How to form a joint venture in Portugal

Author: | Published: 1 Sep 2005
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As in most jurisdictions, joint ventures in Portugal can be defined as a commercial agreement entered into with the specific purpose of joining efforts to obtain a profit from a business activity. It can also be defined as a way of joining legally independent companies that are uniting resources to carry out specific projects.

Joint ventures are only a temporary structure: a contract that might constitute, for instance, a company or a consortium. It might or might not adopt a specific company type as defined by law.

Issues such as the liability of members to the joint venture are closely related to the legal type of company chosen to support it. If the members of a joint venture decide to incorporate a company, it is possible to limit their liability according to the type of company chosen to carry out the joint venture and its respective legal regime.

In Portugal it is usual for a joint venture envisaging a lasting relationship between its members, or at least one lasting for an unlimited period of time, to adopt the form of a stock company or a private limited company.

Various forms for companies can be associated under Portuguese law when forming a joint venture scheme to bring a group of companies together for a specific purpose or activity, including:

  • a consortium;
  • an association in partnership (associação em participação)
  • a complementary group of companies; or
  • a European group of economic interest.

Consortium

This is a particular type of contract, with a specific scope that is determined by Decree-Law 231/81 of July 28 (DL 231/81). According to this Decree-Law, a consortium is defined as a contract entered into by two or more legal persons (individuals or companies) that carry out an economic activity, to proceed with a specific business activity (which constitutes the scope of the contract), binding themselves to proceed with that activity or to carry out a particular contribution, so as to:

  • carry out material or legal acts, preliminary to a continuing activity or to an enterprise;
  • pursue a certain project;
  • supply goods to a third party, produced by each member of the consortium;
  • research or exploit natural resources; or
  • produce goods that may be shared between the members of the consortium.

Any of the above-mentioned objectives must be common to all the consortium members, and all actions taken by each of them must be undertaken jointly.

Consequently, the basis of this contract relates to the obligation undertaken by all contracting parties to act jointly.

Aspects of the legal regime

Consortium contracts must be set out in writing. Formalization by way of a notarial deed will only be necessary if an element of real estate is included in the contract establishing the consortium (for example, the creation of a security interest or the transfer of title of a given property).

The guiding principle of this form of contract is the freedom of the parties to define the content of the relevant contractual clauses. This prerogative is only limited by the mandatory provisions of the statute that regulates consortium contracts and the mandatory provisions of the law in general.

According to Portuguese law, consortium contracts may adopt one of two forms:

  • Internal consortium: the activities or goods are supplied to one of the consortium members and only this member is empowered to establish relations with third parties; or, the goods and activities are supplied directly to a third party by each consortium member, without declaring the fact that they are members of the consortium.
  • External consortium: the activities or goods are supplied to a third party by each of the consortium members, with an express reference to the existence of the consortium contract. This emphasises the organizational element and the joint actions of all members.

A consortium does not have legal personality and, as such, contracts entered into with third parties are executed on behalf of one or several of the consortium members (depending on the terms agreed under the consortium agreement). This raises issues: for example, are consortium members subject to joint and several liability? DL 231/81 is not explicit on this. As a general rule, each consortium member is liable according to the terms of general civil law. This means that the parties may freely stipulate in the contract clauses regarding the liability of the members. The joint and several liability exists between the consortium members in their relations with third parties (even in the case of the external consortium) because the limitation of liability is not presumed. Therefore it is possible to establish a full liability between the members, in which case this option must be stated explicitly (usually under the expression joint liability consortium).

The same principle as that applicable to liabilities can be applied to profits, because the parties have full capacity to determine how profits are distributed. If this is not foreseen in the consortium contract, specific provisions of DL 231/81 apply. Furthermore, Article 20 of DL 231/81 forbids consortium members to create common funds (any consortium member receiving funds from another member will be regarded as an agent of the latter). This prohibition applies both to internal and external consortiums.

Depending on the purpose for which the consortium was formed, it can be considered as envisaging a lasting relationship between its members although not for an unlimited time. Under Portuguese law the following situations are foreseen for the termination of a consortium:

Resignation of a consortium member

Pursuant to Article 9 of DL 231/81, a consortium member has the right to resign whenever one of the following situations occur:

  • whenever, without fault, it becomes impossible for the consortium member to fulfil its obligations;
  • whenever a situation that constitutes just cause for termination occurs, in relation to one consortium member, and relevant damage has occurred, and it is impossible to come to an agreement with the party breaching the contract.

Consortium termination for just cause

Whenever just cause for termination arises, it is legally possible to exclude one of the consortium members. If this situation occurs, the written consent of all the remaining members is required. Under DL 231/81, a just cause for termination exists whenever any of the following events occurs:

  • declaration of insolvency;
  • serious non-compliance, either in a one-off event or continuously, regardless of the existence of fault, with the members' obligations as members of the consortium;
  • failure to comply with the obligation to carry out an activity or a contribution.

Consortium termination

As said above, the consortium is not intended to last for an unlimited time, and Portuguese law foresees the following causes for its extinction:

  • unanimous agreement of the consortium members;
  • fulfilment of the object of the consortium, or if the object becomes impossible to fulfil;
  • the coming to term of the time limit established by the consortium contract, if there is no extension of this limit;
  • reduction of the number of the consortium members to the extent that continuing the contract becomes impossible (that is, when it is reduced to less then two members); or
  • due to any other cause foreseen in the contract.

If none of these situations arises, and given the fact that a consortium contract is not intended for an unlimited period of time, it will terminate automatically after 10 years from its execution date. This termination may be delayed if the members expressly agree to a contract extension.

Association in partnership (associação em participação)

This type of agreement is also governed by DL 231/81. The agreement consists of the association of two or more entities where one of them (the contributor or associado) participates in the profits, or in both the profits and losses of the economic activity of the other (director or associante). While the contributor raises the necessary funds and/or goods to pursue an economic activity, the director manages this activity, and the funds and/or the goods raised, as if it were the owner.

These agreements do not have to be set out in writing unless the goods brought by the contributor require a special form, for example, when an element of real estate is present.

Throughout the duration of this agreement the director holds the title to the raised funds and goods. The director is liable to the contributor for any damages that the contributor incurs as the consequence of unlawful use of goods or funds raised. As in consortiums, common funds are prohibited in these partnerships.

Given the fact that partnerships do not have to be set out in a written contract, the contributor may remain anonymous in the dealings of the partnership. This form of joint-venture vehicle is not as commonly used as others because it represents a considerable risk to the contributor, considering the transfer of title to the funds raised by the contributor, even taking into account the fact that the director is under the obligation to report the results of the economic activity on a year-by-year basis.

The termination of an associação em participação will take place upon the occurrence of any of the following events:

  • insolvency of the contributor;
  • termination of the economic activity pursued by the agreement;
  • if it becomes impossible to pursue the economic activity;
  • dissolution of any of the parties;
  • merger of both parties; and
  • unilateral wish of one of the parties whenever there is a default by the counter-party.

Complementary group of companies (CGC)

A CGC is a corporate entity incorporated to improve the performance conditions of an activity or the economic activities of an individual or corporate entity with legal personality. It is grouped by way of a contract, without prejudice to the respective individual legal personality of the contracting parties involved.

CGCs are set up primarily to render services to the members of the group or to produce goods for the use of these members, but they are also permitted to render services or produce goods for third parties.

A CGC acquires legal status, with the registration of its articles of association at the commercial registry. It has the capacity to undertake all the necessary or appropriate rights and obligations to enable it to carry out its objectives.

A CGC's members will be held jointly and severally (and unlimitedly) liable for the debts incurred by the CGC. There may be exceptions if specifically set out in the contracts signed with specific creditors. The creditors of a group may not, however, require group companies to pay amounts due to them without the assets of the group itself being seized first.

CGCs may not make and distribute profits as their main purpose. Article 1 of Decree-Law 430/73 of August 25 (DL 430/73), modified by Decree-Law 36/2000 of March 14, also establishes that CGCs may make and distribute profit as an accessory activity when explicit authorization is granted under the terms of its articles of association. The incorporation of a CGC with or without its own capital is entirely at the discretion of the contracting parties and can provide an indication as to whether or not the group carries out profit-making activities in accordance with the terms with which it is allowed to do so. If the CGC foresees profit making as its accessory activity, the group members must make capital contributions, which will constitute the CGCs share capital.

According to Article 5 of DL 430/73, the capacity of a CGC does not include: (i) "the acquisition of property rights or other rights in rem over property, unless the property is to be used as premises for the company's head offices, branch office or is a facility for its own use"; (ii) "participation in companies with a civil or commercial status or, in addition, other complementary groups of companies"; and (iii) "the holding of offices in any companies, associations or complementary groups of companies".

A member of a CGC may leave the group in the following two cases (in addition to any further set out in the articles of association):

  • if alterations are made to the articles of association with which the member does not agree;
  • ten years from the date the member was admitted, provided it has fulfilled its obligations.

The exclusion of a member must be approved by the general meeting and may occur:

  • when the group member to be excluded has ceased to carry out the activity that was deemed to be complementary to the CGC;
  • when the group member has been declared insolvent;
  • when the group member has failed to pay (within the period established by the management) the contributions for which it is responsible after receiving a notification for payment; or
  • in additional situations foreseen in the contract.

In addition to the grounds for dissolution as stated in the contract, Article 16 of DL 430/73 also establishes the following grounds for dissolution:

  • if there has been a breach of legal rules governing competition;
  • if a direct profit-making activity as been persistently carried out as a main purpose;
  • at the request of a member who has been held responsible for the overdue and outstanding commitments of the group.

Article 16(2) of DL 430/73 establishes that death, restraint, incapacity, insolvency, dissolution or the wish of one or more members does not determine the dissolution of a group, unless the contrary is foreseen in the articles of association.

European group of economic interest (EGEI)

The EGEI (a contract based in EU law) was created to increase cooperation between companies and service providers in EU member states. It is similar to the French regime of the groupement européen d'intérêt économique, which was also an influence on Portuguese legislators when defining CGCs, one of the main reasons the legal regime applicable to EGEI is that of CGCs.

The law governing EGEIs is EC Regulation 2137/85 of July 25, the Decree-law 148/90, of May 9, and the Portuguese Companies Code (Código das Sociedades Comerciais) regarding general partnerships.

EGEI members have unlimited personal, several and joint liability, and any EGEI member that leaves the group will remain liable for the debts resulting from the group's activity before the date it ceased to be a member. Nevertheless, the Regulation foresees the possibility of an agreement entered into by the EGEI and a third party, according to which one or more EGEI members are liable for certain debts.

Joint ventures look to consortiums

All of these types of associations would be perfectly valid under Portuguese law, but it is most common for a joint venture in Portugal to adopt the form of a consortium to bring a group of companies together for a specific project, usually towards the incorporation of a commercial company. Most joint ventures are formed to develop a public service or supply contracts and so the consortium model is most common and appropriate for their governance.

Author biography

Miguel Spínola

Mullerat

Miguel Spínola is a lawyer working with the corporate, M&A and capital markets group at Mullerat. His areas of practice are essentially corporate and commercial law, mergers and acquisitions, property and leisure, and litigation and arbitration.

He concentrates on acquisition, structuring and disposal of private and listed companies, project and corporate finance, restructurings, PPP, joint ventures, corporate law and corporate governance.

He specializes in advising sellers as well as purchasers on corporate acquisitions, representing Portuguese and foreign clients.

He has participated in large cross-border and national transactions in diverse sectors such as financial services, power and renewable energies, real estate, environmental services and construction, chemicals, and franchising.

Spínola has a law degree from the Portuguese Catholic University, and was admitted to the Portuguese Bar Association as a full member in 2001. He is the author of several articles in specialist publications.

Spínola speaks Portuguese, English, Spanish and French.