It is common for the private partner to seek to change its shareholding arrangements and thereby, its owners. Provided that such a change does not increase the risk to the government or diminish the public benefit, it should not be prohibited by the PPP contract. The following circumstances are examples in which such a change may be appropriate.
- Following completion of construction, when the construction contractor wishes to exit the project – this enables that party to recycle its investment into a new project.
- When a financial investor wishes to exit if the financial investor does not bring any special skills to the project. Their replacement with another equivalent investor may not introduce any new risks or diminish the public benefit.
However, one possible risk that must be mitigated is the disposal of shares to an unsuitable new shareholder. This applies to circumstances where the government has taken comfort from a commitment by the original shareholders to keep their economic stake in the project. This is particularly true of a shareholder who has a specified an active role in the project, such as a construction contractor or equipment supplier.
The government may reserve the right to approve a change in shareholding, especially where such a change in shareholding in the private partner means that the beneficial ownership or control of the private partner is altered. The meaning of change in control and of beneficial ownership will have to be defined in the PPP contract. The contract may specify that a period of time must lapse before any disposal is permitted (for example, disposals of shares may be forbidden until two years after construction is completed).
Lenders have legitimate interests in limiting permitted changes of control of the private partner and in requiring some commitments from the shareholders (and their holding companies) to maintain their shareholdings and economic stake in the project, at least for some minimum period (usually not ending before they have invested all of their equity and shareholder loans in the project). The government should not use its approval right in a way that will interfere with the ability of the lenders to protect their legitimate concerns.