2.1 Alliances and joint ventures

Cooperation: strategic aims. The basic aim of an alliance 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).

Terminology. 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.

Alliance or incorporated joint venture? The choice in favour of a contractual alliance, instead of an (incorporated) joint venture, 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 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)

Conversely, the provisions in the model Corporate Joint Venture Agreement may be added to the Alliance Contract:

  • Article 5 (capital and further finance)
  • Article 6 (directors and management)
  • Article 7 (reserved matters for important decisions)
  • Article 9 (additional contributions)
  • Article 13 (restrictions on the parties)
  • Article 14 (deadlock and termination)

Transaction documents. 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 (see section 1.3(b)).

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 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 (section 2.3(a)).
  • 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.