Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Transfer Of Shares In Joint Venture Companies.

13 January, 2015


Legal News & Analysis – Asia Pacific – Hong Kong – Corporate/M&A 


Finding the right partner for a joint venture and establishing the joint venture business can be a lengthy process. For this reason alone, most participants in a joint venture will want to retain some degree of control over the parties involved. It would, for example, be unfortunate to witness the exit of a key participant or the introduction of an unknown or undesirable third party. If a corporate vehicle is used for the joint venture, restrictions are therefore often placed on the participants’ ability to transfer shares in the joint venture company (“JVC”), typically set out in the articles of association and/or in a separate joint venture agreement. Here we look at some of the possible methods of dealing with the transfer of shares in a JVC. While the focus is on the use of a corporate vehicle, many of the concepts are equally applicable to other forms of business relationship that have more than one owner.

The appropriate level of restrictions on the transfer of shares in a JVC will ultimately depend on the purpose and nature of the joint venture. In some situations it may not be appropriate to allow any transfer of shares without the consent of the other parties. Where a venture has a fixed and relatively short lifespan, the parties may be more likely to agree to an absolute prohibition on transfers. In most cases however, parties will want to retain a degree of flexibility to exit the joint venture or sell off part of their interest at a later date. Parties may therefore agree to prohibit transfers only for a specified period of time or to place other restrictions and conditions on the transfer of shares.

If transfers are allowed, the joint venture participants will often include pre-emption rights in the articles of the JVC. Pre-emption rights require shareholders who are planning to dispose of shares to first offer them to the other existing shareholders to purchase on the same terms. This gives the existing shareholders the option of keeping share ownership among the existing members, albeit at cost, and preventing an unknown third party from entering the venture. The parties may nonetheless consider permitting certain transfers free of pre-emption rights, such as transfers to companies within the same corporate group as the selling shareholder (although this in itself can raise issues).

In some cases, parties may not be willing or able to take up their pre-emption rights. This is particularly relevant where a majority shareholder intends to sell its shares in the JVC. In such cases, the minority shareholders may not have sufficient means to purchase the shares and may be unable to prevent the controlling interest in the JVC passing to a third party. In order to protect themselves, minority shareholders are advised to seek some form of “tag along” right in the articles or joint venture agreement. Tag along rights take effect when a proposed sale of shares would result in a change in the control of the JVC. In such cases, the tag along rights require the selling shareholder to procure that the proposed buyer makes an offer to the other shareholders on the same terms. This allows minority shareholders to “piggy back” on a sale by the majority shareholder of its majority interest.

Similarly, to enable a sale of the whole company, a majority shareholder will often seek to include “drag along” rights in the articles or joint venture agreement. Such rights give a majority shareholder greater flexibility to dispose of its interest in the JVC; it may be more difficult to sell a controlling interest in a company without ensuring that a prospective buyer can acquire the entire shareholding free of minority interests. In the event that the majority shareholder intends to sell its shares in the JVC, drag along rights can be used to compel the minority shareholders to sell their shares to the same buyer, thereby ensuring that the buyer can acquire the entire share capital of the JVC.

Parties to a joint venture may also wish to consider whether additional conditions should be placed on any transfer of shares, for example, will new shareholders be required to enter into the same or a similar joint venture agreement with the existing members? Will the name of the JVC need to be changed if certain shareholders leave the venture? What happens to any agreements between a shareholder and the JVC if that shareholder decides to exit the venture?

Ultimately, the appropriate level of restrictions and conditions on the transfer of shares will depend on a number of factors including the purpose, lifespan and ownership structure of the joint venture. Nonetheless, how these issues are dealt with is one of the most important aspects of a joint venture or shareholders’ agreement.




For further information, please contact:


Paul Westover, Partner, Stephenson Harwood
[email protected]

Victor Lee, Stephenson Harwood
[email protected]

Fiona Cheng, Stephenson Harwood
[email protected]


Homegrown Corporate/M&A Law Firms in Hong Kong 


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