In the high-stakes world of international energy and infrastructure, few projects are undertaken by a single company alone. The risks are too high, the capital requirements too massive, and the technical challenges too complex. Instead, companies form Joint Ventures (JVs). While many of these partnerships are purely contractual, others require the creation of a distinct, standalone company. When this path is chosen, the governing document is the Shareholders Agreement (SHA). The model provided by the leading association of international negotiators has become the industry standard for drafting these complex contracts, providing a sophisticated roadmap for how partners will own, fund, and manage a joint corporate entity.
The Decision to Incorporate: SHA vs. JOA
Before diving into the agreement itself, it is crucial to understand when and why it is used. In the oil and gas industry, the most common partnership structure is the Joint Operating Agreement (JOA). A JOA is an unincorporated association; it is a contract between parties to share costs and production, but it does not create a new legal company.
The Shareholders Agreement is different. It is used when the partners decide to incorporate a Joint Venture Company (JVC). This JVC is a separate legal entity with its own board of directors, its own bank accounts, and its own liability shield. Partners might choose this route for several reasons: to limit liability in a high-risk jurisdiction, to meet local content laws that require a locally registered company, or to facilitate external project financing, as banks often prefer lending to a distinct corporate entity. The SHA is the constitution of this new company.
Governance and Control: Who Steers the Ship?
The most heavily negotiated section of the agreement is almost always Governance. Because the JVC is a separate company, it is managed by a Board of Directors. The SHA dictates exactly how this board is composed. Typically, each shareholder has the right to appoint a number of directors proportional to their equity stake.
The crucial mechanism here is the voting threshold. The agreement will define which decisions can be made by a simple majority of the board and which decisions require a “supermajority” or even unanimity. These “Reserved Matters” usually include high-stakes decisions like approving annual budgets, taking on significant debt, changing the scope of the business, or issuing new shares. This section protects minority shareholders, ensuring that the majority partner cannot make fundamental changes to the business without consensus.
The Money Stream: Funding and Default
A Joint Venture Company is a hungry entity; it requires a constant stream of capital to explore, build, and operate. The SHA creates the legal obligation for shareholders to fund the company. This is typically done through “Cash Calls”—formal demands for capital contributions or shareholder loans.
The agreement must also address the “what if”: What happens if a partner runs out of money or refuses to pay? The Default Clause is the enforcement mechanism. If a shareholder fails to meet a cash call, the SHA outlines severe penalties. These can range from the suspension of voting rights and the loss of dividend streams to the dilution of their equity (where their percentage of ownership shrinks) or even the forced forfeiture of their shares to the paying partners. These draconian measures ensure that the project is not held hostage by a non-paying partner.
Exit Strategies: Pre-emption and Transfer Rights
Energy projects last for decades, but corporate strategies change. A partner may eventually want to sell their stake and leave. The SHA controls this exit door through Transfer Restrictions. Generally, a shareholder cannot simply sell their shares to a stranger, especially a competitor, without permission.
The central feature here is the Pre-emption Right or Right of First Refusal (ROFR). This clause dictates that if a shareholder receives an offer to sell their stake, they must first offer it to the existing partners on the same terms. Only if the existing partners decline can the shares be sold to an outsider. This ensures that the remaining partners maintain control over who they are in business with. Advanced agreements may also include “Tag-Along” rights (protecting minority shareholders by allowing them to join a sale initiated by the majority) and “Drag-Along” rights (allowing a majority to force a minority to sell in the event of a total company buyout).