Incorporated and Unincorporated Joint Ventures: The View from Royal Dutch Shell

   

Download the PDF version of this article pdf.png

An excerpted interview with Reg Fowler of Royal Dutch Shell on the differences and implications associated with the two types of asset joint ventures

Incorporated and Unincorporated Joint Ventures: The View from Royal Dutch ShellREG FOWLER HAS worked in-house for three Oil & Gas companies over the last 19 years, in trading and shipping, as well as in upstream joint ventures. His present responsibilities cover Shell’s non-operated joint ventures in Kazakhstan and western Russia, as well as providing training and advice on joint venture governance and agreements to lawyers and clients within Shell. He publishes and presents outside of Shell on topics including joint venture agreements, host government contracts, and the Arctic. What follows is an excerpt of a conversation from last year with Reg Fowler, Senior Legal Counsel at Shell International.

1. WHAT ARE THEY KEY DIFFERENCES BETWEEN UNINCORPORATED AND INCORPORATED JOINT VENTURES?

I wanted to start by making a point which is perhaps unusual: Many of our upstream Oil & Gas joint ventures operate internationally, so their investors are in one set of countries, while the asset is in another country (which is certainly true of my work in Kazakhstan). One of the things I find most difficult – culturally – in sorting out shareholder governance and management of the joint ventures is simply cultural legal expectations about whom does what. One of the things that attracts me to an incorporated JV, when you are talking about an international enterprise or consortium, is that people are already familiar with the idea of a limited liability company and the relationship between shareholders, management, and Board members. It takes a bit more time to adapt and adjust to the way in which an unincorporated JV operates – it does not have any preexisting rules or any preexisting paradigm between shareholders, management, and the Board. That can cause all sorts of issues, at least in the early days. It is also true, if you look at some of the jurisdictions we operate in, the rules around joint stock companies and limited liability companies are already fixed. These rules most likely developed from Western code – and so everyone has become familiar with these rules throughout their business careers and their legal careers.

2. WHAT ARE THE KEY CHALLENGES WITH UNINCORPORATED JOINT VENTURES?

A common feature of unincorporated joint ventures is that quite often there is much less law on the subject and it is mostly high level. Certainly an example like Kazakh law or Russian law, the civil code implies all sorts of rather unusual and difficult principles which you need to try and avoid, and be aware of. This leads to a lot of unexpected provisions around liability and responsibility to tax, which conflict, frankly, with the way in which an unincorporated JV might work in the U.S. or the UK. Another thing to bear in mind is conflict of interest. When we design an incorporated JV, the rules around conflicts of interest and expectations about when you disclose and when you step out of decision making, are clear within the corporate laws of most jurisdictions. When you get inside an unincorporated joint venture, and in circumstances where conflicts of interest are likely to be an issue, then you have to come up with your own contractual rules by your management procedures and your contractual terms. There again, you have an education process, where if you start with an incorporated joint venture, some of that is already in place and familiar to people.

3. WHAT ARE YOUR EXPERIENCES USING SECONDEES IN NON-OPERATED JOINT VENTURES?

You need someone who actually understands, not just the policies and procedures of the parent organizations, but is sufficiently selfconfident in the rationale for his/her job. This includes understanding how you make sure that not just the policies and procedures of this organization, which are probably somewhat foreign to the individual, work, but also make sure the culture is right. Often I have seen secondees saying that we have decided not to follow the Shell practice on safety, and decided to follow another partner’s practice instead. Our reply is, that’s fine, go and understand it, go and make it work, forget the fact it’s not Shell, go and make that partner’s process work. These practices are not so very different that you, as an experienced secondee, cannot actually see what is working and what is not working.
Joint Venture Directors and Conflicts of Interest