Facilitating Investor-developer joint venture in Cyprus: A Success Story

A fast-growing developing company in Cyprus wanted to increase its brand awareness and further infiltrate the Russian market. It decided that the best way to do this was via a joint venture with a successful Russian businessman. They agreed to acquire and develop two adjoining premium plots in the center of Paphos. The development would consist of a luxury block of apartments of unique design and build, targeted at high net worth individuals.

The Joint Venture Formation

The Russian businessman, Mr. S, aimed to infiltrate the Cyprus market and diversify his investments while having the ability to cross-sell different products to his existing clientele and network. The Cypriot developer had local expertise and know-how. Crucially, they shared similar values and a vision for what they wished to achieve.

Due to the urgency and speed required to acquire the plots, it was imperative to move ahead on two fronts simultaneously. First, we clarified the expectations of the parties and identified potential "red lines" in their future cooperation. This, along with tax considerations, led us to decide on a "structural" joint venture, with future partners splitting the shares of a newly set-up company.

Acquisition of Plots

We moved forward with the acquisition of the plots from owners who were abroad. We located the owners and signed reservation agreements with them for the benefit of the Cypriot partner, as the joint venture company was not yet set up. The agreements included a provision that a connected company could be used to complete the purchase. Meanwhile, we registered the joint venture company and split the shares equally between the partners.

Financing the Project

During the process of acquiring the plots, we assisted the partners in reaching an agreement on the size of investments and the method of financing. Each party would finance half of the plots' purchase price and half of the construction cost, estimated to exceed €5,000,000. Finance had to be concluded quickly due to tight deadlines for plot acquisition.

We worked closely with the parties' accountants and decided to structure the capital investments as convertible debt. This allowed flexibility to complete the purchase within the deadline and preserved the partners' ability to use tax benefits by converting shares into share capital in the future. This approach also provided flexibility to adjust to any changes in circumstances or future sales and was time-efficient with banking and incurred fewer legal costs.

Securing the Partnership

The parties wanted to clarify and protect the relationship against potential future cash-flow issues. An agreement was reached for the Russian partner to provide a loan to the Cypriot party if needed, allowing the Russian partner to secure a larger stake in the business if the loan was not repaid. The loan was secured with a shares' pledge held by an independent security trustee. While a "pledge" of shares may seem incoherent, it is standard practice in Cyprus under related legislation and was preferred by the Russian partner's foreign legal advisor.

We adjusted the pledge agreement provisions to remove legal uncertainties and detailed each party's rights in the contract to avoid future disputes.

Future Prospects

The newly established joint venture company completed the acquisition of the plots, and construction is underway. The Cypriot partner did not utilize the loan facility, and as a result of clear expectations and cultivated trust, the parties intend to extend their cooperation into further projects in Cyprus.