If accounting gaps are exploited, these vehicles can become a devastating financial means of concealing corporate debts, as seen in the 2001 Enron scandal. The creation of a commercial vehicle/project (SPV) is an essential feature of most PPPs. The SPV is a legal entity that carries out a project. All contractual agreements between the various parties are negotiated between them and the SPV. VPPs are also a preferred way of implementing P3s in limited-capital or non-refundable situations, where lenders depend on cash flow and project security as the only way to repay their debts. The following figure shows a simplified PPP structure. However, the actual structure of a PPP depends on the nature of the partnerships. We often see convertible shares that are used in joint enterprise agreements in which a loan can be converted into equity. Convertible shares offer the benefit of a repayable loan. But in the case of convertible shares, it is possible to convert the loan into capital.
Another problem that often arises with regard to the rules of a joint venture project and the increase in the degree of complication in its structure could be the desire to choose foreign law to govern the joint enterprise agreement, while the charter of a Polish SPV must be governed by Polish law; Similarly, the transfer of ownership of their shares, even if they are provided for by a Community treaty under foreign law. A destination/project vehicle (SPV) is a legal person carrying out a project. All contractual agreements between the various parties are negotiated between them and the SPV. An SPV is a commercial company created by an agreement (also known as the association protocol) between shareholders or sponsors, in accordance with the corresponding law of a country. The shareholders` pact defines the basis of a company`s incorporation and contains information such as name, ownership structure, management control and social affairs, authorized social capital and the amount of debts of its members. Enron`s shares grew rapidly and the company transferred a large portion of the inventory to an ad hoc entity, taking cash or a note in return. The ad hoc entity then used the hedging portfolio of assets held on the company`s balance sheet. To reduce the risk, Enron has guaranteed the value of the vehicle.
When Enron`s share price fell, the values of ad hoc vehicles followed, and the guarantees were put into play. Any member of the consortium (with the exception of certain designated contractors) must commit to and participate in the future SPV as a shareholder. Shareholders hold equity in the shares defined and agreed in the shareholders` pact. The size of a stake can vary from very small (pin-point-equity) to large. Normally, it is the main project sponsors who together hold the largest amounts of equity. This is why a destination vehicle is sometimes called a remote bankruptcy entity. The exit strategy is a very important consideration in any joint enterprise agreement. In practice, the details of how the parties withdraw and how the parties are paid must be taken into account in the joint venture agreement and in the article and shareholder contract, as it overlaps between the size of the joint venture and the equity capital of the joint venture.
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