Joint ventures and strategic alliances may be used in a variety of fields, including technology, communications, manufacturing, distribution and real estate businesses. For example, many real estate contractors and developers use joint ventures to design, build, market and manage commercial properties. In any joint venture or collaboration, various structural and legal issues must be addressed.
Strategic Alliance vs. Operational Venture
A “joint venture” is a cooperative business activity, formed by two or more businesses that creates an independent business entity and allocates ownership, operational duties and financial risks and rewards to each member, while each company retains its separate identity. A “strategic alliance” is created when one corporation signs an agreement with another for the transfer of technology, research and development services and marketing rights or provides equity for a minority position, but a separate business entity is not created.
The purpose of many high tech alliances has been to provide a centralized research and development environment to produce technological breakthroughs and to transfer the new technology to member companies in a timely manner. These approaches have been used with success in United States, Japan and other countries during the past few decades to improve research and development efficiencies and to advance technology and increase competitiveness of the member firms. The purpose of alliances generally have involved:
Two or more companies with advanced technology join together to pursue a set of agreed upon objectives, but remain independent businesses after the formation of the venture.
The venture businesses share the benefits of the alliance and control over the performance of specific duties. The venturers contribute on a continuing basis in specified strategic or technological areas for mutual benefit. The choice of a legal structure for a venture should be based upon the specific circumstances of the transaction. The following criteria may be used as a general guide to make the decision.
Alternative Legal Structures
Several basic questions should be examined during the formation of a venture, such as the following:
Who invests capital and how much?
Who invests time, and how much?
Who receives rights to:
- market or distribute products?
- manufacture products?
- acquire or license technology?
- purchase future products or technology?
Who receives tax benefits?
Who is responsible for specific accomplishments?
What happens if more money is needed?
How are the profits (and losses) allocated?
How is confidential information handled?
What products are specifically included/excluded?
What are the patent provisions?
What are the guidelines for termination or revision?
Are there any government regulations that should be considered?
The Organizational Structure
In high-technology ventures, the organization should provide management and supervision of the research. The goal of the structure is to obtain maximum results. There should be well-defined lines of authority and agreed-upon communication methods and decision-making. Alliances with more than two members may become difficult to manage. Initially, it is essential to decide upon either an informal or formal structure.
Alliances fail usually because operating managers do not make them work, not because contracts are poorly written. When properly formed, a business alliance should be worked out clearly in terms of the strategic, management, financial, and operational objectives well in advance of the binding legal agreements. Typically, the legal process will go through several distinct stages:
A. The letter of intent
B. The non-competition and confidentiality agreements
C. The binding legal agreement
The Letter of Intent
One of the most critical steps in forming an alliance is the preparation of a non-binding letter of intent. Its main purpose is to advance negotiations from the discussion stage involving verbal understandings which are vague and conceptual to the stage of a clear understanding of the basic terms of the alliance.
The letter of intent should be drafted mutually by the principals of each of the parties of the joint venture. The lawyers will translate this basic document into the final binding legal agreement. The letter of intent should be brief. Clarity of thought, simplicity of design, practicality and profitability are essential objectives of the letter. The letter of intent should cover at least eight critical points:
A non-binding letter contains preliminary intentions of the parties to form an alliance based on certain conditions. It typically provides that after review by respective legal counsel, revisions may be proposed to be included in a formal agreement, which will legally bind the parties. For a period of a few months, the parties agree to follow the principles of the letter of intent until superseded by the formal legal agreement, or by an extension or modification of the letter of intent, or by the decision to abandon the alliance prior to entering into a formal legal agreement.
After the letter of intent is reviewed with prospective operating venture managers, the president of each company should sign the letter to ensure that the leaders and managers of the venture understand the collaboration and are committed to its scheme and operating plan and budget.
A difficult legal problem involves maintaining secrecy of the venture itself to avoid disclosure to competitors outside the venture. This problem must be addressed by appropriate confidentiality provisions and careful scrutiny.
The binding legal agreement is the final document that structures the joint venture. It should follow the basic format of the letter of intent. Any issues such as licensing agreements and development contracts which are not covered in the letter of intent will be covered in the binding agreement.
American and Japanese companies have recognized the value of international alliances, including broad-ranging high technology ventures. Ventures may create technology which can be transferred to member companies for commercialize usage. Spin-off companies may be created to take advantage of new technologies. State of the art research facilities are being been developed to allow scientists to advance technology. In past research alliances, staff have been added for marketing, public relations, and technology transfers to the member companies.
Practical problems in international alliances involve the disparate objectives of American and Japanese firms in the ventures and cultural differences. American firms generally require rapid commercialization of the joint research efforts compared to Japanese firms’ longer term view of these projects. This should be addressed by discussion and correspondence relative to future production and marketing plans, even if these plans are not contemplated by the initial joint venture agreement.
Firms which are members of international collaborative ventures must recognize the different objectives and perceptions in order for long-term joint efforts to be successful. Each party must accommodate the other’s needs in alliances.
Various lessons have been learned from prior experiences both from a business and legal perspective. An alliance structure which is recognized by American law should be adopted to clarify the rights and obligations of both parties to the transaction. A joint venture structure or LLC may provide the best alternatives in terms of flexibility, clarity and efficiency for both parties.
A key ingredient in the success of a proposed alliance is the ability of both parties to manage the relationship, particularly if there is a significant difference in size or philosophy of the member companies. In the past, American companies have not been very skilled at managing such alliances because of their desire for total ownership and control. Many Japanese companies have strong capabilities in this area because of their experiences at the keiretsu partner level in cooperating with their counterparts. Many Japanese management teams are quite skilled at managing successful collaborations.
CONTINUED-CALL OUR OFFICE FOR COPY
Criteria for Choosing a Legal Structure
Critical Points of Letter of Intent
The Binding Legal Agreement
The Confidentiality Agreement
The Non-Competition Agreement
Relationship between Venturers
Leadership & Management
Project vs. Goal Orientation
Risk & Reward
Contingencies & Change
Strategic Technology Alliances
International & American Companies
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