Alliances and collaborations: strategic aims
The basic aim of an alliance, collaboration agreement or a joint venture is strategic: activities that are of significant importance to an organisation’s core business and that cannot be performed at the required quality level or with the necessary efficiency by the company itself ‘must’ be partnered (unless cooperation is a first step towards divestment of certain existing business, starting with the joinder of a fifty percent ‘partner’ and followed by a full-swing sale of the other fifty percent to that party).
If the required activities are not a company’s core business and if (i) undertaking such activities does not add significant value, or (ii) the core business is not crucially dependent on the activities, a company should not enter into cooperation but instead consider outsourcing.
In one way or another, cooperation may facilitate any of the organisation’s (core) activities: the (joint) purchasing of raw materials, inventories or services, the outsourcing of a key discipline to a partner, the development of new technology or products, a joint exploration or exploitation of a market segment, territory or product market.
Also, an alliance may provide access to the partner’s network or technology, create learning opportunities (e.g. as regards the partner’s way of working), allow for cost savings (e.g. joint purchasing, joint production), result in risk sharing, or grant access to new markets and to establishing a distribution channel (e.g. expansion of the customer base).
An alliance or joint venture may be given various titles. It may be created under the name ‘joint venture’, ‘collaboration’, ‘consortium’, ‘teaming’, ‘cooperation’, ‘joint development’, ‘joint operation’, ‘joint exploration’, or even ‘partnership’. Its legal qualification, as well as the accentuation in legal consequences or prerequisites, will always be made on the basis of the actual setup.
Contractual collaboration or alliance, or incorporated joint venture? #
The choice in favour of a contractual alliance, instead of an (incorporated) joint venture, as discussed in another chapter, is often based on one or more of the following considerations:
- Informal character – a contractual alliance structure is more informal than an incorporated joint venture with its mandatory management organisation and formal decision-making requirements. In addition, setting up or dissolving a legal entity involve the satisfaction of various formalities.
- Taxation and accounting treatment – fiscal transparency: in a contractual alliance or partnership, each partner fully consolidates the alliance results in its financial results.
- Limited scope or duration – by its informal character, the alliance is typically also easier to terminate and unwind, and therefore more suited for collaboration with limited duration.
- Limitation of liability being less relevant – a corporate structure might be preferable if the alliance should deliver products or provide services to third parties.
- No joint (cash) investments to be made – when the alliance can operate without (cash) investments by a party in a jointly owned business, a contractual setup may be preferable. However, an incorporated joint venture may be preferable when two parties jointly enter a national market in which neither of them is present and establishing a legal entity is desirable, for example in view of taxation.
- No creation or acquisition of joint property – but if a new product is developed, its joint exploitation may be easier in an incorporated joint venture.
- No realistic profit-making potential of the venture – if cooperation is a cost-factor and not profitable, its costs and losses can be fully consolidated by both parties if it is set up as a contractual alliance or as a partnership.
The above considerations are mere indicators. Recent legislative developments and the increasing number of tax treaties between countries have lessened the differences between informal contractual alliances and incorporated joint ventures.
In each case, it may be important to provide for an appropriate exit scenario in case of deadlock once considerable efforts have been made. If know-how and intellectual property are involved or created, it is essential that the entitlement to such know-how and intellectual property rights are clear.
Interchangeability of provisions
It is important to note that all the provisions in the ITC’s model alliance contract are well suited to be copied into the ITC model corporate joint venture agreement. This applies in particular to the following articles:
- Article 1 (objectives and key principles for future decision making)
- Article 4 (joint projects, for exploring new business opportunities)
- Article 6 (intellectual property rights)
- Article 7 (preferred supplier arrangements)
- Article 8 (secondment of the parties’ personnel to the alliance)
Transaction documents in alliance and collaboration agreements #
Alliances and joint ventures will typically require more than just one contract (i.e. one document). Once the main principles of the collaboration are agreed, it may be worthwhile to involve more people from both parties’ organisations and work on the various aspects involved. If the alliance or joint venture is complex or somewhat voluminous, consider starting with a letter of intent (LOI) or memorandum of understanding (MOU) setting forth the high-level principles of the collaboration.
The various documents that result from those preparatory discussions will be included in the alliance contract or joint venture agreement, which will then contain one or more schedules. Using more than one document makes it easier to separate facts and ‘legalistics’, or the involvement of different disciplines (each working on their own document).
If the alliance or joint venture triggers several legal relationships then it is important to establish each of them in their proper contract. For example:
- A joint venture agreement will typically include one or more business arrangements – such as a technology or trademark licence, a long-term supply of or a general purchasing agreement for products or raw materials – in addition to a (one off) contribution to the joint venture itself. Each can be reflected in its own contract, and all of them should be attached to the main joint venture agreement.
- A joint development agreement may require that one party provides certain tools or equipment on loan, in which case the goods on loan will be dealt with in a separate contract.
- An alliance aimed at the joint development of a product, service or technology typically contains a statement of work or ‘SOW’ (i.e. a technical document specifying various aspects of the work to be developed, such as for example the product specifications, testing criteria and acceptance procedures, deliverables and milestones, go/no-go decision-making points, budget allocations, persons involved in the various stages). See also the remarks on the ITC Model international supply of services contract (Article: Services agreements).
- A joint venture agreement will typically contain a description of the joint venture’s business. As sharpening the scope of the business does not require a full document to be circulated each time, separating this into a one-page schedule may facilitate the discussions.
Similarly, a joint venture agreement will normally contain a business plan for the collaboration. The business plan may be a PowerPoint presentation or an Excel spread sheet (depending on the kind of persons who are responsible for preparing the business case). A contract, however, should not contain spread sheets or presentations.
Alliance or collaboration agreements further explained #
A contractual alliance contract is a framework for an alliance or a collaboration agreement between two or more parties where no separate, jointly owned, corporate entity is created. The alliance or collaboration agreement is based solely on contractual arrangements between the parties.
Each contractual alliance or collaboration is different, and the ITC Model international contractual alliance contract therefore provides a series or a “menu” of possibilities, depending on the purpose of the alliance. Of course, provisions that are not relevant to the particular alliance should be deleted. Moreover, if the context of the contemplated collaboration makes it desirable to provide for a different arrangement, then this different configuration should be negotiated or adopted. After all, contract law facilitates flexibility and autonomy for the parties to tailor their relationship.
Costs and benefits
The ITC Model Contract anticipates that the two parties will share pro rata in the costs of the alliance. It is important to establish what types of costs are to be shared, especially to the extent that this would require cash payments from the parties. If a party is to be paid for its work or other contribution, the basis for remuneration should be clearly established – either at the outset or through the management committee.
Appropriate compensation schemes can be: time-based (i.e. per hour, day or month), fixed pricing (e.g. one lump sum compensation or divided into milestones), a commission or a pro rata sharing of revenues (e.g. a percentage of turnover or net sales). It is recommended that you be explicit about costs and cash benefits.
Organisation and decision making
The ITC Model Contract envisages the formation of a management committee, on which the two parties are jointly represented. In this regard, it may be appropriate in some cases to (i) spell out the authority of particular individuals or subcommittees, or (ii) ensure that certain “reserved matters” require unanimous decision.
See also the related provisions in the ITC Model international corporate joint venture agreement (Articles 6, 7 and 8). It is important that issues involving ownership, (strategic) business scope, non-compete and intellectual property rights remain subject to consensus (i.e. unanimity). If more parties are involved, these issues might be subject to a veto or qualified vote.
In the ITC Model, Article 3 contemplates that each party will have areas of responsibility to contribute towards the success of the alliance. In some cases, these will be expressed in general terms – and not involve formal legal commitment (see examples in Article 3.3.1, 3.2.1 and 3.3.2). In other cases, specific legally-binding commitment will be appropriate.
Especially in larger or complex alliances, it is common to subdivide the agreements: the alliance agreement becomes an umbrella for adjacent (project) agreements. Article 3 would refer to those agreements, which are attached as a schedule. For example:
- Commitments related to promotion and sales of alliance products could be based on the ITC Model Contracts international commercial agency or international distribution of goods.
- Commitments to supply certain goods to the alliance (or to another party) can follow the format of the ITC Model international long-term supply of goods or Weagree’s General purchasing agreement.
- The provision of services, the joint development of a ‘work’, product or component can be inspired by the ITC Model Contract international supply of services.
Other important clauses in alliances or collaboration agreements #
If the alliance is a joint development agreement, Article 4 (‘joint projects’) is helpful: the ‘organisation’ established in Article 2 is attributed the authority to define and monitor the joint development work, and the parties commit to fund such joint projects. In many cases, it is indispensable to specify technical requirements, technical tolerances of results and external licences in a separate ‘statement of work’ to be attached as a schedule, as well. If the joint activities include an exchange of staff or key personnel, Article 8 establishes a few safeguards.
Intellectual property rights (IPR)
Article 6 sets out provisions for a relatively straightforward sharing of know-how and technical development. The ITC Model Contract provides a framework of key points. It envisages that specific IPR developed under the alliance will be jointly owned and that “going to market” will require the consent of both parties. Clarity is important regarding rights after termination of the alliance. In many cases, more detailed licence agreements will be appropriate to cover the IPR arrangements, particularly where one party’s IPR is made available for use by the other party under the alliance.
In many cases, one of the parties is likely to be appointed a preferred supplier or distributor of products developed under the alliance. In such cases, the ITC Model’s Article 7 may inspire such an arrangement, which typically grants a first opportunity (or, alternatively, a right of first refusal) to one party to supply the other party, subject to price, specification, quality and delivery times being agreed and no less favourable than other potential and comparable suppliers.
It must be noted that preferred supplier arrangements may constitute an infringement of competition law in the countries where the party-suppliers are established or where the alliance will become operative.
Many alliances contain a clause restricting the parties’ freedom to undertake activities competing with those of the alliance. This may take the form of a non-compete clause (see Article 10.1 of the ITC Model Contract), as well as a certain level of exclusivity of the cooperation (Article 10.2).
Usually, the scope and duration of these clauses are heavily negotiated. It is therefore important to be accurate as to what is prohibited and what is permitted. It is common (and generally not subject to competition law restrictions) to provide for a non-solicitation clause as well: Article 10.3 prohibits the partners from enticing away each other’s (key) employees.
The duration of such restrictions is often extended beyond the term of the alliance agreement. The prevents one party from opportunistically terminating the alliance when it appears that cooperating requires the efforts of a struggling marriage, but key skills or learning points of the other party seem replaceable. While a post-termination continuation of a non-compete is justifiable for the viability of an alliance, competition law also limits how long that continuation may last.
Establish the duration of the alliance. Most alliances are related to the term of a certain project. Once the project has been completed or when the results appear unachievable, the parties may (freely) either consider extending the scope of the initial project or go their own ways. In the ITC Model, Article 12 provides for the case where the alliance will continue indefinitely subject to a party’s right to terminate – either unilaterally by giving notice or in specified circumstances. Alternatively, the alliance parties might agree on a specific term with subsequent renewal requiring mutual agreement.
One termination ground is particularly common for alliances and close cooperations: termination on the ground of a ‘change of control’ over the other party. The reason behind it is based on the personal nature of cooperation and the mutual trust required in collaborations. This mutual trust would typically be diminished if the partner has been taken over by a competitor or if the commitment of the partner’s management is in doubt following replacement of the people most directly involved.
Tax and liability implications
A contractual alliance does not usually involve the creation of a separate, profit-making business in which the parties share profits as well as costs. If the arrangements do involve income or profit-sharing, it is important to note the potential liabilities that might arise. An alliance might fiscally or legally be qualified as a ‘partnership’ that:
- triggers tax filing obligations and specific tax treatment; and
- entails the considerable risk that, especially if the alliance operates vis-à-vis third parties, each party could become jointly liable to third parties for any claims arising out of the activities of either party in the alliance.
Formalised partnership status
If the venture does involve a separate profit-making business, this will normally require a more formal ‘partnership’ agreement or the creation of a corporate joint venture. Such a formal partnership agreement can be based on the ITC Model international corporate joint venture agreement (where the terms ‘shareholder’, ‘director’ and ‘JVC’ should be replaced, respectively, by the terms ‘partner’, ‘managing partner’ and ‘alliance’.