A fast-growing developing company in Cyprus wanted to increase its brand awareness and to further infiltrate the Russian market. It decided that the best way to do this was via a joint venture with a successful Russian businessman with whom it agreed to acquire and develop two adjoining premium plots in the center of Paphos. The development would consist of a luxury development of a block of apartments of unique design and build targeted to high net worth individuals.
The Russian businessman’s (Mr. S), the target was to infiltrate the Cyprus market and diversify his investments while having the ability to cross-sell a different product to its existing clientele and network. The Cypriot developer had local expertise and know-how. Crucially though, the two of them also had similar values and a similar vision as to what they wish to achieve.
Due to the urgency and speed required to acquire the plots it was imperative to move ahead in two fronts at the same time. First, we had to clarify the expectations of the parties and go through the possible “red lines” in envisaging their future co-operation. This, together with tax considerations allowed us to decide the use of a “structural” joint venture; that is having the future partners split the shares of a newly set-up company.
Second, we had to move forward with the acquisition of the plots from the owners who were abroad. We located the owners and signed reservation agreements with them for the benefit of the Cypriot partner since the joint venture company was not yet set-up and included a provision that a connected company could be used to complete the purchase. In the meantime, we registered the joint venture company and split the shares equally between the partners.
During the process of acquiring the plots, we assisted the partners to reach an agreement on the size of investments as well as the method of financing. The parties would each finance half of the plots purchase price as well as half of the construction cost which was estimated to be in excess of €5.000.000. Finance had to be concluded fast as there were tight deadlines for the acquisition of the plots. We worked closely with the accountants of the parties and decided to structure the capital investments as convertible debt which would allow us the flexibility to complete the purchase of the plots within the deadline and preserved the partners’ ability to use the tax benefits of converting the shares into share capital in the future. This also allowed the flexibility to adjust to any change in circumstances or future sales and was time efficient with banking and with less legal costs.
In addition, the parties wanted to clarify and protect the relationship against the possibility of a potential lack of cash-flow in the future. As such, an agreement was reached for the Russian partner to give the Cypriot party a loan if there would be a need for cash-flow in the future, 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 is incoherent in principle, this is the norm in Cyprus under the related legislation and practice and was the preference of the foreign legal advisor of the Russian partner. Accordingly, we adjusted the provisions of the pledge agreement to remove legal uncertainties and stipulated the rights of each party in the contract in more detail to avoid disputes (should they arise) in the future.
The newly established joint venture company completed the acquisition of the plots and the construction works are in the process. The Cypriot partner did not make use of the loan facility and as a result of the clear expectations and the trust which was cultivated in the relationship, the parties intend to extend their co-operation into further projects in Cyprus.