rights are licensed, the IP owner retains ownership of the IP while granting specific rights to another party. This allows the IP owner to maintain control and potentially exploit the IP in other collaborations or business ventures.

Flexibility

Licensing provides flexibility for the IP owner to grant different levels of rights to different parties. They can determine the scope, duration and exclusivity of the licence, allowing for tailored agreements based on specific needs.

Ongoing relationships

Licensing can be beneficial in cases where the IP owner wants to maintain a long-term relationship or collaboration with the licensee. It allows for continued involvement and potential revenue-sharing through royalty payments or licensing fees.

Monitoring and quality control

With a licence, the IP owner can maintain control over the use of the IP and ensure that it is used in a manner consistent with their standards and requirements. Quality control provisions can be included in the licence agreement to safeguard the reputation and integrity of the IP.

Assigning IP Rights

Transferring ownership

Assigning IP rights involves transferring ownership of the IP from one party to another. This means the assignee becomes the new owner of the IP, and the assignor relinquishes all rights and control over the IP.

Clear ownership and control

Assigning IP rights can provide certainty and clarity, particularly when there is a desire for a clean transfer of ownership and control. It eliminates the need for ongoing relationships or potential conflicts related to licensing agreements.

Value and monetisation

Assigning IP rights can be advantageous when the IP owner wishes to receive a one-time payment or consideration in exchange for the transfer. This can be particularly beneficial if the IP has significant market value or if the owner wants to exit a particular business sector.

Limited involvement

Once IP rights are assigned, the assignor typically has no ongoing involvement or control over the IP. This may be advantageous if the assignor wants to focus on other ventures or does not wish to be responsible for the management and enforcement of the IP.

Environmental, social and governance (ESG) factors are becoming increasingly more important in today’s commercial landscape, both globally and domestically in New Zealand. As ESG factors become more prevalent in corporate decision-making and risk management, clients will increasingly rely on legal counsel to:

• navigate intricate regulatory frameworks;
• mitigate potential liabilities; and
• effectively manage the reputational risks associated with ESG issues.

In 2019, a survey conducted by the New Zealand Sustainable Business Council revealed that 87% of New Zealanders considered sustainability to be a prevalent mainstream issue, with 47% expressing their consideration for sustainability when deciding on a brand or product to buy.

Currently, the case of Smith v Fonterra & Ors is a significant climate change proceeding in New Zealand, awaiting a decision from the Supreme Court. The claim is against seven companies, alleging their contribution to climate change on the basis of negligence, nuisance and a proposed new tort imposing a duty not to interfere with the climate system. The courts have so far struck out these claims and the judgment by the Supreme Court on the appeal is currently pending. If the case proceeds, it could set a precedent for similar actions by activists against various enterprises, including government entities. The Supreme Court had also allowed the involvement of additional organisations in the hearing, suggesting a potential for increased climate action litigation and climate change matters becoming increasingly more relevant to commercial enterprises. 

The government has likewise faced claims from climate change activists, where recently two judicial review proceedings were filed against the Climate Change Commission (the “Commission”) and the Minister for Climate Change for not acting lawfully in its advice and approach in meeting New Zealand’s Paris Agreement targets. Though these claims were dismissed, the court did provide an inference in discouraging the Commission from seeking costs against the unsuccessful applicant, noting that climate change is an important issue with challenge and debate potentially resulting in improved outcomes, ultimately bolstering the credibility of the relevant institution. This is likely to encourage other activists in bringing similar claims in the future. 

In October 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act (FSAA) amended the FMCA (inserting Part 7A, the new mandatory climate-related disclosure (CRD) regime), the Public Audit Act 2001 and the Financial Reporting Act 2013, making it a mandatory requirement for specified entities to prepare climate statements. The CRD regime is expected to capture around 200 New Zealand financial institutions and listed companies. It is likely that non-captured entities will also be influenced by this and proceed to evaluate their business strategy with more ESG factors in mind. 

More recently, in 2023, the Companies Act was also amended to provide that, in addition to the duty to act in good faith and in the best interests of the company, and for the avoidance of doubt, in considering the best interests of a company a director may also consider matters other than the maximisation of profit (for example, ESG matters). The clear reference to ESG in a significant requirement under the Companies Act is a reflection of the shift towards sustainability and responsible investing.

With the growing importance of ESG factors, more legal frameworks and guidelines have been introduced to prevent deceptive ESG claims – ie, “greenwashing”. Along with the FCAA, the Commerce Commission released guidelines in 2020 on environmental claims, and it is likely that guidelines relating to broader ESG claims will be introduced in the future. Notably, in 2022 the Advertising Standards Authority (ASA) Complaints Board removed a “going zero carbon” advertisement by a gas company, reasoning that they had a due sense of social responsibility for this socially significant issue and that, without detail of how this target would be met, the advertisement had not met the ASA’s standard.

Based on the above, JV participants or the JV entity should be taking action or implementing measures in connection with ESG. As ESG factors are becoming more relevant, so too are the potential social and legal ramifications. It would be beneficial for those entities to rethink current business practices with ESG more in mind, and to strategise accordingly for the future to reduce risk and improve economic performance. 

The main ESG regulations in New Zealand are:

• the FSAA;
• the Climate Change Response (Zero Carbon) Amendment Act 2019; and
• the guidelines introduced by regulating bodies such as the Commerce Commission and New Zealand’s Stock Exchange. 

JV arrangements in New Zealand can come to an end in several ways – for example, when the JV has completed its purpose it may naturally terminate, or there may be mutual termination of the JV or a set expiry of the JV on a certain date. In each case, specific terms and conditions should be outlined in the JV agreement or shareholders’ agreement, which will dictate how the JV will come to an end. 

The general matters that should be dealt with on termination of the JV are:

• the termination date;
• the method of termination;
• distribution of assets and liabilities; and
• allocation of any remaining profits or losses.

It is important to note that the terms of termination should be agreed upon in advance and included in the JV agreement. This can help avoid disputes and ensure that all parties are aware of their rights and obligations.

In general, in New Zealand there is no difference between assets originally contributed to the JV by a JV participant and assets originating from the JV itself. Participants would hold the assets of the JV as tenants in common in undivided or specified shares based on each party’s individual contribution to the JV, with these shares being the separate assets held by each participant.

There is no standard method of distribution of JV assets, whether via liquidation or redistribution proportionate to contribution – ultimately, this arrangement is governed by contractual agreement.