Strategic alliances, joint ventures and other partnering transactions
When thinking about entering into a partnership to help grow your business, it’s essential that you first consider the legal, as well as the financial, implications of you and your partner’s joint efforts. To ensure that your interests are protected, you need counsel familiar with the ins and outs of your business goals so you can enjoy the best agreement possible.
The Callan Law Firm, P.C. can assist you in negotiating agreements for joint ventures and collaborative research and design; development, services, and university licensing arrangements; and other agreements to develop new products and technology. Our expertise in corporate law allows us to provide exceptional business-oriented legal advice for these types of complex commercial arrangements. Our Firm will work closely with you to structure and implement an agreement that develops your resources, while mitigating your risks. To schedule an appointment to speak with an attorney, click here. To learn more about partnerships, joint ventures and strategic alliances, read on below.
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares.
With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are “co-venturers“.
The venture can be for one specific project only – when the JV is referred to more correctly as a consortium (as the building of the Channel Tunnel) – or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchiseand brand use agreements, management contracts, rental agreements, for one-time contracts. The JV is dissolved when that goal is reached.
A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits.
Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.
While the following offers some insight to the process of joining up with a committed partner to form a JV, it is often difficult to determine whether the commitments come from a known and distinguishable party or an intermediary. This is particularly so when the language barrier exists and one is unfamiliar with local customs, especially in approaches to government, often the deciding body for the formation of a JV or dispute settlement.
The ideal process of selecting a JV partner emerges from:
- screening of prospective partners
- short listing a set of prospective partners and some sort of ranking
- due diligence – checking the credentials of the other party
- availability of appreciated or depreciated property contributed to the joint venture
- the most appropriate structure and invitation/bid
- foreign investor buying an interest in a local company
Companies are also called JVs in cases where there are dominant partners together with participation of the public. There may also be cases where the public shareholding is substantial but the founding partners retain their identity. These companies may be ‘public’ or ‘private’ companies.
Further consideration relates to starting a new legal entity ground up. Such an enterprise is sometimes called ‘an incorporated JV’, one ‘packaged’ with technology contracts (knowhow, patents, trademarks and copyright), technical services and assisted-supply arrangements.
The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for ‘one-time’ contracts, e.g., for construction projects. They dissolve the JV when that goal is reached.
A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This form of cooperation lies between mergers and acquisitions and organic growth.
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.
Some types of strategic alliances include:
- Horizontal strategic alliances, which are formed by firms that are active in the same business area. That means that the partners in the alliance used to be competitors and work together In order to improve their position in the market and improve market power compared to other competitors. Research &Development collaborations of enterprises in high-tech markets are typical Horizontal Alliances.
- Vertical strategic alliances, which describe the collaboration between a company and it´s upstream and downstream partners in the Supply Chain, that means a partnership between a company it´s suppliers and distributors. Vertical Alliances aim at intensifying and improving these relationships and to enlarge the company´s network to be able to offer lower prices. Especially suppliers get involved in product design and distribution decisions. An example would be the close relation between car manufacturers and their suppliers.
- Intersectional alliances are partnerships where the involved firms are neither connected by a vertical chain, nor work in the same business area, which means that they normally would not get in touch with each other and have totally different markets and know-how.
- Joint ventures, in which two or more companies decide to form a new company. This new company is then a separate legal entity. The forming companies invest equity and resources in general, like know-how. These new firms can be formed for a finite time, like for a certain project or for a lasting long-term business relationship, while control, revenues and risks are shared according to their capital contribution.
- Equity alliances, which are formed when one company acquires equity stake of another company and vice versa. These shareholdings make the company stakeholders and shareholders of each other. The acquired share of a company is a minor equity share, so that decision power remains at the respective companies. This is also called cross-shareholding and leads to complex network structures, especially when several companies are involved. Companies which are connected this way share profits and common goals, which leads to the fact that the will to competition between these firms is reduced. In addition this makes take-overs by other companies more difficult.
- Non-equity strategic alliances, which cover a wide field of possible cooperation between companies. This can range from close relations between customer and supplier, to outsourcing of certain corporate tasks or licensing, to vast networks in R&D. This cooperation can either be an informal alliance which is not contractually designated, which appears mostly among smaller enterprises, or the alliance can be set by a contract.
A strategic partnership is a formal alliance between two commercial enterprises, usually formalized by one or more business contracts but falls short of forming a legal partnership or, agency, or corporate affiliate relationship.
Typically two companies form a strategic partnership when each possesses one or more business assets that will help the other, but that each respective other does not wish to develop internally.
One common strategic partnership involves one company providing engineering, manufacturing or product development services, partnering with a smaller, entrepreneurial firm or inventor to create a specialized new product. Typically, the larger firm supplies capital, and the necessary product development, marketing, manufacturing, and distribution capabilities, while the smaller firm supplies specialized technical or creative expertise.
Another common strategic partnership involves a supplier / manufacturer partnering with a distributor or wholesale consumer. Rather than approach the transactions between the companies as a simple link in the product or service supply chain, the two companies form a closer relationship where they mutually participate in advertising, marketing, branding, product development, and other business functions. As examples, an automotive manufacturer may form strategic partnerships with its parts suppliers, or a music distributor with record labels.
There can be many advantages to creating strategic partnerships. As Robert M. Grant states in his book Contemporary Strategy Analysis, “For complete strategies, as opposed to individual projects, creating option value means positioning the firm such that a wide array of opportunities become available”. Firms taking advantage of strategic partnerships can utilize other company’s strengths to make both firms stronger in the long run.
Strategic partnerships raise questions concerning co-inventorship and other intellectual property ownership, technology transfer, exclusivity, competition, hiring away of employees, rights to business opportunities created in the course of the partnership, splitting of profits and expenses, duration and termination of the relationship, and many other business issues. The relationships are often complex as a result, and can be subject to extensive negotiation. The advise of counsel is highly recommended when using the above strategies. To speak with an attorney, click here.