Alliances and Joint Ventures: Structures and Legal Issues Craig McCrohon Partner Holland & Knight,...
-
Upload
russell-conley -
Category
Documents
-
view
220 -
download
0
Transcript of Alliances and Joint Ventures: Structures and Legal Issues Craig McCrohon Partner Holland & Knight,...
Alliances and Joint Ventures:Structures and Legal Issues
Craig McCrohonPartnerHolland & Knight, LLCJanuary 12, [email protected]
Alliances and Joint Ventures:Structures and Legal Issues
Craig McCrohonPartnerHolland & Knight, LLCJanuary 12, [email protected]
2
Craig McCrohon practices in the areas of corporate and securities, including technology and financial services. He advises companies and boards of directors regarding corporate transactions, director and officer liability, corporate finance, intellectual property and regulatory matters. His work has included organizing bank holding companies, negotiating venture capital investments, assisting with initial public offerings, providing general counsel to technology companies, and negotiating joint ventures in Europe, China and Hong Kong
He is a graduate of Harvard University and received his joint law degree from the University of Pennsylvania and M.B.A. from the Wharton School of Business. He also was a graduate student in law and economics at the London School of Economics. Prior to entering private practice in Chicago he worked with the legal staff of the United States Senate Committee on Banking, Housing and Urban Affairs. He is listed in Who's Who in American Law, and served as President of the Board of Directors of the Technology Executives Roundtable of the Evanston/Northwestern University Research Park, and was named by the Chicago Lawyer as one of the 40 Under 40 Outstanding Illinois Attorneys.
3
What is a JV?What is a JV?
4
JVs Like Pornography: You’ll Know it When you See ItJVs Like Pornography: You’ll Know it When you See It
• JV/Alliance Elements:– Long-term commitments– Bet the company deals– Gatekeeper power– Multi-departmental– Zero-sum element
5
The JV/Alliance Family TreeThe JV/Alliance Family TreeJoint
Venture
Equity
Partnerships/LLCs/Corps.
Corp. VC Distribution
Contractual
LicensesDevelopment/
Research
6
The Strategic Alliance ContinuumThe Strategic Alliance Continuum
One-shot customer/research agmt.
Bulk sale
Bulk Purchase
Distribution – non-exclusive
Distribution - exclusive
Joint Development
Technology/Process Licensing
Jointly-owned new entity
7
Blurred Boundaries: JVs Versus Other DealsBlurred Boundaries: JVs Versus Other DealsAcquisitio
n
JV Investme
nt
Bulk Sales
Actual Alliance
ContractDevelopmen
t
JointDevelopmen
t
Outsourcing
Joint Resources
8
JVs and Alliances as the Mother of All Consulting ProjectsJVs and Alliances as the Mother of All Consulting Projects
9
Psychology of the JVPsychology of the JV
10
The Problem: Company Yearns for Joint Ventures, but Isn’t Sure What They AreThe Problem: Company Yearns for Joint Ventures, but Isn’t Sure What They Are
• Keeping up with the Jones: – If my competitor announced a “joint venture” or “strategic alliance”, then I
should have one too– Supplier, customer proposes an “alliance”, but does not specify what this is– Reporting to senior management that more than a simple contract has been
executed
• Asking for the “preprinted strategic alliance form”
11
The Why of the JVThe Why of the JV
• Get money from someone else• Get technology• Access to markets:
– Regulatory hurdles– Foreign barriers to entry– Cultural barriers to entry
• Share risks– Iridium
• Share costs– Auto joint ventures
• Eliminate competition• Develop industry standards
(computers, auto makers)
12
JV Justification: More than Just LoveJV Justification: More than Just Love
Market Focused Technology Focused
Defensive Blocking;
Protecting existing customers;
Success=status quo
Acquire proprietary formulas, designs
Offensive Expand to new markets Acquire understanding of unwritten process
13
JV Justification: More than Just LoveJV Justification: More than Just Love
Market Focused Technology Focused
Defensive BlockingProtecting existing customersSuccess=status quo
Acquire proprietary formulas, designs
Offensive Expand to new markets Acquire understanding of unwritten process
14
JV Justification: More than Just LoveJV Justification: More than Just Love
Market Focused Technology Focused
Defensive BlockingProtecting existing customersSuccess=status quo
Acquire proprietary formulas, designs
Offensive Expand to new markets
Acquire understanding of unwritten process
15
JV Justification: More than Just LoveJV Justification: More than Just Love
Market Focused Technology Focused
Defensive BlockingProtecting existing customersSuccess=status quo
Acquire proprietary formulas, designs
Offensive Expand to new markets Acquire understanding of unwritten process
16
Sociology of the JVSociology of the JV
17
Concentrated Industries and Joint VenturesConcentrated Industries and Joint Ventures
• Like Europe on the eve of WWI: a few powers, unstable alliances• Automotive JVs:
– Rover Group/Honda (1980)– GM and Toyota Motor Corporation (1983) agree to form a joint venture, New
United Motor Manufacturing, Inc. (NUMMI), to produce a small Chevrolet automobile in the Fremont, Calif., assembly plant previously operated by GM
– GM/Volvo (1986) (U.S. production)– GM/Toyota (1987) (Australia production)– Ford/Nissan (1992)
• PC Hardware and Software JVs:– IBM/Microsoft 1988 (OS/2)– IBM/Apple: 1991 Kaleida; Taligent (in 1994, adds HP)– Apple/IBM: 1997– Microsoft/IBM: 2001 (Amicore)
18
Industry Defines the Agreement, Like Sports Defines the AthleteIndustry Defines the Agreement, Like Sports Defines the Athlete
• R&D joint ventures– Pharmaceuticals– Biotechnology
• Distribution alliances– Software– Manufacturing– Services
• Manufacturing joint ventures– Automotive– Consumer/business durables (copy machines, refrigerators)
• Strategic marriages– Cross-border JV’s– Real estate joint ventures
19
Strategy of the StrategyStrategy of the Strategy
20
Strategic Alliances as a Chess GameStrategic Alliances as a Chess Game
Success determined by more than simply ROI
• If we don’t do the deal with them, will my competitor?• Locking up the best JV partners• Locking up markets• Locking up suppliers, distributors, governments• Hurting the competition, and little else
– Life as a zero sum game
21
Game Theory and AlliancesGame Theory and Alliances
• The everybody wins, many fish in the sea NON-game• Hold up game• Prisoners Dilemma – multi-period game• The zero-sum game• Signaling• Short versus long-term exploitation
22
OxymoronsOxymorons
• Jumbo Shrimp• Middle East peace
Alliance Portfolio
23
JV SpecimensJV Specimens
24
The Brief Sad Life of Iridium: 1990 - 2000The Brief Sad Life of Iridium: 1990 - 2000
• Among the partners: Lockheed, Raytheon, Sprint• Global satellite network• $5 billion satellite network; only 10,000 customers• Bad first call: VP Al Gore• One of the largest bankruptcies in history at the time• Was it a failure?
25
Fisher Body/General MotorsFisher Body/General Motors
• Fisher Body supplier to GM• 1919 GM acquires 40% - 60% of Fisher Body• 10-year supply contract• Fisher Body threatens to locate plants far from GM
assemblies• 1926: GM acquires Fisher Body
26
International ExamplesInternational Examples
• Italian submarines and Chinese jungle power plants– The hold up problem
• European market research– The prisoners dilemma– Long-term became short-term game
27
The How-To Manual: Getting StartedThe How-To Manual: Getting Started
28
Cutting Through the FogCutting Through the Fog
• What does the company actually want:– Identifying the transaction components, legal categories– Joint venture entity– License– Distribution Agreement
• Greatest need for integrating the business with the legal decisions
29
The Complexity of the Joint VentureThe Complexity of the Joint Venture
• Not the straightforward two-party transaction• Multiple parties
– Competing interests, timetables, resources, cultures
• Multiple venues– regulated versus unregulated; domestic versus foreign; for-profit versus association
• Multiple transactions– Licenses, partnerships, distributorships, leases
• The Multiplying Matrix– Not: 3 + 3, but 3 x 3
• Balancing extreme pessimism of the law, extreme optimism of the manager
30
Legal PracticalitiesLegal Practicalities
• Simplify transaction– Fees can be enormous
• Target streamlined:– Management– Dispute resolution– Accounting– Structure– Unwind provisions
31
JV – Basic StructuresJV – Basic Structures
32
Master Joint Venture AgreementMaster Joint Venture Agreement
Master JV Agreement
Entity Agreement
License Agreements
Financing Agreements
33
JV Structure: Bypassing the Long-Form JV AgreementJV Structure: Bypassing the Long-Form JV Agreement
Contrib.Agreement
Distribution
Leases
OperatingAgreement
Trademark License
Licenses
JV Entity/LLC/LP Agrmt
LOI?Distinct Entity, Distinct
Transactions
34
The Contractual Alliance: Single DealThe Contractual Alliance: Single Deal
Licensor/Manufacturer
Licensee/Contractor/Researcher
35
Contractual Joint Ventures:No Master Agreement ShellContractual Joint Ventures:No Master Agreement Shell
• Licenses• Distribution agreements• OEM arrangements• Supply agreements• Development agreements
36
Pre-nuptial Agreements or Purchase Orders?Pre-nuptial Agreements or Purchase Orders?
• Contractual alliances must be:– Long-term– Exclusive– Significant– Jointly governed
• Industry/product specific terms– Delineate territory– Specify standards
• Invading their personal space:– When the legal agreement includes business details
37
Joint Ventures – the AgreementsJoint Ventures – the Agreements
38
Summary Checklist:Master Joint Venture Agreement – The Town PlanSummary Checklist:Master Joint Venture Agreement – The Town Plan
OverviewOutline of new entityOutline of non-competition obligations
Products and services deliveredTerritory of operation
Outline of future entity agreementsPercentage ownershipListing by country/industry
Capital contributionsConditions to closingAppointment of initial directorsContributions to be madeThe “no joint venture” joint venture disclaimers
39
One Little Definition – Huge ImpactOne Little Definition – Huge Impact
• The product• Uses• Geographic market• Milestones• Time period
40
Joint Venture Entity: Organizational Documents – The House DesignJoint Venture Entity: Organizational Documents – The House Design• Limited Partnership Agreement, Operating Agreement
– Twin of the master joint venture agreement; often used as the form for the master joint venture agreement– Parallel structure:
• Purpose• Capital contributions• Management• Dissolution• Transfer restrictions• Dispute resolution
• The corporate packet– Articles of incorporation– Bylaws– Shareholders Agreement
41
Summary Checklist:Ancillary Equity Joint Venture Agreements – Interior DecoratingSummary Checklist:Ancillary Equity Joint Venture Agreements – Interior Decorating
• Financing agreements– Secured/unsecured– Covenants/defaults
• Other licenses and distribution agreements:
42
Joint Venture Entity:Contribution AgreementJoint Venture Entity:Contribution Agreement
• Specify assets• Representations and warranties• Closing conditions
43
Contribution Agreement TrapsContribution Agreement Traps
• Insider transactions• Inflated asset values/questionable accounts
– receivable
• Litigation• Title to intellectual property• Employment agreements/change of control• High risk/high cost employees
– Beware foreign laws regarding accepting employees who are VERY expensive to terminate
• Concealing true reason for alliance interest: Desperate for someone with cash
44
Joint Venture Entity:Operating AgreementJoint Venture Entity:Operating Agreement
• Rent– Beware assignment of the worst space: outskirts of Frankfort
• Salaries• Allocation of overhead• Transfer pricing
– Beware of inflated prices, especially at a distance• Schedules identifying assets contributed, services to be
provided– Which machines– The backdoor termination: shifting workers to shift termination costs
45
Control: Equity Joint VenturesControl: Equity Joint Ventures
JV or Operating Agreement• Executive hires• Significant spending• Financial reporting• Approval of business plan• Significant corporate transactions• Borrowing, sales of equity• Disposal of assets• Non-competition/non-solicitation
46
Termination TriggersTermination Triggers
• Bankruptcy• Failure to fund/contribute• Failure to achieve milestones• Anti-trust judgments• Change of control• Breach of confidentiality/non-competition
47
Lessons from the Life Sciences JVLessons from the Life Sciences JV
48
Ostex/Metrika: Ostex Direct ContributionsOstex/Metrika: Ostex Direct Contributions
Non-exclusive License technology to selected reagents for measuring bone collagen metabolites
Fund clinical trials and regulatory applications Purchase of Metrika stock Marketing expenses Royalties to Metrika for sales
49
Ostex/Metrika: Ostex ContributionsOstex/Metrika: Ostex Contributions
Assist with regulatory approval of Metrika measurement deviceTechnical assistance regarding assay technology to development
measuring deviceTraining of Metrika’s employees in the critical reagentsSell the measurement devices
50
Ostex/Metrika: Risk ShiftingOstex/Metrika: Risk Shifting
For first 90 days, either party may terminate if appears that the other cannot meet its obligations
Initial term of at least one year; automatic one year renewal termsTermination after six months notice if development schedules
unsatisfied by a partySix months notice if commerciality determined not commercially
viable30 days notice if parties cannot agree
on allocation of cost overrunsTerminates upon expiration of
applicable patents, bankruptcy ofa party
51
Ostex/Metrika: Documentation and ManagementOstex/Metrika: Documentation and Management
Product Management committeeBoth parties report quarterly regarding marketing activities and
orders madeRolling forecasts by Metrika for quantities of critical reagents
from OstexGeneral business plan for the venture
52
Ostex/Metrika: Ownership of New InventionsOstex/Metrika: Ownership of New Inventions
If relating to the Ostex technology exclusively, then with Ostex
If relating to the Metrika technology exclusively, then to Metrika
In all other cases, with the party for whom the inventor works
53
Ostex/Metrika: Metrika ContributionsOstex/Metrika: Metrika Contributions
Manufacturing facility
Royalty payment to Ostex for use of Critical ReagentsFund clinical trials and regulatory applications for measuring
deviceCommitment to pay a percentage of gross sales for marketing the
measurement devices for the first yearPayment of customs duties and taxes on the reagents and
measurement devices Invent a measurement device Regulatory approval for the device
54
Ostex/Metrika: Dispute ResolutionOstex/Metrika: Dispute Resolution
Escrow account; prevailing party gets the funds plus 10%15 – 60 day cure periods for breachesArbitration, after third party mediation
55
Common JV Problems
Common JV Problems
56
The Alliance Life SpansThe Alliance Life Spans
0
5
10
15
20
25
1 2 3 4 5 6 >6
Years Until Termination
Built-in Obsolesence
% Terminated: AutoJVs
57
Matching CulturesMatching Cultures
• Profit/for profit• Institutional/entrepreneurial• Capitalist/communist• Eastern/western• Publicly held/closely held• Different levels within the organizations• Differing significance to the partners
58
Balancing RisksBalancing Risks
Similar Business
New Business
Non-Competit
or
DirectCompetit
or
JVExperienc
e
New to JVs
Equal Leverage/Importanc
e
Unequal Leverage/Importanc
e
CultureSimilar
CultureDissimilar
59
Conflicts of InterestConflicts of Interest
• Using money for intended purpose• Shifting funds to projects of more interest to only one party• Doing nothing • Allocating inventive responsibility when scientist working on
joint development and proprietary development simultaneously
60
JVs Like Hollywood Couples: The Inevitable Break-upJVs Like Hollywood Couples: The Inevitable Break-up
• Changing market• Learning technology• Learning markets, making friends• Spoiled by success• Changing fortunes of the partners
61
Crime and PunishmentCrime and Punishment
Techniques for Punishing Non-Performing Partners* dilution of interests (failure to make capital call)* loss of director, officer role* reversion of IP rights to the other party* increase product costs to a partner* release one party from exclusivity obligations
62
Calling it QuitsCalling it Quits
63
When the Honeymoon Is OverWhen the Honeymoon Is Over
• Abusive insider transactions:– Excessive rent/transfer pricing
• Poor financial records• Fraternizing with the enemy: doing deals in violation of non-
competition covenants• Asleep at the wheel: ignoring obligations• The Common Theme: Siphoning money, signaling interest in
terminating the arrangement• Solutions: solve the problem; turn out the lights• Lawyer as letter writer: need to continually document actions
64
Termination RemediesTermination Remedies
• Sale of interest to partner– Punitive valuation
• Valuation formula, premium applied
• Purchase of interests from partner– Punitive valuation
• Valuation formula, discount applied• Book value
• Sale of the entire JV• Liquidation of the JV• Do nothing/stay married
65
Ostrex: After the Divorce: Dividing the AssetsOstrex: After the Divorce: Dividing the Assets
• Product of the joint venture– Each party non-exclusively– One party, pursuant to a license– Each party, according to field of use or territory
• Variations if agreement terminated through the fault of one of the parties
• If developed solely by a party, then to that party• If shares of a joint venture entity, then valuation and
purchase by a party; otherwise liquidation and cross licensing
Alliances and Joint Ventures:Structures and Legal Issues
Craig [email protected]
*Holland & Knight LLP is a limited liability partnership registered under Florida law. In Illinois, Holland & Knight LLP is a limited liability partnership registered under Florida law. In Illinois, attorneys practice as Holland & Knight LLC, an Illinois limited liability companyattorneys practice as Holland & Knight LLC, an Illinois limited liability company
Alliances and Joint Ventures:Structures and Legal Issues
Craig [email protected]
*Holland & Knight LLP is a limited liability partnership registered under Florida law. In Illinois, Holland & Knight LLP is a limited liability partnership registered under Florida law. In Illinois, attorneys practice as Holland & Knight LLC, an Illinois limited liability companyattorneys practice as Holland & Knight LLC, an Illinois limited liability company